#227 Looking Ahead, Looking Back...

India vs Bharat Debate, 16th Finance Commission, Policy Lessons from the Maruti Story, and Puliyabaazi @201, Not Out.

India Bharat Policy Watch #1: Bharat FTW

Insights on issues relevant to Bharat

— RSJ

I don’t know about you, gentle reader, but I have rarely felt the weight of ‘colonial mentality’ while I go about my daily business. I mean, I write a business memo, make a sales pitch, talk to my colleagues and whine about things at work. And surprisingly, it never appears to me that the ghosts of Macaulay or Bentinck are on my shoulders, guiding my everyday decisions. But that’s just me. To many who support the party in power in India, it is a tad different. The thing for them that’s hampering our growth and holding us back from amritkaal is our ‘colonial mentality’. I have tried to understand what this means by reading the many opinion pieces on those who think this a real problem of India today and speaking to a few who were ready to offer an intellectual scaffolding to this argument.

Broadly, there are three points made by them if I take their arguments in good faith.

One, the colonial mentality prevents us from seeking wisdom and insights from our indigenous systems of knowledge and our past. Understanding them and using them to look at our current issues will help in finding solutions that will work on the ground in India. Instead, we seek Western solutions and copy Western development models that might not be suited to our unique social and cultural milieu. Two, we suffer from an inferiority complex because of centuries of subjugation that has meant we seek constant validation from the West. We are mentally colonised still. This has prevented us from creating our own benchmarks of excellence and charting our own intellectual course, which we believe is unique and often better than what Western enlightenment has to offer. Lastly, a decisive break from every vestige of colonialism in form and substance will ignite a moral and social renaissance in our society that will provide a new model of leadership to the world based on our somewhat superior ancient knowledge system. We must have the conviction to do so, and we must offer this alternative to the world.

In a way, this was summed up by the PM in his Independence Day speech this year when he said:

“In no part of our existence, not even in the deepest corners of our mind or habits should there be any ounce of slavery. It should be nipped there itself… This slavery of hundreds of years has kept us bound, has forced us to keep our emotions tied up…(it) developed distorted thinking in us. We have to liberate ourselves from the slavery mindset which is visible in innumerable things within and around us.”

Now, this is a subject on which I have written in multiple editions in the past. I bring this topic up again because we had the India/Bharat discussion quite a lot last week after the official invitation from the President mentioned Bharat instead of India.

I will reproduce extracts from previous editions on this a bit later. I will make the four arguments I have on this now.

First, if you believe the Western world sets the rules of the game and you have a better alternative to offer, what’s the way for you to change it? As much as we would like to declaim at every forum about our glorious past, where we apparently invented pretty much everything, it won’t cut much ice. Because almost every large nation has a similar past to offer. I mean, Greece, China, Turkey, and Mexico can all join in the fun on who invented more things in the past. But more importantly, why should anyone follow the lead of a country that has over two-thirds of its population living today at sub-Saharan poverty levels, no matter how glorious its past? The only real path to realising any dream of offering an alternative is to first win at the game the way it is played now. Otherwise, I’m sure even North Korea thinks juche is a much superior way of running a society, and everyone should follow their lead. 

Two, what is the evidence that a colonial mentality is hampering our growth right now? What specific policy change that we want to make is being weighed down by this mentality? The multiple committees and the numerous recommendations that have been made by them on police, judicial or administrative reforms to transition us away from the Victorian age have been stymied over the years by successive administrations. Why? Because of some colonial hangover that we collectively suffer from? Or because the political and administrative masters love lording over us using the tools left behind by a colonial power. It is not only difficult to do the hard work of bringing our system of governance from the colonial objectives that underpin it to the more egalitarian world of today, but it is also convenient for our masters to keep us there. Instead of real reforms and leaving colonialism behind, what we are offered is everyday tokenism to rebranding and renaming. Rajpath to Kartavya Path. Abide With Me to Sare Jahan Se Achha at the Beating Retreat ceremony. A bahi-khata in a jhola instead of the briefcase for a budget speech. I could go on and on. These do not rid us of the real colonial legacy that drags us down. These are the modern equivalent of bread and circuses to keep the Romans in thrall and oblivious to the real issues. 

