#140 We Do Need Education 🎧

On negotiating with China; Price caps in Indian pharma; And there's no Civics anymore


India Policy Watch: Chinese Checkers

Insights on burning policy issues in India


We often write about China here. And we make three points:

  1. China is a model of authoritarian state-driven capitalism. There should be no illusion anymore it will turn into a liberal democracy as its citizens gain greater economic freedom. The Party will find new market demons to slay to send out a convincing message to the people that only it can usher in a stable and prosperous society. It will continue to undermine liberal democracy and it is ready to mount an ideological and economic challenge to G7. (Edition #132)

  2. Most analysts often overestimate China’s long-term thinking or strategic acumen. Pranay has written about this in a few editions. People tend to get taken in by civilisational mumbo-jumbo and Confucianism that China spouts about their national objectives. This has given rise to a cottage industry of experts who scour through Chinese history to (over)interpret the words and actions of its current regime. We believe this is unnecessary. China makes its usual quota of strategic errors in geopolitics. There is too much made about it being a rational actor of the highest order. (Edition #136)

  3. China is a very different kind of threat to the western liberal order. It is deeply enmeshed in global trade and economy. Decoupling from it is easier said than done. It has grown at the expense of Europe in the past three decades and now Europe cannot imagine its economy without the Chinese supply base or its markets. It is open to learning from the West (it sends the most students to western universities) while it selectively blocks global information platforms at home to ‘manage’ its society. This asymmetry lets it have the best of both worlds. It has the Soviet-style disdain for liberal democracy without the shortage of resources or paranoia about the West. In short, as I have written in the past, if this were to be seen as a new cold war then China is USSR on steroids. (Edition #47) and (Edition #44)

Chinese Books Are Flooding The Market

I’m no expert on China. So I like to read books on China to update my priors. Surprisingly (in a good way), the last nine months have seen a never before supply of books on China by Indian authors. These include books by China scholars and academics - India Versus China: Why They Are Not Friends by Kanti Bajpai, Smokeless War: China's Quest for Geopolitical Dominance by Manoj Kewalramani and India's China Challenge: A Journey through China's Rise and What It Means for India by Ananth Krishnan. These apart, the past few months have seen two of our former Foreign Secretaries come out with their books on China or the broader Asian geopolitics - India and Asian Geopolitics: The Past, Present by Shivshankar Menon and The Long Game: How the Chinese Negotiate with India by Vijay Gokhale.

I ended up reading three of these books in the past couple of months. They are slim and very readable. Among them, I will pick Vijay Gokhale’s book in this edition to discuss his perspectives on how China negotiates. Gokhale’s focus is on understanding the strategy and tools China deploys in its negotiations with India and what India can learn from the 70 years of dealing with them. He takes six key negotiations between India and China to draw his conclusions. These include recognition of the PRC in 1950, the negotiations on the status of Tibet in 1954, Pokhran and India’s nuclear status, the question of Sikkim, the US-India 123 nuclear agreement in 2007 and the listing of Masood Azhar as a terrorist by the UN in 2019 after a decade-long effort.

Gokhale’s credentials on the topic are second to none. He has served as our top diplomat for over three decades in China, Taiwan and Hong Kong. His personal involvement in four of these negotiations offers a ringside view to us on diplomatic jabs that were exchanged over the years on these issues. Even in the two negotiations that predate him (recognition of PRC and Tibet), Gokhale is meticulous in his research of available official documents, notes, letters and press reports of the time to offer us a concurrent view of how the two sides were thinking about the issues and planning their negotiations. The book is a tremendous addition to the literature on China and I hope it spurs more former diplomats to write about their experiences.

The Original Sin

I have picked up a few excerpts from the first diplomatic negotiation between the two over the recognition of PRC to give you a sense of how differently the two newly independent nations thought about geopolitical issues. I will run through the context briefly before doing so.

India, in 1949, was a free country in the process of establishing itself as a Republic. The horrors of partition were fresh and its leadership was still finding its feet after the assassination of Mahatma Gandhi. Yet, it was seen globally as the voice of the ‘third world’ largely on account of the Constitution it had drafted, its leadership that had international credibility and its commitment to liberal democratic principles.

China, on the other hand, had emerged from its ‘century of humiliation’ with a civil war between Mao’s Communists and the Nationalists led by Chiang Kai-shek. By 1949 the Communists had driven the Nationalists away to Taiwan and were looking for global recognition while being aware that America being on the side of the Nationalists made this a difficult task. To put it simply, Communist China would have been grateful if India recognised it early.

But through a strange mix of naivety, diplomatic blunders, confused thinking and narcissism on India’s part and some astute planning by China, the tables were turned. In some ways, this set the tone for all future negotiations between them.

