#273 Taking Things Too Far

One Nation One Election, A Money Supply Boost, Pager Attacks Ruin Electronics for Everyone, and China's Pension Reforms

India Policy Watch #1: Running With A Bad Idea

Insights on current policy issues in India

— RSJ

The Union Cabinet this week cleared the proposal of the High-Level Committee on One Nation, One Election headed by former President Ram Nath Kovind. The Bill facilitating these concurrent polls could be introduced during the winter session of Parliament. This Committee, set up in 2023, consulted 39 political parties, jurists, economists, and the Election Commission of India. It studied international practices to arrive at a conclusion that the Prime Minister had already foreseen a few years back. As we have written in the past, evidence-based policymaking is so boring. We prefer policy-based evidence-making. As they say, India is not for beginners. 

What happens next?

Well, the Committee has suggested about 18 constitutional amendments, of which about half might need ratification by over 50 per cent of state assemblies and about 2/3rd support from both houses of parliament. The Law Commission is also preparing a report, and it will likely recommend simultaneous elections across the Lok Sabha, state assemblies and local bodies as early as 2029. 

As the HT reports:

“The committee has suggested a one-time transitory measure to synchronise all elections and proposed when Lok Sabha is constituted after the general elections, the President would by notification on the same date as that of the first sitting bring into force the provisions for transition. This date would be called the appointed date.

Irrespective of whether a state assembly has completed its five-year term or not, a clause under proposed Article 82A stated that all the state assemblies constituted in any general election held after the “appointed date” shall come to an end on the expiry of the full term of the Lok Sabha.”

We have written extensively about ONOE in previous editions. Our argument remains the same. The problems that it is trying to solve don’t need such fundamental changes to the constitution and the nature of our polity. Policy paralysis due to the continuous elections treadmill and the moratorium period before it; costs of holding elections in a disaggregated mode; the constant election mode parties tend to be in keeping the political temperature high; and the mobilisation of security forces multiple times because of various state elections—these are all issues we have debated and suggested simpler solutions than One Nation, One Election.

The costs of moving to a quasi-presidential form of elections where the local issues, especially in smaller states, might get buried under the avalanche of national issues are quite real. There are other constitutional issues, too, in terms of how incentives change for elected politicians when they know any mid-term loss in the mandate of a government will mean an election that will be held for only the remaining term (a truncated term till the next date for simultaneous elections). It could also mean more elections because there could be more truncated terms, given the nature of politics in many states. Lastly, our contention has always been that the long-term nature of such changes is quite difficult to predict and could possibly be quite damaging to democracy. We should try simpler and less intrusive solutions to effect electoral reforms in India rather than go for something like this.

But where is the drama in that?

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Addendum

— Pranay Kotasthane

You’ll find all our arguments challenging ONOE in this thread.

Or in this edition.

#226 Regression to the Mean

These arguments apart, there are two additional points to consider.

First, my opposition to ONOE is qualitatively similar to my opposition to the caste census. Sure, both ideas have some advantages. However, a linear decision-making calculus underestimates the long-run effects of such moves. These are leverage points in a complex system that will have disproportionately negative effects on the Indian State, market, nation, and society. So, we should be abundantly cautious and exhaust other reform alternatives.

Second, a common assumption underlying the demand for ONOE is that parties are in a “constant election mode” under the current system, which is supposed to be terrible for policymaking.

Now, let’s test this assumption. As I have said before, analysts often commit the mistake of comparing the best-case version of an imagined future due to policy reform with the worst-case version of the current status quo. That’s inadequate. We must anticipate a reform's unintended consequences before committing ourselves to it.

So, here’s how the worst-case version of an ONOE, one that operates exactly as desired, might appear. Let’s assume that simultaneous elections largely happen only once in five years in a steady state after the initial transitional hiccups. What would that world look like?

To answer that question, observe the stakes at play here. Voters vote for the same party when simultaneous elections are held. This claim is based on robust evidence. Association for Democratic Reforms (ADR) found that in the 31 instances of simultaneous elections for state assemblies and the Lok Sabha since 1989, major political parties polled almost a similar proportion of votes for the Assembly and the Lok Sabha on 24 occasions. Thus, a coalition that wins elections at the national level is likely to fare better at the other levels under ONOE. Thus, a party faces a stark choice: it will either simultaneously command power at many levels or risk political irrelevance for five years. In other words, it is a pressure cooker without any safety valve. करो या मरो.

In such a high-stakes game, what would the incentives of an incumbent government look like? We already know state governments tend to postpone hiring in policing and other positions towards the end of their term. This trend will grow stronger. Governments might postpone all hiring decisions towards the end of their term. The same applies to populist freebies. With the stakes being this high, intermittent small-scale distributed populism might get replaced by large-scale concentrated populism from all sides towards the end of the term.

