#278 Old Ideas, New Beginnings

Direct Benefit Transfers for Women, The Glue that Keeps Democracies Going, A Last Chance to Revive Urban Governance, and Dealing with Our Hardware Insecurities

India Policy Watch #1: “Dear” Sisters

Insights on current policy issues in India

— RSJ

Maharashtra goes to poll this Wednesday. Pollsters, chastened by the Lok Sabha and Haryana election outcomes, haven’t done many opinion polls. The two primary political configurations, the BJP-led Mahayuti and the Congress-led MVA have spent considerable time figuring out the complex seat arrangements among themselves, leaving limited time for real campaigning. The number of large political families involved in Maharashtra politics has meant different members of the same family have spread themselves out across the political spectrum based on the ideology of convenience. How they will regroup once the elections are over is anyone’s guess.

The usual poll time rhetoric on communal lines has caught on as the central BJP leaders joined the campaign. The sense of betrayal that the Shiv Sena (UT) and Sharad Pawar camps capitalised on during Lok Sabha elections seems to have ebbed too. Speaking to a cross-section of voters in the past couple of weeks in and around Mumbai and following the local media, I got a sense the ruling BJP coalition had their nose ahead. The one reason most quoted to highlight the good work of the ruling coalition was the Majhi Ladki Bahini Yojana (which we wrote about here) that was started only in July after the Lok Sabha losses. The scheme now covers 2.34 crore women (or “sisters” as the government communication calls them) who are receiving Rs. 1500 every month in their Aadhar-linked bank accounts. In fact, the initial response to the scheme was so good that it appears to be the primary reason for delaying the Maharashtra elections instead of doing it together with Haryana as had happened in the past. Since then the ruling coalition has milked the scheme and its benefits through a communication blitz that’s quite visible in the election season. The opposition MVA has promised to increase the monthly allocation to Rs 2100 in a clear acknowledgement that the scheme has widespread public support.

If this works for Mahayuti at polls this week, expect more states to launch copycat schemes with higher money allocations. Voters love “free” money, and politicians like nothing better than being seen as modern royalty, opening up the state’s treasury for their subjects. Given my view that this could soon be a nationwide phenomenon, I thought it would be useful to look at the data about such schemes that are already on for the past three years and the conclusions one could draw from them. Here’s what I have gathered:

1. It is already a nationwide phenomenon! 14 states have already launched similar schemes for adult women whose family incomes are below Rs. 250,000. These include Andhra Pradesh, Assam, Jharkhand, Haryana, HP, Karnataka, MP, Maharashtra, Delhi, Odisha, TN, Telangana and WB. Maharashtra, in July, was the 10th state, and since then, Haryana and Odisha (both BJP-led states) have launched similar income transfer schemes. These schemes are already covering a third of women in these 14 states and almost 20 per cent of women across India (about 13.5 crore women). The annualised spending based on schemes where transfers are already happening will total up to over Rs 2 trillion by next year. That’s about 0.6 per cent of the national GDP, which, to put things in perspective, is more than the total outlay on education in the union budget. And, as I mentioned, we are just about getting started on this round of competitive populism. These numbers grew by 3x in FY 25 over FY 24, and I expect the trajectory to remain steep for the next couple of years.

2. The 14 states are a mixed bag in terms of economic performance over the last 5 years. The fiscal deficit of most states in the country has worsened since 2019 because of COVID-19, fiscal profligacy, and changes in devolution. Every state in this list, except a couple, has fared worse than the national average on deterioration of their fiscal position. Barring 4, all other states have seen a reduction in revenue receipts as a percentage in these 5 years. Most of these states are spending more, earning less and worsening their fiscal deficit where they can afford to do so. Other states seem to be cutting their capex spends (which would have generated real employment and multipliers in future) or cutting other regular spends (likely to be health and education) to support this. Maharashtra, for example, will have its revenue deficit grow 5x in the past 2 years and a contraction in capex spending for the second year in a row.

