#226 Regression to the Mean
The Law & Order Problem in the US, One Nation One Election, Cement Decontrols, and Evasion of Price Caps on Russian Crude Oil.
Global Policy Watch #1: Law And Order
Global issues relevant to India
— RSJ
The U.S. presidential election season is up and running. I caught up for a bit on what prospective Republican hopefuls had to offer as their electability pitches at the Lincoln Dinner in Des Moines, Iowa, last week. There was the mini-Trump in the shape of Vivek Ramaswamy, who was trying to out-Trump everyone with his ‘outsider’ perspectives on small government, America-first and several other bizarre stuff that I could barely keep up with. DeSantis was neither here nor there and seemed to be running out of ideas to get the base excited. Nikki Haley had a good evening but not enough that will have anyone place a bet already on her going far in this race. At the end of it all, Trump spoke in his own mixed-up patois of bluster, lies, crowd-pleasing quips and a wide range of insults, all culminating into a redux of ‘Make America Great Again’. Will it work? Well, the latest polls show him with a 35-point lead over DeSantis, who was the only candidate who polled a double-figure number. We might go through this dog and pony show of the primaries over the next nine months, but I guess Biden vs. Trump in 2024 looks inevitable.
For me, the moment of the night was when one Republican contender, Will Hurd, with barely a snowflake’s chance in hell, went after Trump. “Donald Trump is not running for president to make America great again,” Hurd boldly declared to the assembled crowd. “Donald Trump is running to stay out of prison.” I haven’t heard someone being booed that badly since the time in the early 90s when Ravi Shastri used to play one of his special innings in ODIs. That’s what the base thinks of Trump’s indictments so far. It is a strange moment for democracy in the United States. The latest indictment, Trump’s third in the past few months, is the most damaging of the lot. It is about his role to question the fairness of an election that he lost and then bully people into contesting the validity of elections. Democracy rests on the most fragile premise of fair play from its participants. That when you lose an election as an incumbent, you transfer power to the winner. There aren’t many enforceable laws that will force you to do so. You should do it because, in the long run, this gesture is what gives you hope and the real option of coming back into power. Take that guarantee away, and you soon slide into anarchy.
But that danger doesn’t seem to matter to the Trump supporters and maybe to American voters too. Trump is running neck-and-neck with Biden now, and the more he gets to play up his victim card, the better it does to his poll numbers. A quick look at Pew Research’s unfavourable ratings of both Trump and Biden at the moment is quite revealing:
“Trump remains broadly unpopular with the public: 63% of Americans have an unfavorable opinion of the former president, while 35% view him favorably. A year ago, Trump’s rating stood at 60% unfavorable.
In the new survey, 66% of Republicans and Republican-leaning independents have a very or mostly favorable opinion of Trump, while 32% have a very or mostly unfavorable view of him.”
That’s Trump. Now look at the Biden-Harris numbers.
“Six-in-ten Americans hold a very or mostly unfavorable opinion of Biden, while 39% view him favorably. Biden is viewed slightly more negatively than he was a year ago, when 55% held an unfavorable opinion of him.
Around six-in-ten Americans (59%) also view Vice President Kamala Harris unfavorably, while 36% express a favorable opinion of her.”
They are worse.
We must be ready for a scenario where Trump runs his campaign from a prison and wins. And then pardons himself. Now, this might be new territory for the Americans, but we Indians have had a long experience of voting for politicians indicted for crimes that make Trump look like an ordinary huckster. That brings me to the question of how important is the rule of law for a democracy. On the surface, the Indian experience of having all kinds of criminals voted to power within a democratic setup that has sustained itself seems to suggest it doesn’t really matter. These criminals might get the votes because of their wealth, caste or maybe the State has gone absent for citizens, and they have become the de facto state in the areas that they lord over; whatever the reason, it has never been enough for them to gang up and overthrow the government. Criminals get elected, they lose, they switch parties, they go to jail, and they win again. Democracy goes on. And, so you may say it is what the United States is learning now.
Except that there are two problems that get lost in looking at things this way.
