#262 Promises vs Realities
Sports Governance, Indian Government Bonds Cross a Milestone, and the Risk-Reward Trade-off in Manufacturing Investments
India Policy Watch #1: Heretical Ideas in Sports Governance
Policy issues relevant to India
— Pranay Kotasthane
We recommended Nandan Kamath’s Boundary Lab: Inside the Global Experiment Called Sport in the HomeWork section a few editions ago. It is a deep dive into various facets of sports, with the Indian context at its front and centre. Every chapter is framed around questions that almost every sports fan ponders, such as, “Should India bid to host the Olympic Games?” or “Should we hold separate women’s chess events?”. With these relatable questions serving as hooks that draw the reader in, Kamath delivers a masterclass about philosophy, governance, and the purpose of sports.
One aspect of the book relevant to this newsletter’s theme is the nature of sports governance in India. The book highlights a study which found that 47 per cent of presidents in Indian sports federations were politicians, emphasising that India is an outlier among democratic countries in this regard. Readers will instantly recall the egregious case of misconduct by the previous Wrestling Federation of India president, further underscoring the need to overhaul sports governance.
The book provides a structural explanation for these outcomes. It highlights that the governance of all sporting disciplines is organised in the form of a pyramid. Further:
“Each tier of the pyramid claims the exclusive authority to govern and administer the sport within its territory. This authority stems from a system of hierarchical and peer recognition. Each body is recognised by its superior body, and also by its peers at the same level of the pyramid. There is only one body at each level within any jurisdiction. Each subordinate federation becomes a member of the body immediately above it in the pyramid” [Boundary Lab, page 32]
This hierarchical structure and “one national team per country” imply that the National Sports Federations (NSF) enjoy both a monopoly and a monopsony. Monopoly in the sense that only these bodies can hold sub-national competitive tournaments and set technical standards and codes of conduct applicable to all players within the country. Monopsony in the sense that these bodies are the only “buyers” of talent in a sporting discipline, as each international sports governance body recognises only one NSF per country. In economic terms, this is a highly anti-competitive structure, which would be frowned upon in most other domains. By default, the cards are stacked against players and spectators and in favour of sports administrators.
Even though this book highlights this problem, it seems to take this structure for granted. The waves of governance reforms proposed in India seem to have taken it for granted. Every controversy results in a lawsuit, and the Court eventually recommends an ad hoc oversight committee that tries to mollify all interest groups. The situation returns to business as usual once a new set of office bearers are brought in. Such measures only kick the can down the road until a new controversy hits the sport.
At the same time, it would be foolish to consider evicting politicians from sports governance. Given the stakes involved, such diktats would only result in a sarpanch-pati syndrome, where the politicians will continue to hold power behind the curtains. Given the structure, introducing competition seems to be a good way to improve the status quo. Curtailing National Sports Federations’ monopolistic and monopsonistic powers—to the extent possible—might achieve better results than court-mediated stop-gap arrangements. What would this look like?
At the very least, NSFs shouldn’t also conduct sporting events. That should be left to other organisations. A monopoly over conducting subnational events allows an NSF to use its monopsonistic power against players. For instance, when the Indian Cricket League began in 2007 without the approval of the Board of Control for Cricket in India (BCCI), the BCCI banned the ‘rebel’ players from representing the national team. Never mind that in a move reminiscent of the AmazonBasics strategy, the BCCI copied the ICL format and began its own Indian Premier League (IPL).
Next, the sports ministry could recognise at least two apex sports governance bodies for every discipline. The monetary support given to these bodies can be proportional to their annual performance. The federation that performs better in terms of player and fan welfare should be offered higher support. Selection for the “national” team can then be made by a panel that picks the best players from the two federations. These selectors should have no responsibilities related to the administration of the game. Competition between the two bodies will help reduce their monopsonistic and monopolistic powers.
There might be some even more heretical ideas to consider. Why should there be just one national team per country? Like the Cannes Film Festival, which allows open submissions without country quotas, why not have international sporting events where multiple teams per nation-state and teams spanning across multiple nation-states are allowed? Perhaps the answer to this question lies in the primary purpose of sport itself. If sports is primarily a nationalistic ritual that reaffirms comradeship by staging encounters with the “other” in a non-violent manner, the current arrangements will continue to hold sway. But if the aim is entertainment and a commitment towards excellence, there is no need for a country quota.
In summary, sports needs a deep sectoral reform, like in the telecom and Space sectors. Telecom and space reforms were not about punishing errant officials but about a new architecture to ensure that no entity can simultaneously be an umpire and a player.
PS: The Banishing Bureaucracy framework by Osborne and Plastrik is a good starting point for reforming sports governance. We’ve covered this framework in edition #15.
India Policy Watch #2: India’s Bond Moment?
Policy issues relevant to India
— RSJ
The big financial news of the week was the inclusion of India’s government bonds in JP Morgan’s Emerging Markets debt index starting Friday. The announcement was made way back in September’23, and since then, FPIs have been rebalancing their portfolios to include Indian bonds. Since then an estimated $11 billion inflow has already happened into Indian debt markets. India will account for about 10 per cent of the index by March ‘25, which will mean about $2 billion monthly inflow on average till then. We have written on different occasions about the Indian debt market and the challenges it faces in terms of depth and maturity. In that light, the inclusion in global bond indices like JP Morgan and Bloomberg (possibly in January 2025) is a positive development.
However, in the macro scheme of things, the impact will be limited despite the usual triumphalism from some quarters. Global investors—pension funds, mutual funds, sovereign funds, family offices, and passive funds—use bond indices like the JP Morgan Emerging Market index to track and compare bond movements across multiple economies and make investment decisions. A 10 per cent weightage in an index like this will mean the Indian bond market becomes an important part of their investment portfolio by default. Broadly speaking, there are four key benefits here.