Third, and possibly the more insidious point, is how much of the framing of these topics is done to show that anybody opposing the ruling party is opposing India. At the heart of the democratic process is that it is a contest of ideas on what works best for the people and the country. There could be different paths to that goal, and you could be ideologically opposed to the path of your political adversaries, but you wouldn’t or shouldn’t question the objectives they pursue. More importantly, for the long-term health of democracy, you shouldn’t tar your political opposition with an anti-national brush because that’s the equivalent of tarring more than half of your own people with those who might have those political affiliations. The 20th century is full of examples of how this eventually ends up from Germany picking itself from World War 1 and going rogue on nationalism to Mao using the cultural revolution to get over a century of humiliation and killing his own people in millions. Turkey changing its name to Turkiye isn’t going to revive its economy from dreadful indigenous economic policies and thoughts that have only brought ruin. Nor will Putin asserting akhand Russia bring Russians any material comforts. There are more than a few bad precedents, and if and when the electoral wheel turns in India, it will be used in the same vein by the others. It is a slippery slope from there on, as we already see in democracies like the USA, where the political fault lines among people run so deep that you won’t be surprised if people stop believing in the democratic process soon. 

Lastly, and this is a point that I have made in the past too, what’s the evidence we have that our glorious past and civilisational values have the richness of content that can help us address the issues of the future? I mean, it is one thing to venerate our past and feel confident about ourselves as a polity on the back of it. It is a completely different thing to go on a wild goose chase to read scriptures that are mostly meta-texts written a couple of thousands of years ago with limited context of their time and find solutions to present problems. It is all good to retrofit whatever modern science figures out today and then go back and find some echo in some ancient text. Most civilisations can do the same if they decide to waste their time this way. It is a different thing to use those texts to actually invent something new or conceptualise a new political or economic stream that the world hasn’t seen. The line between finding justifiable pride in our ways of doing things and being led to false pride by political masters for electoral gains is thin. We, the people of Bharat, cross that quite easily. 

I will close with two extracts from previous editions. First from #169 (The Past Is A Foreign Country):

“…this is a point we raise often in these pages - what should be our priorities at this time? We are a low-income nation that has underperformed on its potential for decades. We still have a window of opportunity available to raise our people out of poverty and provide a life of dignity to them. That should be our goal. Do we believe a reckoning with the past that’s over half a millennium old, however justified, will take us further on that goal? Are we not able to build good roads, hospitals, and schools because we are weighed down by the sense of victimhood and our medieval history? And once we are out of that funk, will we make the lives of our people prosperous? And it’s not true that we can do both at the same time as some argue? We cannot build a nation while seemingly persecuting a sizable section of our own people. We also have limited state capacity that should be channeled to its most productive use.        

In Moral Man and Immoral Society: A Study in Ethics and Politics, Neibuhr an American theologian and ethicist who, as Wiki will tell you, worked on the intersection of religion, politics, and public policy makes three arguments that are relevant for this discussion. First, individual self-interest cannot be fulfilled in collective good. Therefore, to also believe a collective good will spur individual action is an illusion. Second, inevitably the will to power overcomes the will for good. So, don’t expect an action, however well-intentioned for a society, that strengthens power for a group will not fall into the trap of furthering that power at the expense of being a force of good. This is because collective morality is much more vulnerable to fracture than individual morality which is by itself liberal. And lastly, morality and political power are a dangerous combination to hold, and they can subjugate every other interest in the name of national egoism. It erodes any kind of self-criticism and leads to an eternal search for scapegoats for pinning the blame of underperformance.”