One, if millions of people believe they can ignore the judicial system, or worse, call it rigged and place it below their devotion to one man, then we are going down a path where people will question the basis of law in other areas, too. If it becomes acceptable that people’s beliefs and passions should override the rule of law, you will soon have the state vacate its monopoly over violence that forms the basis for law and order because it is afraid it will inflame people. This inversion is a dangerous trend, and while we haven’t seen this play out in India yet, there should never be any complacency about what mindless hero worship could mean for democracy.
Two, the United States has the rule of law problem at the other end of the spectrum, too. I’m both amused and horrified when I read of the shoplifting epidemic that’s ongoing in big American cities. When the state pleads budget constraints for inadequate policing capacity and asks law-abiding citizens to fend for themselves in protecting their property, we are undermining democracy in as insidious a way as Trump and his supporters. What’s worse, the state, instead of looking for solutions to increase law enforcement capacity, is actually drafting laws to ‘tolerate’ a certain level of lawlessness in the name of inequality and other woke causes that seem to have support among the liberals (see the proposed California bill on tolerating shoplifting up to $1000).
This strong partisan support for ideas that undermine democracy - for Trump charged with insurrection or for a bill that lets the state look the other way on petty crimes - suggests there's a fundamental threat to the foundational idea of the state. The U.S. democracy might survive it in the short run, as we have seen it in India. But it will bring with it lawlessness, disorder and disruption quite soon. And in the long run, the threat to democracy will be real.
India Policy Watch #1: One Nation, One Election
Insights on burning policy issues in India
— Pranay Kotasthane
Old-time readers might recall that this newsletter discussed the “One Nation, One Election (ONOE)” idea in November 2020. Looks like this idea is back in the discourse. There is speculation that ONOE is one of the items on the agenda for the special session that came as a surprise announcement.
Beyond speculation, the government announced a committee headed by former President Ram Nath Kovind to investigate the feasibility of ONOE. The Hindu reports that such a change would need “at least five constitutional amendments and a large number of additional electronic voting machines (EVMs) and paper-trail machines.”
Notably, the nine-member committee has no representation from any of the regional parties. This is important because past analyses showed that simultaneous elections would benefit national parties at the expense of regional parties since national issues will dominate the pre-election discourse.
To analyse ONOE, I’m going to rehash my 2020 article with some additions based on further reflection.
PM Narendra Modi has batted for this idea on many occasions before. His latest pitch for the idea claimed:
Elections are held at different places every few months, the impact it has on development works is known to all. Therefore, it is a must to have deep study and deliberation on ‘One Nation, One Election’.
The most robust defence of ONOE comes from a NITI Aayog discussion paper by Bibek Debroy and Kishore Desai. They cite four reasons. Let us investigate the top three.
Interestingly, this discussion paper has been taken down from the NITI website since January 2023. Thankfully, the internet never forgets. So, the link to the paper above points to a Dropbox location. Anyone interested in this issue should start with this paper. It reveals the government's position quite well.
Back to the three stated reasons.
Reason #1: The imposition of Model Code of Conduct by the Election Commission derails development programs and governance
According to this view, political parties, once in power, are brimming with development ideas but are not able to do so, that too for considerable periods, because of repeated elections. This view is shared by many people outside the government as well.
The discussion paper tries to estimate the development time lost because of elections. Based on a projection that at least two states go to elections in India every year the authors conclude:
“Assuming the average period of operation of Model Code of Conduct as 2 months during election to a State Assembly, development projects and programs (that of State Governments going to polls and of Union Government in those states) may potentially get hit every year and that too for about one-third (four months) of the entire time available for implementing such projects and programs. Such a situation is completely undesirable and needs serious deliberations and appropriate corrective measures.”
Sounds quite serious. But hang on. There are several problems with this assessment.
One, if the Model Code of Conduct is the problem, it can be changed either by shortening the length of the moratorium or by relaxing the kinds of developmental activities permitted during the election season. Even in its current form, the government can consult the Election Commission about the developmental works it plans to undertake, and if they are deemed not to have electoral implications, they are allowed to continue. I’m in favour of removing these restrictions altogether. If a government wants to use developmental activities to lure its voters, it’s more than welcome to do so. If the government is promising freebies to distort voter choices, it can do so even today, just before the Model Code of Conduct comes into place.