Currently, parties in the opposition invariably have an election to look forward to. Election losses are followed by chintan shivirs where party leaders try to regroup and motivate their cadre. But once you have simultaneous elections, there is little to look forward to for the next four to five years, which increases the chances of opportunist leaders splitting parties and jumping ship more often.

None of these outcomes appear beneficial to public policy outcomes. Perhaps parties being in a “constant election mode” is not optimal for public policy, but one-shot elections will likely be far worse. Public policy is the art of selecting the second-best option; in this case, ONOE remains a far third.

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India Policy Watch #2: Where’s The Paisa?

Insights on current policy issues in India

— RSJ

The Fed cut rates 50 bps last week in an 11-1 vote with Jay Powell indicating inflation in the US was in the realm of comfort with a less tight labour market. The 50 bps cut indicates an admission that the Fed was behind the curve, and a 25 bps cut could have come a couple of months earlier. Following the Fed rate cut, Hong Kong and Indonesia also cut their rates by 25 bps and other emerging markets will follow suit during the next month. The next Monetary Policy Committee of India (MPC) meeting of RBI is on Oct 7-9, and I sense we won’t see a rate cut so early. Also note the October meeting will see 3 out 4 MPC members complete their terms and an almost new team at the helm. So, it will be a wait-and-watch kind of MPC discussion with a likely shift in stance only in the December meeting. The earliest likelihood of a rate cut is going to be at the February MPC meeting unless we see another Fed cut by then. 

The RBI increased the repo rate by 250 basis points between May 2022 and February 2023. Since then, the MPC has kept rates and stance unchanged, citing inflation concerns and risks in an uncertain global environment. But that might be behind us now. A month here or there doesn’t alter the fundamental point here. We are at the start of a rate-cut cycle now.

There’s a slowing down of growth in the economy, as the Q1 GDP numbers showed. Consumption isn’t growing as fast as in the past, and government spending was weak owing to elections. Also, China’s weak demand and overcapacity are starting to show up in export numbers across countries in one way or the other. India is no different.

That apart there is another constraint to the GDP growth that will exacerbate when the rate cuts start. For a few quarters now, we hear banks struggling to raise deposits. The reasons offered are many, from household savings coming down to money going into equity and real estate to banks not raising deposit rates to attract money.

While these may seem apparent, the real underlying cause is that the central bank hasn’t increased the stock of money in the system since 2022. After the surplus liquidity that was injected and created in the system during COVID-19, the RBI has continued to drain the liquidity out of the system to tame inflation and manage the rupee. The rise in government cash balances and higher cash in circulation in the economy over the past 2 years have created a fairly tight liquidity situation for the banks. The credit demand in the system hasn’t abated though. What this has meant is that for over 2 years now, the credit growth has exceeded the deposit growth in the system by 300-500 bps. This has been flagged by the RBI as a risk since the loan-to-deposit ratio (LDR) has gone up significantly for the Banking system during this period (from about 67% in Oct ‘22 to almost 80% now). The banks have tried to get the LDR down, but that can only come at the expense of credit growth because the deposit growth remains. This has meant a sharp fall in credit growth in the last 6 months in the system, from about 17 per cent to 13 per cent. Now to be sure, some of this growth was happening in the risky unsecured loan segment, which had become overheated, and it is good for the system to avoid such bubbles. But it is also true this credit growth decline will hurt other productive areas of the economy like housing and small businesses. 

Once the rate cut cycle starts, banks will have to be in sync with the cuts in pricing their loans. The credit and subsequent growth expectations will go up in the system with rate cuts. But if the liquidity situation remains as tight as it is now, there will be a huge gap between credit demand and credit availability and the actual transmission of rate cuts won’t happen. This is already seen in the slowing growth numbers in consumption but could get aggravated further in future. More than the interest rate stance and the timing of the cuts, the central bank will have to signal it is opening up its fist on the money supply in the system. That will give the required boost to the economy for the rest of the year. 

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Global Policy Watch: Pension Reform with Chinese Characteristics

Global policy issues relevant to India
— Pranay Kotasthane

If there’s one reform that scares even the most committed dictators, it would be pensions reform. After years of dithering on this front, China finally took a major step last week. Its “parliament” approved a calibrated increase in retirement age, believed to be the first such modification since 1978.

As with all pension reforms, no cohort is happy with the move except those already in the government. After the move was heavily criticised by the young and the old on Chinese social media, the Censors swiftly deleted these little signs of insubordination from the internet.

Here’s how the different cohorts saw it. The young were unhappy that retaining the old would mean fewer jobs in an already tricky employment market. Prospective young parents were disappointed because child care in urban China is overwhelmingly delegated to retired grandmothers, who are “supposed” to fit into this role after retirement at 50 (as blue-collar workers) and 55 (as white-collar workers).