As Gokhale writes:

The Chinese also planned the negotiations with India with great care, seeing it as a template for future negotiations with other non-socialist countries, including the West. Their strategy consisted of three elements:

1) to make India recognise the People's Republic of China as the sole, legitimate government. Mao was determined not to allow Two Chinas to legally exist at the same time, and this was a core objective;

2) to ensure that India did not join the American-led anti-China camp. Since the Americans were backing Chiang Kai-shek, it stood to reason that India should be asked to prove that it was not an American camp-follower by making a clean break with Chiang Kai-shek and the Nationalist regime; and

3) to utilise India's international influence to gain diplomatic space. The Soviet Ambassador N.V. Roshchin recorded his conversation with Mao thus: 'During the past few days he (Mao Zedong) had received the report from Beijing that the governments of Burma and India expressed their readiness to recognise the government of the People's Republic of China. The position of the Chinese government on this matter is as follows: to informs the governments of Burma and India that if they are sincere in their wishes to mend diplomatic relations with the PRC, first, they must completely break all tie with Chiang Kai-shek, unconditionally any kind of support and assistance to this regime, making it into an official declaration. Under the condition that the governments of these countries accept the aforementioned proposals of the Chinese government, the Indian and Burmese government may send their representatives to Beijing for negotiations.’

This, then, was the Chinese strategy, and the tactics were determined accordingly.

It is interesting to note how despite having the weaker hand, it appears from above like the Communist China is offering a privilege to others. There are multiple things at play here. China’s clarity on what’s non-negotiable (there cannot be two Chinas), its ability to play on the guilt or ego of the other party for its interests (India has to show it is not a camp follower of America) and its chutzpah in setting the terms of its own recognition; including asking India to send its representatives to Beijing and not the other way around.

Now contrast this with how Gokhale describes the Indian approach.

The lapses on India's part - the absence of wider political consultations within the Indian leadership, the overlooking of its national interest in its anxiety over the timing, and the erroneous assumption that the act of officially recognising the People's Republic of China was tantamount to the automatic establishment of formal diplomatic relations - led the Government of India to see the act of recognition as its only objective. In the process, India unilaterally gave up some crucial negotiating cards.

First, India severed ties with the Nationalistic government in Taiwan.….the cutting off of ties with Nationalist government in Taiwan was inevitable, but it should have been part of the give-and-take during the negotiations. Instead, India squandered a bargaining point as a concession to Communist China even before the negotiations commenced.

Likewise, India made efforts to reassure the Chinese side that it would not harm them by aligning with the Americans. This mean that India gave up any leverage that was to be gained by allowing the Chinese side to believe that it had the option of leaning to the side of the Americans in case China did not accommodate its interests in the process of diplomatic recognition. Thus, India lost another tactical advantage that might have allowed it to extract assurances from the Chinese communists.

Thirdly, and most significantly , India did not lay out substantial 'asks' for the Chinese side to fulfil as a counter-response to their demands, even though they were aware of Chinese preconditions. The Government of India felt that making recognition dependent upon fulfillment of conditions by the new Chinese regime may be seen as hard or humiliating.

…..India's approach to the whole idea of recognition was a mixture of emotionalism and conjecture.

There was no strategy. The timing became the central point of the exercise. This too was determined by international calendar rather than by India's national interests. The Commonwealth Foreign Ministers Conference was to be held in Colombo in mid-January 1950. Nehru decided that India should recognise the People's Republic of China before the other members of the Commonwealth. It was accordingly decided to do so on 30 December 1949.

Getting It Wrong Again?

I believe Nehru gets a bad rap in today’s India. He had his flaws. But he was a great man by every definition of the term. I don’t think we will see someone like him in our polity anytime again. And I defend him stoutly on most issues including his economic thinking. I’m no statist and I have no time for central planning but I’m not sure I’d have been a free marketer at the time of independence. So, I give him a wide berth there too.

But on foreign policy, I think Nehru has no excuses. He had strange notions of India being some kind of a vishwaguru, he personalised diplomatic decisions without considering the diverse set of views from his experts, he put himself at the centre of negotiations which undercut the negotiating options of his diplomats and he had a vague, narcissistic self-image of a global statesman that eclipsed India’s interests often. The above extract on the recognition of PRC and India’s handling of the Tibet issue soon after was a result of this approach to diplomacy. When I read these lines again, I wonder how much, if, at all, things have changed since then.

Gokhale ends his book with a chapter on ‘Lessons for India’ where he outlines his experience of how China negotiates and what the Indian side should look out for. There are reams of practical advice here. The Chinese attention to details at the pre-negotiation stage: everything from the setting of the agenda, laying the benchmarks for the other side to meet prior to the negotiations and to push for unilateral gestures as a show of goodwill. Then the tricks and tactics used during the negotiations. The insistence on agreeing on principles that will act as the framework, the incremental nibbling technique (the salami-slicing equivalent of diplomacy), the playing on the guilt of another party, the random usage of old Chinese proverbs, the sense of their relative position in the hierarchy of global powers and their ability to manipulate the other side are all discussed at length with specific instances. And finally the post-negotiation setting of the narrative. The Chinese focus on getting everything just right is relentless.

