Jun 12 • 31M

#172 State Of Play

Regulations in Media. Interest rate hikes. Pakistan's tryst with military dictatorship.

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Frameworks, mental models, and fresh perspectives on Indian public policy. Audio narrations by Ad Auris.
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PolicyWTF: See No Evil, Read No Evil, Hear No Evil

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

— Pranay Kotasthane

Earlier this week, I stumbled on this headline in the Business Standard: "Remove price cap and channel bundling restrictions: Broadcasters tell TRAI”. For someone writing a weekly newsletter on Indian public policy, price controls are a gift that keeps on giving. Naturally, I went down this rabbit hole.

For context, read this consultation paper. Under the New Regulatory Framework 2017, there are price caps on channel bundles, individual channels that are part of bundles, and the overall package of standard-definition channels. Once this 2017 order came into force, broadcasters smartly kept the popular sports channels out of the channel bundles. The aim was to price them high, thereby cross-subsidising other channels. Further, some providers included these sports channels in bundles at a discounted rate so that they could be packaged with other trashy channels. Not surprising. And now, TRAI wants to reduce the price cap on individual channels that can be part of a bundle to ₹12 from ₹19 per month. Mind-boggling, no?

The consultation paper is quite well-written, to be honest. It makes me wonder the extent to which state capacity is applied to come up with price controls.

This instance got me thinking about how government restrictions have shaped today’s media environment in India. Let’s have a look at the three major types: video, radio, and written media.

How OTT (Over-the-top) became TOT (The-Only-Thing)

The same TRAI consultation paper highlights that OTT platforms (SonyLiv, HotStar, etc.) are displacing traditional TV. Anecdotally too, this shift is quite obvious. So why is it that there’s good Indian content on OTT platforms, while the old news channels seem to be stuck in a rut?

Government regulations are one big reason. There are no price caps on OTT platforms, allowing them to make investments, create niche content, and recover the investments at an appropriate price. In contrast, TV channel prices are controlled by the government since 2004.

News channels, in particular, have degraded the most. Writing in Hindustan Times in 2017, Ashok Malik traced the cause to (surprise! surprise!) price caps again:

“As per the TRAI tariff order of 2016, the price ceiling for a news channel is Rs 5 per month. In contrast the price ceiling for a general entertainment channel is Rs 12 per month.

Consider what this means. In theory, the general entertainment channel could be re-running old soaps (cost of content: zero). The news channel would be required to constantly generate fresh content. Even so, the former is allowed to charge more than double what the latter is able to. Besides a general entertainment channel is always likely to get more subscribers. So it is a double hit for anybody seeking to build a serious news channel.

Over time news channel owners have simply given up, and decided to take the route of reality TV. Today, with the sheer volume of free – occasionally dubious and sometimes outright fake – content available online, one wonders if the news business can ever be rescued in India.”

Not that general entertainment channels have fared much better. Broadband internet has now made subscription easier, and the people have voted with their feet, remotes, and phones. At present, TRAI no longer caps the prices of individual channels, on the condition that they are not included in any bundle. But that’s hardly a respite when enough damage has already been done.

Radio Silence

The case of another broadcast medium, the FM radio, is also instructive. The kiss of death here is a ban on FM channels broadcasting news or current affairs. Observe how the government justified pre-censorship in the Supreme Court in 2017:

“Broadcasting of news by these stations/channel may pose a possible security risk as there is no mechanism to monitor the contents of news bulletin of every such stations. As these stations/channels are run mainly by NGO/other small organisation and private operators, several anti-national/radical elements within the country can misuse it for propagating their own agenda.”

Need I say more? This is the reason why all our FM radio channels play mind-numbing songs, spoofs, and call pranks on loop. While some niche content has moved to podcasts, a lot of current affairs content is now sought after on non-English YouTube channels. As for “radical elements within the country can misuse it for propagating their own agenda”, that has been turbocharged by one-to-many communication on Twitter, WhatsApp, Facebook, etc.

The Pen is Mightier than its Subscribers

Now let’s come to the curious case of print and online media. There are no price caps on newspaper and magazine prices. Not that it wasn’t attempted. But in a 1961 Sakal Papers vs Union of India judgment, the Supreme Court, citing Article 19(1), declared unconstitutional a law that tried to connect prices to the number of pages published.

And so, India has an amazingly high number of newspapers and magazines— nearly a lakh registered ones, increasing year on year. But that’s where the party ends. Print media is disproportionately dependent on advertisement revenue and not reader subscriptions. Newspapers are primarily pamphlets, with a bit of news and opinion thrown in.