Two, the claim that developmental activities get stalled for four months a year is misleading. That’s because the code of conduct applies only to the state where elections are to be held. There’s no reason why developmental activities need to stall in all other states. Moreover, it’s useful to see the development period lost over a five-year period. Assuming that one Lok Sabha election gets held between two state assembly elections over five years, the total “developmental time lost” in the state is six months. That’s an average of one-tenth of a year, not one-third.
Three, this “developmental time lost” argument sounds a lot like the dog ate my homework excuse. For one, governments know when the next elections are due and can reasonably plan their developmental works taking this ex-ante information into consideration. Secondly, and this is the bigger issue, this view relegates elections to a begrudgingly necessary event; a mere obstacle blocking the grand developmental vision of the party or the leader in power.
Four, there’s another way to analyse this argument. Policy practitioners often claim that currently, a government is most likely to push through tough reforms immediately after it is elected and when its legitimacy is at its peak. By the third year of the term, governments start becoming more conservative—redistribution rather than reforms become a priority.
If we were to accept this model for a moment, what impact would simultaneous elections have?
Potentially, the reform window might widen as the government will not have to worry about other elections once a party is voted into power. Not a bad thing. However, given the high stakes involved with a simultaneous election, parties might also go all out to offer freebies and make unreasonable promises as the “big election” festival approaches. Such promises might become more back-loaded than they are currently, but they will likely increase in size and scope. What’s a better trade-off?
Given these reservations, I don’t think the “developmental time lost” is a convincing argument to change the status quo.
Reason #2: Frequent elections lead to massive expenditures by governments and other stakeholders
The NITI Aayog paper claims:
Elections lead to huge expenditures by various stakeholders. Every year, the Government of India and/or respective State Governments bear expenditures on account of conduct, control and supervision of elections. Besides the Government, candidates contesting elections and political parties also incur huge expenditures. The candidates normally incur expenditures on account of various necessary aspects such as travel to constituencies, general publicity, organizing outreach events for electorates etc. while the political parties incur expenditures to run the party’s electoral machinery during elections, campaigning by star leaders and so on.
While this is true, “massive” expenditures need to be unpacked. The first component is the government expenditure in conducting elections. The 2014 Lok Sabha elections cost 3870 crores i.e. an expense of 0.03 per cent of India’s 2014 GDP once every five years. State elections for a large state like Bihar cost a tenth of this amount i.e. 0.003 per cent of India’s 2014 GDP every five years. Even if we assume all states require the same amount as Bihar did, India would be spending 0.12 per cent of India’s 2014 GDP over a period of five years, all state assemblies and Lok Sabha elections combined. Clearly, this number is not unaffordable. It can’t be the primary motivation for undertaking a constitutional amendment exercise fraught with unintended consequences.
The other component of the cost is spending by political parties and candidates. While the latter is capped to laughably low numbers (Rs 70 lakh for Lok Sabha and Rs 28 lakhs for state assembly elections), there’s no cap on the former. The paper claims that taken together, this component amounted to Rs 30,000 crores for the 2014 Lok Sabha elections. This is indeed a worrying number, more so because the expenditure is often in the form of freebies and votes for cash exchanges. However, arguing that conducting simultaneous elections will fix this problem is an admission by political parties that they will not change their ways; it’s just that they will engage in this simultaneous corruption once every five years. Fixing election expenditures requires many urgent solutions, but a simultaneous election is not one of them. A high-stake simultaneous election will more likely increase electoral spending, albeit in a shorter time span.
Reason #3: Engagement of security forces for significantly prolonged periods
The paper argues:
“the deployment of security forces (particularly the CAPF) is normally throughout the elections and they remain mobile from one place to another. Considering that about 2-5 State Assemblies go to polls every 6 month period as stated previously, this situation leads to a lock-in of CAPF and state police forces for prolonged periods of time.
Such a situation is clearly unwarranted as it takes away a portion of such armed police force which could otherwise be better deployed for other internal security purposes – the basic responsibilities for which these forces were developed for.”
This argument makes sense to an extent. However, it needs further analysis. In the current schema, when state elections happen at different points of time, the requirement for security forces is smoothened out over five years. With simultaneous state and union elections, the security force shortage will be felt more acutely. The demand will be episodic (once every five years), but the peak requirement will also be higher.