Reading this chapter and going by the book title ‘The Long Game’, you almost place Gokhale in the camp of those who believe in the extraordinary powers of China to think really long term. Like we have written before, we think this to be a gross exaggeration. But Gokhale makes a strong case for us to update our priors. China might not always be playing a long game. But it surely does have a game.

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PolicyWTF: Market Pricing with Government Characteristics

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

— Pranay Kotasthane

Did you know that the price of a paracetamol tablet is capped at approximately Rs 2 by the government? Apparently, over 200 companies produce paracetamol under different brand names. Such levels of competition should’ve kept the price of paracetamol low in any case. Why the price cap then?

Turns out that not just paracetamol, nearly 14 per cent of drugs by value, and 25 per cent by volume in India fall under price controls. Not only are their prices capped, but the mechanism used for capping is disingenuously labelled ‘market-based pricing’. I find this label fascinating because this is the second instance I know where the government actively distorts market prices and yet is successful in passing the blame on markets for the resultant price rise.

Consider the case of pharmaceuticals first. Market-based pricing here obviously doesn’t mean that a drug can be priced on the basis of demand and supply alone. Instead, it just means that the price cap will be calculated by averaging prices of brands that held at least a 1 per cent share of the market for the formulation.

Anticipating the unintended consequences of such a policy is not difficult. One, price caps ‘disincentivise’ differentiation and innovation. Why would any new company invest in creating a new formulation when it cannot reap the benefits by charging higher? Two, price caps foster collusion and rent-seeking. With new entrants impeded from disrupting the sector, incumbents can benefit by colluding with each other. By collectively and incrementally increasing the price of their brand, the price cap threshold can be pushed up. And three, the engineered market-based pricing deepens the scepticism Indian consumers have with the price system. No wonder that an ordinary Indian intuits that market-based price is just a euphemism for unreasonable price hikes.

Another sector where the government passes off its active price distortion as a market-based mechanism is in fuel pricing. Since 2010 and 2014, the price of petrol and diesel have been deregulated respectively. If the market were truly allowed to operate, petrol and diesel prices should’ve hit an all-time low over the last few years because of the excess supply. More recently, the COVID-19 pandemic even depressed the demand. And yet, petrol prices hit a century because the government more than compensated for the drop in market prices by increasing the tax rate on the two fuels. We have covered this chicanery in many previous editions.

So the next time you see sticky high prices, poor quality, or both, first investigate the government diktats on pricing in that sector.

As a parting shot, it’s important to understand the beauty of the price system. Hayek’s landmark essay The Use of Knowledge in Society explains that the price system is a decentralised coordinating mechanism for society. As he wrote in the essay:

“Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all.”

Every time the government interferes with the price system, the information residing in the price gets diminished. The real-world implications of this loss are all too familiar — price caps lead to shortages and poor quality, price floors lead to wasteful expenditure. Distorting prices costs lives.

Not(PolicyWTF): Civics vs Political Science

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

— Pranay Kotasthane

One of the positive changes in our education system is the improvement in the quality of NCERT textbooks. Readers over the age of thirty will recall studying a boring subject called “civics”. This subject was the first and sometimes the only introduction to political science to many people of this age group. Not only was it boring, civics explicitly avoided introducing students to the messy details, ambiguities, and contradictions of our social and political lives. Framed with a colonial mindset, it gave the impression that subjects’ enjoyment of the rights granted by the State is contingent on them performing duties.

Last week, I happened to search for what students were learning in Civics today. I was pleasantly surprised. There is no Civics anymore. The National Curriculum Framework 2005 acknowledged has reimagined the sterile commandments into richer political science discussions. Have a look yourself here.  

Of course, upgrading textbooks is the easier part of the problem. Changing the minds of teachers and parents who have internalised simplistic and wrong models is far more difficult. Perhaps the loss of nuance in our political discourse is a consequence of being “curriculated” in an uncritical way.

For now, I was just happy going through the new textbooks.

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Reading and listening recommendations on public policy matters

  1. [Article] TCA Raghavan reviews Shivashankar Menon’s book in India Today. Menon on Nehru: “Nehru’s ideas, prioritising legitimacy over power, also led him to ignore real threats and ultimately to failures, as in his dealings with China.”

  2. [Podcast] The Seen And The Unseen by Amit Varma. Episode 234: Kanti Bajpai on India vs China

  3. [Podcast] The Seen And The Unseen by Amit Varma. Episode 231: The China Dude Is in the House

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