First, and to this extent some triumphalism is justified, it signals a certain maturity and stability of the Indian economy and its stewardship. Foreign investors have long-term confidence and faith in India’s fiscal management prudence and its ability to stay the course on reforms. Banks and Mutual Funds globally have been holding Indian G-secs, but this move will diversify the investor base too. Some of this was triggered by the Ukraine war and the shutdown of the Russian market to FPIs. But we would have got here eventually.
Second, a larger set of buyers and the inflows that are expected every month will ensure yields are capped. This will lower the government's borrowing costs, which is a positive if we were to consider the plans for public sector capex in infrastructure and energy. Of course, any such spending by the government will be under greater scrutiny now that FPIs have a greater stake, and in some ways, this increases the need for prudence in fiscal management.
Third, the increased foreign inflow gives domestic institutional investors additional headroom to diversify their investments in the bond market. The risk of crowding out reduces with a diverse base. This will be a positive for the Indian private sector, allowing it to tap into the bond market for its financing needs, especially in areas that are being actively promoted by the government through PLIs and other schemes.
Lastly, this kind of additional flow of dollars will continue to help the government with its Balance of Payments (BoP) management. India is sitting on a currency reserve of about $650 billion; further inflows will help add to this buffer. This gives more ammunition to the central bank to intervene and manage rupee volatility. The stability in the rupee will help with further inflow as the risk of value erosion due to rupee depreciation is capped.
While all of the above is true in the long run, the short-term impact will be muted. India still has high government debt and poor interest-to-revenue ratios. The political landscape suggests there might be some tendency towards more welfa
rism if the state elections don’t go well for the incumbent Union government. On an aggregate basis, the total addition of $40 billion of flow, while good by itself, will possibly impact the rate by 15 bps and much of it is already priced in. Further influence of debt pricing seems limited. We should see this as a symbolic milestone that signals a coming of age of our debt market rather than an instant game-changer. The path to a deeper and more mature debt market in India needs additional work than mere foreign inflows.
PS: Read our backgrounder on India’s corporate bond market here.
India Policy Watch #3: The Risk-Reward Trade-off
Policy issues relevant to India
— Pranay Kotasthane
In previous editions, we have written about the government’s preference for pro-business policies over pro-market ones. Across economic sectors, the government seems to be following a common strategy. First, go all out to attract key investors by offering them subsidies and capital support. Second, block external competition by raising tariffs. And then, pray that these firms will have a generative effect, attracting other lead firms while creating a robust domestic vendor ecosystem.
In contrast, pro-market policies would mean lowering tariffs and taxes and eliminating cost disabilities by improving the ease of doing business.
In a new Indian Express article, economists Josh Felman and Arvind Subramanian offer a new way to frame this dichotomy, this time as a trade-off between returns and risk. They argue that the government has done a lot to improve returns on investment through subsidies and incentives but has failed to mitigate the risks that investors face.
Felman and Subramanian write that investors care about three types of risks: state actions that favour competitors, directly coercive actions, or state actions that increase friction in the supply chain. The government has been found wanting in all three areas. In their words:
“The first is what could be termed “national champions risk”. On numerous occasions, the government has abruptly changed the policy framework when it saw the opportunity to promote a national champion. The attraction of such an approach is obvious: If it is successful, an Indian firm will invest, become large and successful, and enter the global fray. But this strategy has a drawback — it deters all the other domestic firms from entering the same manufacturing space or even a different space, out of fear that once their irreversible investment is made, the policy framework will be changed to their disadvantage…
The second risk stems from direct and coercive state action, such as aggressive tax collection. Admittedly, such policies can benefit the government, with reportedly around 40 per cent of income tax (corporate and individual) revenue accruing from additional tax demands. But if ED or tax authorities raid selectively, while regulatory agencies render arbitrary verdicts, or actions verge on extortion as in the electoral bonds saga, risk perception deteriorates sharply. As a result, lakhs of crores of investment can be destroyed. And even the apparent revenue benefits may prove elusive over the long-term, since historically most additional tax demands are ultimately overturned in the courts.
In particularly prominent cases, Cairn/Vedanta and Vodafone invoked bilateral investment treaties to challenge the government’s retrospective imposition of taxes. The government dithered when international arbitration upheld their claims. Even when the government eventually withdrew the tax, it was done tardily (after seven years) and more out of duress than conviction. Further, it allowed all its bilateral investment treaties to lapse, viewing them as a problem rather than as a means to reassure investors.
Finally, there is supply chain risk. Today, virtually no manufacturing product is made solely from domestic materials. For India to become internationally competitive — and convince the world to “Make in India” — manufacturing firms need to be assured that they will have access to raw materials and inputs from anywhere in the world. But every time a tariff is increased or a product ban imposed, or even when such measures are floated by the government, firms worry about their access to low-cost supplies.” [Indian Express, Felman & Subramanian]
This formulation is a useful heuristic for understanding why private investment levels have remained stagnant despite the government’s efforts. It also helps explain China’s past success in attracting investment. The dominant narrative credits generous subsidies and state support for domestic firms. However, the more important determinant might have been the consistency in trade, tax, and policy regimes, which gave investors enough confidence to invest in long-term investment projects.
HomeWork
Reading and listening recommendations on public policy matters
[Paper] This OECD paper on competition issues in sports is worth a read for people interested in sports governance.
[Article] In a two-part Business Standard article, the authors argue that the GST compensation cess should be retained, while the assured revenue guarantees to the state governments must end.
[Book] When the Drugs Don’t Work by Anirban Mahapatra explains the anti-microbial resistance challenge quite well.