And this footnote from edition #143 (This Day, That Year, Their Civilisation) quoting Toynbee:

“Of the twenty-two civilizations that have appeared in history, nineteen of them collapsed when they reached the moral state the United States is in now.”

I will leave you to draw your inferences as you read the above section and look at the course America has taken over the past two decades.

History might not repeat. But it rhymes.

I will close with what Toynbee thought was the only way for a civilisation to revive itself:

“Schism in the soul, schism in the body social, will not be resolved by any scheme to return to the good old days (archaism), or by programs guaranteed to render an ideal projected future (futurism), or even by the most realistic, hardheaded work to weld together again the deteriorating elements [of civilization]. Only birth can conquer death―the birth, not of the old thing again, but of something new.”

There’s a lesson there for Bharat.

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India Policy Watch #2: Let the Fiscal Federalism Games Begin

Insights on issues relevant to India

— Pranay Kotasthane

The 16th Finance Commission (FC) is expected to take shape in November this year. It will recommend the formulae for vertical devolution (revenue-sharing between the Union and all States as a whole) and horizontal devolution (revenue-sharing amongst the States).

It’s a thankless job, much like umpiring a cricket match. Ex-ante, every government would like the Finance Commission to arrive at a formula that only favours their situation. Eventually, every state will be disappointed with the FC for disregarding their specific concerns.

Thus, I have immense respect for FCs. That their major recommendations have been accepted by all but one Union government speaks highly about the political and technical capabilities of the institution.

Now, fiscal federalism has become a politically salient axis in recent years. There will be countless reports and counter-charges once the 16th FC starts visiting state capitals. So, it is useful to take a step back and focus on public finance issues before ideological politics takes over.

Despite popular arguments that southern states should receive a greater share of revenues because of their higher contributors to the income tax kitty, equity between states will continue to receive a higher weightage in the horizontal devolution formula. That makes perfect sense. Here’s why.

The objective of untied funds given by the FC is to enable comparable levels of public services at comparable tax rates. Given that there is not a lot of difference in the tax rates of various states in India, this implies that per capita general purpose transfers from the Union need to go to areas where the levels of public services are poorer. This approach places an individual at the centre of policy-making regardless of the state where he or she resides.

The idea of punishing individuals elsewhere in the country just because these areas continue to languish goes diametrically against the Indian Republic’s spirit. If this argument of southern-versus-northern states is followed through, a direct corollary would be to also oppose money flows from Bengaluru to Bidar, or from Whitefield to south Bengaluru.

Given the zero-sum nature and the FC’s objectives, most better-performing states will, by definition, receive fewer transfers than they hope. What cards can they play in that case? Here are three options.

The first option is to focus on vertical devolution, i.e. how the money is split between the Union government and all states as a whole. If the Union government keeps less money to itself, all states stand to gain together. So, states must demand that their share of the divisible resource pool increases beyond the current 41 per cent.

Second, better-performing states can argue that the horizontal devolution formula must accord weightage to public debt management. States with unsustainable debt levels must be punished, while the prudent ones must be rewarded. There is currently no institutional mechanism in India to strongly disincentivise states from spending beyond their means. The Fiscal Responsibility and Budget Management Act has enough loopholes that governments routinely exploit, as this new Indian Express opinion piece reveals.

Economists Ayesha Ahmed, Poonam Gupta, and Barry Eichengreen explain this problem well:

We hear whenever the Finance Commission (FC) is set up, through horizontal devolution of taxes, richer states subsidise the poorer states. There is another subsidisation happening which is (the) more prudent states are subsidising the profligate ones through interest rate evening out. Gujarat should be certainly able to borrow at a lower interest rate than Punjab. But the fact that those rates (are) kept uniform, there is another element of subsidy that is happening,

The implicit guarantee provided by the union government for state government bonds, coupled with rules that mandate banks to buy government bonds, has led to perverse incentives. In their paper India’s Debt Dilemma, the three authors note:

