#132 A (Non) Manchurian Candidate 🎧
G7 Talks Big. Tax Buoyancy. DARPA Apna Apna
While excellent newsletters on specific themes within public policy already exist, this thought letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways.
Audio narration by Ad-Auris.
Global Policy Watch: G7@Cornwall: Return Of A Rules-Based International Order?
Bringing an Indian perspective to burning global issues
A key geopolitical question to ask as most of the world gets back to normalcy following the pandemic is - what kind of a world will we be living in?
I was expecting the G7 meeting held in Cornwall last week to help with an answer. It didn’t entirely. But it did help in framing the key questions that will engage commentators discussing about the world order this decade.
The rhetoric at the end of the summit was summed by Boris Johnson: “the West is back”.
Johnson and Biden repeatedly made the point about the summit representing the coming together of the great democracies of the world. Others parroted the same line. Even PM Modi speaking on the final day as part of the outreach programme positioned India as a natural ally of G7 in its resolve to fight the challenges arising out of authoritarianism, terrorism and disinformation.
Democracies V Autocracies Now?
The need to counter the ideological and economic challenge of China has bipartisan support now in Washington. Naturally, Canada, UK and Japan are in the same boat. The summit succeeded in making the somewhat reluctant Germany, France and Italy come around to the same view. This looks like an attempt to roll back the Cold War years. But like we have written in the past, China is a very different threat from the erstwhile USSR. In fact, it is USSR on steroids. So making the threat of China into the familiar construct of Cold War that you are comfortable dealing with is like searching for your lost keys under a lamppost because there’s light under it. It will be easy to search but you won’t necessarily find the keys.
The other problem for G7 is how to treat Russia. With China the two strands of a superpower contest and the mortal combat with an illiberal regime that won’t reform as was expected, come together. So it offers ideological clarity. Russia isn’t an economic superpower and its political strength is restricted to its backyard. But it ticks all the boxes of a rogue, authoritarian regime - stifling dissent, encouraging crony capitalism, launching cyber attacks against other nations and meddling in their elections. Does the G7 slot Russia into the same ideological enemy category as China and push it further into its arms? Then we have a very different Cold War on our hands. Or, does it give Russian illiberal tendencies a free pass to keep it neutral and counter the threat of China? The Putin-Biden summit that followed the G7 meet seems to suggest that’s the likely course of action. But if you do that, where is the ideological glue of ‘great liberal democracies’ coming together? What stops other democracies (Brazil, Turkey, India and many more) to go down authoritarian route knowing the ideology is a sham?
Marshalling A New Plan?
The other question is how committed are the G7 to back their return to relevance with financial support, commitment to free trade and moral leadership during the next crisis? The evidence during the pandemic wasn’t flattering. It was everyone to themselves. The easy thing is to blame it on Trump but the hesitancy of Biden administration during early days to share its vaccine stockpile suggests ‘America First’ won’t just disappear after Trump.
The summit threw up two responses to allay concerns on this.
One, the promise by G7 to provide for more than one billion vaccine doses to the developing world. This was a late but welcome step to regain a semblance of moral authority. But one billion isn’t enough to inoculate the poorest in the world. It didn’t go far enough.
Two, the G7 decided to counter China’s Belt-and-Road initiative (BRI) with its own plan to lend billions of dollars in financing infrastructure in developing nations. As the New York Times reported:
The plan described by the White House appeared to stitch together existing projects in the United States, Europe and Japan, along with an encouragement of private financing. A fact sheet distributed to reporters gave it a name, “Build Back Better for the World,” with roots in Mr. Biden’s campaign theme — shortened to B3W, a play on China’s BRI.
It emphasizes the environment, anti-corruption efforts, the free flow of information and financing terms that would allow developing countries to avoid taking on excessive debt. One of the criticisms of Belt and Road is that it leaves the nations that sign on dependent on China, giving Beijing too much leverage over them.
There are a few problems with this plan. One, it is not clear how much of a success BRI has been for China. The programme has been beset with inflated costs and accusations of debt trap by countries borrowing from it. China seems to have gone tepid on it too. So, why copy a plan that failed for China?
Two, Italy is already a member of the BRI and France and Germany don’t share the Biden’s administration conviction in taking on China economically. There are huge investments and trade deals hanging in balance there. This isn’t as tight a house as it appeared from the outside during the summit.