Those on the verge of retirement were not happy either. Some felt that a portion of their peaceful retirement years was being snatched away. Others felt that, despite the reform, private firms would force them out early before they hit the retirement age. Some from retiring cohorts in the private sector thought that the benefits would accrue disproportionately to old civil servants and government employees in permanent positions at their expense. A particularly poignant comment on Weibo, now only present as an archived post on China Digital Times, reads:

日本大臣：When I was born, you complained I was one child too many. When I had one child, you complained I should have had more. When I tried to find a job, you complained I was too old. When I tried to retire, you said I was too young. —With sincere thanks from all of us 65-year-olds hobbling to work on our canes

Finally, there was no increase in the retirement age in this policy for those registered as being a part of rural households (hukou), which made this cohort fret against the urban elites.

So What?

From an Indian perspective, studying the difficulties of China’s pension system is instructive.

As in India, China also follows a pension system that is loaded in favour of government employees. Private firm employees had to shell out 8 per cent of their salaries into a pension fund, while government employees didn’t have to pay a penny. Like India’s Old Pension System, government employees’ pension was funded out of the general budget in a pay-as-you-go model.

This discrimination continued for way too long. It was only in 2015 that the Chinese government made a major course correction. Since then, even government employees have contributed 8 per cent of their salary to the pension fund while the government shells out another 20 per cent. (Doesn’t it remind you of India’s Unified Pension Scheme?)

But even this change wasn’t enough. Current estimates suggest that the state pension fund will be emptied by 2035 at the current levels of retirement, and hence, the eventual policy directive to increase the retirement age couldn’t be postponed further.

The lesson for India is that a dual-track pension system is a curse that only worsens with time. The NPS was a visionary move for tackling this problem, taken a decade ahead of China, but has now been pushed a step back again with the UPS. China’s case should serve as a useful reminder for what could happen if the UPS is diluted further.

The other point to note is how slow and difficult any pension reform is. You would have thought increasing the retirement age is an elegant solution to reduce pension tensions. But, no. Russia (2018) and France (2022) found out that even slight increases in retirement ages lead to a ferocious pushback. Learning from these experiences, China has made the transition even more gradual. Here’s how The Economist explains it:

“The retirement age for female blue-collar workers will rise from an astonishingly low 50 to 55, for female white-collar workers from 55 to 58, and for men from 60 to 63. These changes will begin in January 2025 and be phased in over 15 years. For men and female white-collar workers, the pension age will rise by a month every four months. For blue-collar women it will rise by a month every two months.”

Apart from opting for a superslow-burn approach, the government also tried to bring this reform in quietly, without inviting public feedback to any draft proposals. Despite these precautions, the reform was met with anger and rebuke. The lesson for India is that we can’t rely on increasing retirement age either. The solution lies in reimagining the social security system now so that there’s enough fiscal room for an older India of the future.

The third point is the spectacular failure of private pensions in China. Despite many recent incentives, individuals do not opt for parking a portion of their pay for retirement expenses. It might be a consequence of financial repression, which sucks away household savings. But without this third pillar of pensions, corporate and government pension funds cannot deliver. Thus, the lesson for India is to first start a conversation on individual pensions and then incentivise such pension products.

All in all, even the supposedly omniscient, prescient, and far-thinking Chinese party-state has been spooked by the ghost of pensions. Or maybe the Chinese party-state isn’t as smart as we think.

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Matsyanyaaya: Ruining Communication Devices for Everyone

Big fish eating small fish = Foreign Policy in action

—Pranay Kotasthane

At Takshashila, we define terrorism as the “indiscriminate use or the threat of use of violence for political objectives”. Israel’s coordinated explosion of pagers and walkie-talkies that left over 2500 wounded and killed over 20 people, including four children, comes pretty darn close to that definition. Like other acts of terrorism, it also had a theatrical value, a much larger purpose: the targets were just “collateral damage” to deter the leaders of Hezbollah, Lebanon, and Iran.

Tactically and operationally, Israel should count this “shock and awe” move as a resounding success. But strategically, it has made things worse for everyone. Just like plane hijacks by terrorists overly securitised airports, these attacks will likely add substantial friction in the electronics supply chain.

This wasn’t a case of a hardware hack. Nor was it a cyber attack. It was a supply chain attack—the result of an elaborate plan where a company linked to Israel manufactured thousands of explodable low-end devices with the sole purpose of detonating them at an appropriate moment. Regardless, the Ayatollahs of Atmanirbharta across the world will pounce on this opportunity to argue why every country should make all of its communication devices.

Ideally, this act should lead to international condemnation for making the world unsafe for non-combatants. That should be followed by a global mechanism for enhancing electronic supply chain security on the lines of the Financial Action Task Force (FATF), which shares information about malicious actors in the financial space.

But we are far away from the ideal world. Prepare for more protectionism under the guise of national security instead.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Podcast] In this All Things Policy episode, KPM Das explains the technical aspects of electronics supply chain security.

2. [Article] Ori Goldberg explains the flaws in the conventional discourse about the pager attacks. It is a must-read.

3. [Resource] China Digital Times translates and brings out uncensored news and online voices from China.

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