Arguments against ONOE
Most importantly, there is a correlation between a higher percentage of electoral wins for national parties against regional parties when Lok Sabha and state assembly elections are held together. There are also severe repercussions on India’s federal structure as state governments falling before the completion of the five-year period might have to be placed under the charge of caretaker governments or state governors. The NITI Aayog paper acknowledged this argument but dismissed it as a mere correlation not worthy of serious attention. Even a correlation that fundamentally alters the federal structure of the Constitution surely merits more analysis and reflection.
What this limited analysis shows is that the reasons given in favour of simultaneous elections don’t hold water. We don’t need One Nation, One Election. Nevertheless, it is good for the Parliament and state assemblies to discuss and debate this issue transparently so that the electorate is better informed about the costs and benefits involved.
Global Policy Watch #2: Good ‘ol Indian Jugaad
Global issues relevant to India
— RSJ
The G7 had imposed a price cap on Russian oil with the intention of hurting its revenues so that it finds it difficult to fund its war in Ukraine. However, it placed no cap on freight costs. And that’s where Indian jugaad seems to have kicked in with an advantage for Russia. Here’s FT reporting:
“Inflated shipping costs are enabling Russian companies to earn far more from crude oil sales to India than previously recognised, according to a Financial Times analysis which suggests that the charges may have raised more than $1bn in a single quarter.
Russia has, until recently, appeared to comply on this route with western measures designed to curb its revenues which were introduced after its full-scale invasion of Ukraine last year. Its oil producers have been selling crude to India for below the $60-per-barrel price cap.
But when freight costs are included, they and the traders with whom they work have charged much higher sums.
An FT analysis of ships running directly from Russia’s Baltic ports to India suggests that this overcharging, combined with fees earned from shipping the oil on Russia-linked vessels, may have been worth $1.2bn in the three months to July.
Benjamin Hilgenstock, an academic at the Kyiv School of Economics, which has been studying evasion of the price cap, said: “Inflated shipping costs are a major concern as they effectively create a leak in the price cap regime through which someone, somewhere can siphon off billions of dollars.”
LOL, or as they say nowadays, IJBOL.
PolicyWTF: Cementing Trust
This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?
— Pranay Kotasthane
Reforms in India have often happened one exposed scam at a time. This was truer in the pre-liberalisation era, where prices of virtually every commodity were controlled, incentivising various hues of “allocation” scams. So, in this week’s PolicyWTF, I’m going retro by discussing the story of cement decontrol in India. All details are courtesy of Montek Singh Ahluwalia’s illuminating book, Backstage.
As you can imagine, the cement industry was under complete price control until the early 1980s. Consumers were charged a fixed price, while producers could only sell at a fixed price to a cement controller, who was then supposed to allocate it to different sectors. The cement controller also had the power to decide allocations to different states.
What a perfect setup for deception. I am hopeful that SonyLiv will add cement to its repertoire of scam-based television series. Eventually, in 1982, the court upheld charges against the then Maharashtra CM for allocating cement from the state quota at controlled prices to a chosen few in exchange for donations to his trust.
This depressing story has a positive ending, though. Within seven years of this scam, cement prices were decontrolled. The official committee on cement pricing was able to push through a crucial reform after this scam came to light. First, producers were allowed to sell in the free market only after “surrendering” a fixed percentage of their licensed capacity to the government at a fixed price. Over time, this percentage was gradually reduced. Only after the full decontrol in 1989 could the cement industry in India surge ahead.
HomeWork
Reading and listening recommendations on public policy matters
[Article] Surajeet Das Gupta has an important insight into the laptop PLI scheme. He finds that the companies promising to make laptops in India have reduced their export targets substantially. Bottomline: Government coercion through licenses might well lead to import substitution, but it won’t translate to export excellence. That’s the major challenge with industrial policies—they are shape-shifting creatures.
[Article]: Jagdeep Chokkar and Sanjay Kumar make a solid case against simultaneous polls.
I was half expecting a take on the new proposed regulations that SEBI intends to bring on Finfluencers