The reasons for this low equilibrium are not very clear. Raju Narisetti contends in a recent book Media Capture: How Money, Digital Platforms, and Governments Control the News (edited by Anya Schiffrin) that the ‘invitation pricing’ model introduced by the Bennett Coleman & Company Ltd. (BCCL) in 1994 created a de-facto price cap for other players. However, that still doesn’t explain the absence of niche, small, and subscription-fuelled newspapers. Magazines do slightly better. I suspect the low purchasing power of Indians when newspapers were all the rage, can explain to an extent the inertia to pay more for reading news.

Whatever the reasons, it works well for India’s governments, for they are the biggest advertisers in newspapers. Mere threats of cancelling advertisement contracts become powerful means to exert influence on the content and tone of newspapers.

Nevertheless, online media has shown that new revenue models are possible. In the pandemic, most newspapers took their online portals behind paywalls. There’re also many subscriber-only portals catering to special audiences.

But how can you keep the government away? RBI’s new rules on auto-debit of recurring payments led to the cancellation of subscriptions and a decline in revenue. (Showing small mercies, the RBI this week decided to raise the e-mandate limit to ₹15,000 earlier this week.)

All in all, if you want to ask why our media environment is the way it is, tracking government regulations is a good place to begin the search. TV and Radio, and to a lesser extent print media, are all victims of seemingly well-intentioned yet counter-productive government regulations.

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India Policy Watch: Inflation, Growth & Stability

Insights on burning policy issues in India

- RSJ

We are back to discussing macroeconomy here. This week, in its scheduled bi-monthly review, the Monetary Policy Committee (MPC) voted unanimously to increase the repo rate by 50 bps (100 bps = 1 percentage point) to 4.90 per cent. It also stayed firm on withdrawing its accommodative policy stance to tame inflation going forward. From the Governor’s press release:

“Let me now explain the MPC’s rationale for its decisions on the policy rate and the stance. The protracted war in Europe and the accompanying sanctions have kept global commodity prices elevated across the board. This is exerting sustained upward pressure on consumer price inflation, well beyond the targets in many economies. The ongoing war is also turning out to be a dampener for global trade and growth. The faster pace of monetary policy normalisation undertaken by systemic advanced economies (AEs) is leading to heightened volatility in global financial markets. This is reflected in sharp corrections in major equity markets, sizeable swings in sovereign bond yields, US dollar appreciation, capital outflows from EMEs and even from some AEs. The EMEs are also witnessing depreciation of their currencies. Globally, stagflation concerns are growing and are amplifying the volatility in global financial markets. This is feeding back into the real economy and further clouding the outlook.”

To put this in context, we have had an almost 100 bps increase in repo rate in about a month. Short-term rates in the market have already moved up by about 200 bps in the last six months. The impact of these will begin to pinch. And yet, inflation remains above 7 per cent and is likely to stay there for a while. There’s been a coordinated response between the government and the central bank in the recent past including a reduction in excise duties on fuel. Some external factors like the lifting of the palm oil exports by Indonesia and a likely good monsoon also might help moderate inflation during the year. But the 6 per cent upper limit of the inflation target range will be breached for most of the year. The Ukraine war and its repercussions on supply chains and commodities have kept prices elevated. The speed of monetary policy normalisation by the developed world has meant the dollar has appreciated sharply, equity markets have fallen across and capital has flown out of emerging markets.

The statement by the Governor acknowledged these issues and summarised its priorities (italicised by me below):

“Experience teaches us that preserving price stability is the best guarantee to ensure lasting growth and prosperity. Our actions today will impart further credibility to our medium-term inflation target, which is the central tenet of a flexible inflation targeting framework. India’s recovery is proceeding apace, offering us space for an orderly policy shift. While we will continuously assess the evolving situation to tailor our responses, our actions must demonstrate the commitment to keep inflation and inflationary expectations under check. Therefore, monitoring and assessing inflation pressures and balancing risks to growth will be crucial for judging the appropriate policy path as we move ahead. 

……Given the elevated uncertainties of the current period, we have remained dynamic and pragmatic rather than being bound by stereotypes and conventions. As the Reserve Bank works tirelessly in its pursuit of macro-financial stability, I am reminded of what Mahatma Gandhi said long ago: If we want to overtake the storm that is about to burst, we must make the boldest effort to sail full steam ahead.”