.. bond yields in India have not moved with the level of indebtedness or inflation. This is true at both the Central and State Government levels. Moreover, the interest rate at which different States raise their debts does not vary significantly by the level of indebtedness, primary deficit, or the rate of economic growth. Mishra and Patel (2018) suggest that this reflects an implicit guarantee from the central government, and the fact that the largest investors in government bond markets (public sector banks, insurance companies and provident funds) are owned by the Central Government, and as such are not purely profit maximizing entities. These institutional investors are all required to hold government bonds as a statutory requirement. In addition the Reserve Bank of India (RBI), by carefully scheduling the calendar of borrowing and coaxing government-owned investors to hold the bonds of the States, ensures that interest rates on State debt remain in a tight range. Evidently, it does not want perceptions of debt distress or unsustainability of the debts of some States to infect others.

Given this situation, the FC formula could be used for controlling government expenditures. I am opposed to the FC being used for objectives beyond finance, such as population control and urbanisation. As the Tinbergen Rule goes, “one instrument, one objective”. But in this case, the FC caring about financial management is not scope creep.

Thirdly, states must also demand that the revenue-sharing formula give higher weightage to fiscal devolution within the state. State governments that have regularly constituted State Finance Commissions and used them to transfer untied funds to their municipalities and panchayats should be rewarded. This, again, is in the interest of better financial management.

Either way, the 16th FC will have an unenviable job to do.

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PolicyWTF: What Policies Made Maruti a Success Story?

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

— Pranay Kotasthane

You would have often come across this argument: Maruti’s legit success in automobiles is proof that the Indian government can run manufacturing businesses. That atmanirbharta can succeed. All it needs is political will.

But the lesson from Maruti’s success is precisely the converse. Maruti succeeded despite the prevailing manufacturing policies. It succeeded because of the peculiar political economy of that project. It was an experiment that crucially went on to convince people within the government about the importance of manufacturing policy reform.

You will find the fascinating and hilarious details about the Maruti story in Montek Singh Ahluwalia’s terrific book, Backstage: The Story Behind India’s High-Growth Years. What follows are my annotated notes based entirely on my reading of the book.

First, Maruti Motors Limited was created in 1971 with Sanjay Gandhi as the first MD. He wanted to make “A People’s Car”, indigenously designed and manufactured in India. After ten years, it had nothing to show apart from a prototype that resembled a baby hippopotamus on four wheels.

After Sanjay’s sudden death in 1980, the Maruti project became emotionally significant to his mother, PM Indira Gandhi. And she pulled out all the stops to make this project happen. Despite opposition to the project’s revival from the Planning Commission and the Finance Ministry, it was approved.

In its new avataar, the PM had the good sense to look past the IAS officers and appoint a seasoned public sector manager, V Krishnamurthy. Apparently, the PM personally requested him to take up this offer and assured full operational autonomy.

Right at the outset, Krishnamurthy made it clear that Maruti could not become atmanirbhar overnight. While manufacturing could be done in India, he got approval to bring a foreign design partner on board. After Maruti paved the way, the government began to look at imports in other sectors more favourably too.

The next bottleneck was choosing an international partner. The then industry minister preferred Renault, which had a neat 1500cc engine. But Krishnamurthy felt that the small Indian market needed a cheaper, smaller car. He eventually zeroed in on a Japanese two-wheeler company that had just designed an 800cc engine car, Suzuki Motors Ltd. Obviously, the minister was not happy. But because Krishnamurthy enjoyed direct access to the PM’s office, the industry minister had to yield.

But India’s reputation for doing business was so terrible that Suzuki dreaded a joint venture. It was willing to get into a licensing arrangement with Maruti to transfer technology and no more. That’s when Krishnamurthy used a “hands-tied” strategy.

He insisted that Suzuki pick up 26 per cent equity with an option to go up to 40 per cent in order to secure its long-term interest in the project. He also structured the partnership agreement such that certain decisions mandated the approval of the foreign partner. This was done to prevent political interference from leading the project astray. It is unimaginable that any other company at that time—even a public sector unit—would have received a green signal for these radical partnership terms.