Three, the G7 equivalent of BRI will need capital contributions from all the members who aren’t themselves in the best fiscal state at this moment. And we aren’t even counting the unresolved Brexit issues (including the Northern Ireland protocol) between UK and EU which threatened to sour the summit. The US treasury seems ready to sign ever increasing checks for domestic stimulus, infrastructure and green deal. Now they will have to fund this too. The icecreams cannot keep coming out of the truck indefinitely. Also, the G7’s insistence of democracy and human rights record will make many developing countries continue to look at the guilt-free Chinese loans. And let’s admit it, there are more of those regimes than others.
Four, the G7 will have to respond to the popular opinion in their own backyards and it is difficult to see how over the next decade free trade, multilateral funding and supporting infrastructure around the world will be politically rewarding. A few regime changes among the G7 nations and this plan will come unstuck. China meanwhile has no such problems. Xi isn’t going anywhere soon. Nor is Putin.
The final question is how will the G7 respond to future global crises after learning the lessons from this pandemic? The list of existential threats to the world isn’t short today with climate change at the van. The summit picked up climate change with a renewed pledge to raise $100bn a year through till 2025 to help developing countries cut emissions and move away from coal.
There are two problems here. First, this isn’t enough for poorer nations to stick to their climate goal commitments. It will be interesting to see how this pans out with the UN climate summit that’s coming up in Glasgow this November (also known as COP 26). The lack of details in the climate change plan - “green revolution” - that would limit the rise in global temperatures to 1.5Cand reach net-zero Carbon emissions by 2050 makes the whole thing sound like the many empty pronouncements of the past.
Second, it is difficult to address climate change without bringing China, Russia and other large populous developing nations (Brazil, India, Indonesia) into the mix. Solving global existential threats require what Richard Haas and Charles Kupchan call the ‘concert of powers’ approach. But how do you do that if you want to frame China and Russia as ideological foes in the new Cold War?
On the balance, the two positives from the G7 summit were quite clear. America led by Biden will not go back to lurking in the backstage of global geopolitics. And, China won’t get an easy pass from here on. Its days of running with the hare and hunting with the hound are over. But beyond that it is all fuzzy.
So, what about India in all of these? India cannot be in the China camp given all the history between them. Russia is a time-tested friend that it cannot dump. India also knows its value to the liberal, democratic front as an ally. If you look closely, it has been dealt a good hand. It can use this confluence of factors to its advantage. Unless, of course, it scores self-goals on liberty and democracy at home and queers the pitch. That can be a real scenario.
Maybe PM Modi’s address where he called India a natural ally in defending shared values of liberty, freedom of expression and democracy was meant more for his domestic audience.
Not(PolicyWTF): When Two Taxes Meet
This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?
— Pranay Kotasthane
Readers of this newsletter will know that I seldom have good things to say about India’s taxation policies. But today is an exception.
Once in a while, even taxes can pleasantly surprise. Even as people are wrestling with the new income tax filing portal, net direct tax collections have doubled over the last year’s numbers. Of which, advance taxes alone have grown by 146 percent. Advance taxes are taxes spread over four quarters in place of the fiscal year-end. This measure is indicative of economic sentiment as higher advance tax collection implies that business activity and payment settlements are happening smoothly.
What caught my attention was this statement in Business Standard:
“Tax officials have attributed it partly to payments from the Vivad se Vishwas Direct Tax Dispute Resolution Scheme and lower issuance of refunds, while others have said it is owing to increased compliance and enforcement due to the sharing of the goods and services tax data with the Central Board of Direct Taxes.”
In essence, one of the explanations is that even though GST collections by themselves aren’t spectacular, the trail that the system leaves can be used to identify direct tax evasions as well.
There’s precedence to better data resulting in increased direct tax collections. Until the turn of the century, many companies were deducting tax at source (TDS) before paying incomes to their employees but this money wasn’t reaching the government. There was no data to compare the TDS collected by a company with the TDS reported by all its employees. The result: tax evasion. Less than 25 percent of those supposed to deduct tax at source were submitting returns. That changed in 2003-04 with the introduction of the Tax Information Network. Dr Govinda Rao explains this breakthrough here:
“Responding to the comment by the Comptroller and Auditor General of India that a large proportion of entities which were required to deduct the tax at source (TDS), simply did not remit the money to the income tax department, Vijay Kelkar who was the then adviser to the finance minister entrusted the task of TIN to NSDL which put together the system of monitoring the TDS payments.
The result was the sharp increase in the ratio of Centre’s direct tax revenue to GDP from 3.9% in 2003-04 to 6.4% in 2007-08, registering an average growth of 31% per year.”