Nothing new there on priorities. For any central bank, they remain to manage the interplay between - price volatility, growth and macro-financial stability. This is an equilibrium hard to locate in normal, calmer weather. In uncertain times like today, it is a gigantic headache. We will dig a bit deeper to understand the variables that RBI will have to deal with in handling these three priorities during the year. 

First, let’s take inflation. As I mentioned above, the global risks to inflation will remain elevated with high crude oil and commodity prices and continuing supply bottlenecks for the next couple of quarters. The more interesting point here is that the input cost spikes haven’t yet been passed on to consumers in India. You can take a look at the declared results of the Jan-Apr quarter for listed companies to draw this conclusion. As this gets passed through eventually, inflation will keep pushing upwards. The opening up of the high contact services sector is almost complete now, notwithstanding the recent spike in Covid cases in parts of India. So, there is still the impact of services inflation to show up. Globally, central banks have made an about-turn on their earlier views of this inflation being transient. India is no different. The inflation expectations now show a secular upward trend and this is reflected in various surveys like PMI and BIES.

Like always, the lower-income bands are starting to voice their concern about prices because it materially affects their lives. Price rise in India is a politically sensitive topic and as much as this government is politically dominant with the opposition nowhere in sight, it is difficult to see how it will remain unfazed by it. An important point to also consider here is the unique K-shaped recovery that’s happened in India post-pandemic. We have spoken about it a few times earlier. This has meant there is further concentration of total consumption among the top 10-15 per cent of India. The problem with this is that it leads to stickiness in prices and wages. This creamy layer of consumers has a low marginal propensity to consume and that combined with the large cushion of savings with them means there isn’t a quick demand-side response to the rising prices in India.

Also, a useful question to ask is what is the impact on growth because of a change in real interest rate in India? Is there any historical evidence to find a relation between the two? A rough rule of thumb is that a 100 bps change in real interest rate could lead to a 20 bps drop in expected growth rate ( a summary of a 2013 paper by RBI that concludes this is at the end of this article). This suggests RBI won’t be worried about growth slowdown anytime soon as it raises rates. The government won’t be worried too. Why? Because there is a global slowdown and it can always point to China struggling with its own lockdowns. In any case, we have seen a 4 per cent growth rate just before the pandemic and that had no impact on the popularity of the government. The government will be willing to trade growth for lower inflation. So, the front-loading of interest rate hikes, as seen in the last month, will continue. My guess is, cumulatively, we will have another 100 bps rate hike by the end of this year.  

Second, let’s look at growth. The FY23 growth forecast has moderated from 9+ per cent about two quarters back to about 7-7.5 per cent range in most estimates. However, so far the high-frequency indicators of growth are holding up well suggesting robust economic activity. On almost every indicator - from fuel consumption, cement and sale production, exports, IIP, e-way bills or GST - we are up by a significant margin from the pre-pandemic levels (20-30 per cent in most cases). Credit offtake has also been strong in the retail loans segment so far. The recent rate hikes and the correction in the equity market will have an impact on this but we will have to wait and see how soon the slowdown in consumption will show up in numbers. My guess is it will take some time because of the nature of the consumption pyramid in India. 

There is also spillover effect of the US Fed's action on rate hikes on India. Will India be forced to mirror Fed’s moves? The inflation in the US is at a historic 40-year high and the economy is running at almost full employment. So supply disruptions apart, there are strong demand factors impacting inflation there. In India, there is some overheating in the labour market, especially in the technology space but we are far from any kind of tightening. It will be useful to bring in Taylor’s rule here to understand the likely monetary policy response. From Investopedia:

“Taylor's rule is essentially a forecasting model used to determine what interest rates should be in order to shift the economy toward stable prices and full employment. The Taylor rule was invented and published from 1992 to 1993 by John Taylor, a Stanford economist, who outlined the rule in his precedent-setting 1993 study "Discretion vs. Policy Rules in Practice."

Taylor's equation looks like:

r = p + 0.5y + 0.5(p - 2) + 2

Where:

r = nominal fed funds rate

p = the rate of inflation

y = the percent deviation between current real GDP and the long-term linear trend in GDP 

In simpler terms, this equation says that the Fed will adjust its fed funds rate target by an equally weighted average of the gap between actual inflation and the Fed's desired rate of inflation (assumed to be 2%) and the gap between observed real GDP and a hypothetical target GDP at a constant linear growth rate (calculated by Taylor at 2.2% from approximately 1984 to 1992). This means that the Fed will raise its target fed funds rate when inflation rises above 2% or real GDP growth rises above 2.2%, and lower the target rate when either of these falls below their respective targets.”