Production at scale was imperative for profitability. Maruti again received favourable treatment in this regard. While the other two companies licensed to produce cars could only produce 20,000 units a year, Maruti got a license to produce 100,000 cars.

Finally, when the time came to produce engines indigenously, the Maruti-Suzuki experience again exposed the absurdity of India’s import licensing regime. This section is so tragicomic that I’ll just quote from Backstage:

“When MUL moved from assembling cars based on completely knocked-down imports to indigenous production under a phased manufacturing programme, they needed to put equipment in place for the next stage of manufacturing. When they asked for a licence to import the equipment to machine the engine block, Hindustan Machine Tools, another public sector company, persuaded the Directorate General for Technical Development (DGTD) that the import licence should be denied as they could supply the machines needed, just as they had done for the engine block of Bajaj scooters.

The matter had to be resolved by Minister of Industries N.D. Tiwari in a meeting. R.C. Bhargava, managing director of MUL, later told me he had arranged to physically bring the engine block of a Bajaj two-wheeler and the engine block of the Maruti car into the room to let everyone see how different the two products were! MUL finally got the import licence, but the episode illustrates the arbitrariness inherent in the system. The flexibility shown here helped the case for a more relaxed administration of the regime.”

This entire story had me in splits.

The Maruti story also tells us that egregious favouritism is often the only way out of a low-equilibrium policy environment. It’s best to never get into that situation. A situation best avoided.

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Puliyabaazi at 201*

— Pranay Kotasthane

I hope readers will excuse me for this self-promotion section. After all, it’s not often that a podcast crosses a double century. Recent estimates suggest that of the 4 million podcasts worldwide, only 4 per cent produced an episode in the last 10 days and had more than 10+ episodes.

Moreover, this medium is still dominated by English. More than 60 per cent of the world’s podcasts are in this language. The largest number of podcasts in any desi language are in Hindi, at a distant tenth position, accounting for 0.9 per cent (although I think there are a large number of Hindi YouTube video podcasts that might be missing from these estimates).

And so, the three of us (Saurabh, Khyati, and me) are delighted to have crossed the double-century mark. More importantly, we are proud to have been able to record some high-quality conversations in easy-going, conversational Hindi/Hinglish.

The reason for writing this section is that we had three fantastic recent episodes.

In episode 199, we discussed the deep political history of the Mysore State between 1799 and 1947 with lawyer and historian Siddharth Raja. As one of the largest and most well-governed princely states, I wanted to understand its politics leading up to Indian independence, and Siddharth didn’t disappoint. He regaled us with intricate details about the polity and society of those times.

The 200th episode was extra special. We spoke with Dr. Pratap Bhanu Mehta, a scholar whose work and kindness we admire deeply. Originally, we wanted to have Dr. Mehta as the guest for the hundredth episode. So we were overjoyed that this episode finally happened. The conversation, as you would expect, is packed with insights about contemporary Indian politics. It’s a terrific starting point for anyone interested in the Indian State and society.

That wasn’t all. In episode 201, we spoke with Mr Montek Singh Ahluwalia on topics that regularly feature in this newsletter—the general equilibrium approach, binding constraints in governments, economic reforms, and so on. His book Backstage: The Story Behind India’s High-Growth Years should be mandatory reading for any master’s level course in public policy.

That’s about it. If you enjoy listening to the Puliyabaazi podcast, please consider rating and reviewing it on Apple Podcasts or elsewhere. That will go a long way in supporting this small-little project of ours. To those here who haven’t given it a try yet, here are a few playlists to begin with.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Articles 1 & 2] M Govinda Rao has a two-part article on things Karnataka must do to present its case favourably in front of the 15th Finance Commission.

2. [Paper] A useful paper on the usage of trade policy for geopolitical objectives.

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