GST offered a similar hope. The logic is as follows. A substantial portion of income tax returns (nearly 40 percent in 2017-18) report business income. Comparing this reported business income with the GST trail of the business can expose tax evasion. The input tax credit mechanism of the GST aligns the incentives of sellers and customers to report their revenues accurately.
In July last year, the indirect tax board (which administers GST collection) and the direct tax board (which administers income and corporate tax collections) signed an MoU to exchange data with each other. The increase in direct tax collections this year is perhaps, in part, due to better triangulation of tax information. The exact impact is tough to gauge but if the trend in direct tax collection remains upbeat for consecutive years, we can isolate the effect to this beautiful meeting of the taxes. Can’t believe I wrote that!
Matsyanyaaya: Everyone Wants to DARPA
Big fish eating small fish = Foreign Policy in action
— Pranay Kotasthane
I posted this writeup first on Technopolitik, a new fortnightly newsletter launched by my colleagues at the High Tech Geopolitics programme. If you are interested in themes at the intersection of technology and international relations from an Indian national interest perspective, do subscribe. Back to the story after that subtle plug.
Japan. The UK. Germany. Even the US. These countries are now attempting their own versions of the original Defence Advanced Research Projects Agency (DARPA). The success of DARPA’s 2013 grant to Moderna for using m-RNA to develop vaccines seems to have further fuelled the FOMO.
Will they succeed? Answering that question requires a reimagination of what ‘success’ implies in this context. Most of DARPA’s initiatives fail, by design. Had most initiatives been marketable, it would’ve only meant one thing: the agency wasn’t betting on the groundbreaking ones. Secondly, even the successful ones such as the ARPANET require long gestation periods. In essence, DARPA replicas need to be set up with the apriori acknowledgement — and requirement — that it should fail most of the time and prepare for long periods with zero successes.
That seems to be a difficult act to accomplish. The Economist (June 5, 2021) edition describes a few principles that made DARPA tick:
An anti-bureaucracy setup. From The Economist:
“Whereas most (R&D agencies) focus on basic research, DARPA builds things. Whereas most use peer review and carefully selected measurements of progress, DARPA strips bureaucracy to the bones (the conversation in 1965 which led the agency to give out $1m for the first cross-country computer network, a forerunner to the internet, took just 15 minutes). All work is contracted out. DARPA has a boss, a small number of office directors and fewer than 100 programme managers, hired on fixed short-term contracts, who act in a manner akin to venture capitalists, albeit with the aim of generating specific outcomes rather than private returns.”
Freedom to try and fail. This often means no ministerial oversight and more crucially, a common consensus amongst political actors that such agencies will be given a long rope.
An assured customer from within the government. Some of US’ own DARPA copies haven’t met similar successes partly because they don’t have an assured customer like the US Department of Defence ready to deploy products of grantees.
Apart from these three elements, there’s another underappreciated factor in my view: a powerful national adversary. DARPA was given the freedoms it got because of the threat the USSR posed. The narrative aspect (democracy vs communism) was no less important in getting scientists onboard on dual-use inventions.
What about India’s chances at replicating DARPA? I would wager that factors #2 and #3 are not difficult for India to manage. There is precedence for India’s national security agencies being left out of parliamentary oversight and financial audits. What’s more difficult is #1. For a government to create an anti-bureaucratic setup that pursues excellence requires immense state capacity of the kind that Indian governments lack.
Of course, Indian governments will have much less money to spare than their western counterparts. But that shouldn’t directly mean fewer risks. It only means that the areas that India chooses to focus on should be different from the ones that the US does. As economists would say, focus on the comparative advantages.
More importantly, India’s revealed preferences show that in its collective imagination, Pakistan was, until now, the most significant adversary. Managing such an adversary didn’t require cutting-edge technology. It just required us to be marginally better than Pakistan. But a much stronger and advanced PRC poses a challenge that requires India to come out strong on all fronts, including technology. Herein lies the impetus for India to be audacious.
Reading and listening recommendations on public policy matters
[Article] “Don’t Start Another War With China” warns Bernie Sanders writing in the Foreign Affairs
[Article] “As G7 takes on China at five fronts, India engages with B3W” write Gautam Chikermane for the Observer Research Foundation (ORF).
[Podcast] Anupam and Pranay discuss how and why to bring petrol under GST. If petrol prices are making you sweat, you might as well listen to this episode during your next commute.
[Essay] A beautiful Lapham’s Quarterly essay on the history of technology.