The current weights for India are 1.2 for inflation and 0.5 for growth while the growth weight for the US might be close to zero. Also, remember we didn’t use the fiscal tools as liberally as the US during the pandemic. The US treasury balance sheet expanded by more than a quarter on the back of the stimulus to prop up the economy in the last two years. We have a very different reality. Of course, there will be some defence of the Rupee that will be needed as the actions of the central banks of the developed markets strengthens the US Dollar. But beyond those temporary shocks of investors looking for a safe haven and creating currency volatility, there should be no real reasons why the MPC should follow the lead of the Fed's response to inflation in the US.

Lastly, how will this expedited, front-loaded rate hike actions impact the macroeconomic stability especially of the financial sector? As we have already seen, the transmission of interest rate hikes has happened with speed. Most banks have lost no time in resetting their rates. Also, remember the majority of small business loans to the MSME sector and mortgage loans in India are now linked to repo rates (or some external benchmarks like 30-day T-bills). If the global growth slows and exports weaken and if the large corporations pass on their input cost burden to the customers or their vendors, we might see stress building up in the system among smaller borrowers. This is a lead indicator to be watched although the repo rates after the latest round of hikes are still about 150 bps below where they were in 2018-19. This isn’t a scenario like in the US or UK where the interest rates are at multi-decadal highs. Some prudence on part of borrowers and a bit of flexibility in restructuring loans by Banks aided by the RBI should help the system see through this phase. 

On the balance, I see the CPI settling at about 5 per cent in four quarters from now. The “neutral” real interest rate should be about 1.5 per cent which would mean a repo rate of about 6.5 per cent. My estimate is that’s where we will end up from the current 4.9 per cent level in about 12 months. That’s when any option of moving back to an accommodative stance will start looking viable. The RBI will be walking on eggshells managing the multiple trade-offs between growth, inflation and macroeconomic stability during this time. Through a happy coming together of circumstances, India is placed relatively better than most economies at this moment. We should avoid any misadventures at this time, political or economic.

That’s not a lot to ask for, I hope. 

Postscript: Here’s the paper from the RBI website - “Real Interest Rate Impact on Investment and Growth – What the Empirical Evidence for India Suggests?”. It is a good empirical study about how much growth sacrifice should be needed to tame inflationary pressure. From its abstract: 

“Monetary policy is often expected to adopt a pro-growth stance in a phase of prolonged slowdown in growth and sluggish investment activities. Sacrificing inflation, i.e. lowering nominal policy rate even when inflation persists at a high level, is a convenient means to lower real interest rates, which in turn could be seen as a pro-growth stance of monetary policy. This paper, using both firm-level and macroeconomic data, and alternative methodologies - such as panel regression, VAR, Quantile regression and simple OLS – finds that for 100 bps increase in real interest rate, investment rate may decline by about 50 bps and GDP growth may moderate by about 20 bps. The empirically estimated sensitivity of investment and growth to changes in real interest rate suggests that if the RBI can lower real lending rates, it can also stimulate growth. Review of literature highlights that a central bank can lower real interest rates either through financial repression or by not responding aggressively to inflation while raising the nominal policy rates in response to inflation. 

Empirical estimates for India indicate that RBI’s monetary policy response to inflation has not been aggressive, and as a result the Fisher effect –i.e. one for one response of interest rate to inflation that could leave the real rate constant – does not hold. Thus, even when a high nominal interest rate may often signal that monetary policy stance is tight, because of higher inflation and absence of Fisher effect, lower real interest rate may actually be growth supportive. In India, real lending rates in recent years have been generally lower than the levels seen during the high growth phase before the global crisis. But lower real rates in the post-crisis period have coincided with sluggish investment and GDP growth. This is due to the fact that while real rates are lower, marginal productivity of capital, or expected return on new investment has also declined, which has dampened the expected positive impact of lower real rates on investment. In such a scenario, one policy option could be to lower real rates even more, by raising inflation tolerance, i.e. lowering nominal policy interest rate even when high inflation persists or inflation expectations remain high. This paper, however, provides robust empirical justification against any policy of lowering policy interest rates when inflation persists above a threshold level of 6 per cent. The beneficial impact of lower real rates on growth that may be achieved through higher inflation tolerance is more than offset by the harmful effect of high inflation, particularly when it exceeds a threshold level of 6 per cent.”


Matsyanyaaya: Dictatorship and Democracy in Israel and Pakistan

Big fish eating small fish = Foreign Policy in action

— Pranay Kotasthane

News reports suggest that Pakistan’s military dictator-turned-president-turned-politician Pervez Musharraf is in a critical medical condition. While I have no good things to say about the man, I was reminded of a post I’d written in 2017 which asked: despite their similarities, why has Pakistan had bouts of military dictatorship rule, while Israel has steadfastly retained electoral democracy?

The two religious States — Israel and Pakistan—were both created for the explicit purpose of securing a homeland for religious minorities. Given their preoccupation with security, the military-security establishment occupied a key position in the politics of the two States. Yet, what can explain this fundamental difference: while Pakistan has had long periods of rule by a military dictatorship, Israel has steadfastly retained electoral democracy?

The similarities between Israel and Pakistan are well documented. Faisal Devji’s 2013 book Muslim Zion argues that

Like Israel, Pakistan came into being through the migration of a minority population, inhabiting a vast subcontinent, who abandoned old lands in which they feared persecution to settle in a new homeland. Just as Israel is the world’s sole Jewish state, Pakistan is the only country to be established in the name of Islam.

In this regard, the military dictator Gen Zia-ul-Haq’s remarks made in an interview to The Economist in 1981 are also instructive:

Pakistan is like Israel, an ideological state. Take out the Judaism from Israel and it will fall like a house of cards. Take Islam out of Pakistan and make it a secular state; it would collapse.

So, what explains the difference?

My hypothesis to explain the difference is this: the mediating variable between democracy and dictatorship is the status of civil-military relations in the formative years.

A simplified model to explain the difference with regards to democracy and dictatorship in Israel and Pakistan

The basis of this hypothesis is an argument developed in Steven Wilkinson’s excellent book Army and Nation. The book tries to explore why the armies in India and Pakistan—although cut from the same cloth—became such markedly different domestic political actors in their respective democracies. My case is that the arguments mentioned in the book apply equally to the Israel—Pakistan comparison. Here’s how.

Wilkinson lists three factors for the difference between the armies of independent India and Pakistan:

  1. India’s socio-economic, strategic and military inheritance in 1947 was much better than that of Pakistan. Among other things, Partition worsened the ethnic balance in the Pakistan army while improving it somewhat in the Indian army.

  2. The Congress party — unlike the Muslim League in Pakistan — was strongly institutionalised and had a political reach and presence that was difficult to replicate, let alone dislodge.

  3. During the first decade of independence, the Indian government took specific “coup proofing” measures: new command and control structures, careful attention to promotions, tenures, and balancing ethnic groups at the top of the military, and attention to top generals’ career pathways after retirement.

Now, if these exact factors related to civil-military relations in the formative years are applied to the Israel-Pakistan case, one can see that points (2) and (3) were exactly what David Ben-Gurion and his political forces managed to accomplish in Israel. And hence while Israel managed to retain civilian superiority over its military forces, Pakistan kept having episodic military dictatorships.

The follow-up question would then be: was Jinnah’s death immediately after Pakistan’s formation a big reason for the path it took, while India and Israel had the benefit of dominant, long-standing civilian leaders in the formative years?

I don’t think so. If Jinnah would have lived longer after Partition, it is likely that he would have put specific “coup proofing” measures in place [point (3) in Wilkinson’s schema]. However, the worsening ethnic balance of the army and a weakly institutionalised Muslim League [points (1) and (2)] would’ve still remained intractable. The paths that Israel and Pakistan are now on have a lot to do with what happened in the formative years of the two democracies.


HomeWork

Reading and listening recommendations on public policy matters
  1. [Article] The EU has agreed to make “One Europe, One Charger” a reality in 2024. In October 2021, we had written why this move is a PolicyWTF. The decision is also a useful case study for policymaking. It demonstrates that we should be wary of intuitive solutions to policy problems.

  2. [Book] Media Capture: How Money, Digital Platforms, and Governments Control the News (edited by Anya Schiffrin).

  3. [Podcast] Ashok Malik speaking about TV price controls on The Seen and the Unseen

  4. [Podcast] Shruti Rajagopalan and Lant Pritchett have released another blockbuster Ideas of India episode. A must-listen for all public policy enthusiasts. If you are short on time, jump to Pritchett’s criticism of the poverty line. It’s superb.