3. The last question on this is where is the money in these schemes going to? It is early to assess how well the targeting works in these schemes. Since these are Aadhar-linked, I assume there isn’t a lot of leakage in the supply chain of these transfers. The question of whether 100 per cent of the scheme is reaching only those who have a family income of Rs. 250,000 or less is difficult to ascertain now. I suspect, again, largely because of the digital public infrastructure put in place, 75-80 per cent of the allocation is going to the target segment, which is largely the bottom 4 deciles in most states that have launched this scheme. This means an income boost of 10-20 per cent (considering Rs 1500 monthly transfer) for these four deciles across 20+ per cent of households in these states. This is quite significant and will show up o eventually in rural sector consumption patterns on essentials like food, health (medicines) and low end durables. A wider adoption of this across other states will keep rural food inflation high over the next year, too.

A couple of years ago, PM Modi bemoaned the “revdi“ (freebies) culture for votes and (rightly) blamed Congress for creating it. The wheel seems to have turned a full circle.

The longer you stay in power, the more you resemble the party you replaced.

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Global Policy Watch: Toleration and Forbearance

Insights on global issues relevant to India

— RSJ

I went back to some of the books that came out after Trump’s first win back in 2017. One of the books published then was How Democracies Die, whose Wikipedia entry reads:

“a comparative politics book by the Harvard University political scientists Steven Levitsky and Daniel Ziblatt about democratic backsliding and how elected leaders can gradually subvert the democratic process to increase their power. The book also offers stark warnings about the impact of the Republican Party and Donald Trump‘s presidency on U.S. democracy.”

Trump went about picking up his colleagues last week in what is being described as a YOLO cabinet of loyalists, hardliners and metaphorical bomb-throwers. Trump is being more deliberate and disciplined this time in ensuring he is not beholden to norms and conventions unlike in 2017. Then, a mix of 5-star generals, Republican old guard and state department officials kept a lid on his instincts to follow his pet themes on trade, immigration and the economy or to go after his opponents in politics, media or business. This time, it seems quite different. We are in the DOGE zone now after all.

Anyway, I thought I would leave you with a couple of insightful passages from the book on how unwritten democratic norms are critical in keeping a democracy healthy, which seems to be timely as the US comes to terms with Trump 2.0:

“Historically, our system of checks and balances has worked pretty well—but not, or not entirely, because of the constitutional system designed by the founders. Democracies work best—and survive longer—where constitutions are reinforced by unwritten democratic norms. Two basic norms have preserved America’s checks and balances in ways we have come to take for granted: mutual toleration, or the understanding that competing parties accept one another as legitimate rivals, and forbearance, or the idea that politicians should exercise restraint in deploying their institutional prerogatives. These two norms undergirded American democracy for most of the twentieth century.

Mutual toleration and institutional forbearance are closely related. Sometimes they reinforce each other. Politicians are more likely to be forbearing when they accept one another as legitimate rivals, and politicians who do not view their rivals as subversive will be less tempted to resort to norm breaking to keep them out of power. Acts of forbearance—for example, a Republican-controlled Senate approving a Democratic president’s Supreme Court pick—will reinforce each party’s belief that the other side is tolerable, promoting a virtuous circle. But the opposite can also occur. The erosion of mutual toleration may motivate politicians to deploy their institutional powers as broadly as they can get away with. When parties view one another as mortal enemies, the stakes of political competition heighten dramatically. Losing ceases to be a routine and accepted part of the political process and instead becomes a full-blown catastrophe. When the perceived cost of losing is sufficiently high, politicians will be tempted to abandon forbearance. Acts of constitutional hardball may then in turn further undermine mutual toleration, reinforcing beliefs that our rivals pose a dangerous threat. The result is politics without guardrails—what political theorist Eric Nelson describes as a “cycle of escalating constitutional brinksmanship.”

Polarization can destroy democratic norms. When socioeconomic, racial, or religious differences give rise to extreme partisanship, in which societies sort themselves into political camps whose worldviews are not just different but mutually exclusive, toleration becomes harder to sustain. Some polarization is healthy—even necessary—for democracy. And indeed, the historical experience of democracies in Western Europe shows us that norms can be sustained even where parties are separated by considerable ideological differences. But when societies grow so deeply divided that parties become wedded to incompatible worldviews, and especially when their members are so socially segregated that they rarely interact, stable partisan rivalries eventually give way to perceptions of mutual threat. As mutual toleration disappears, politicians grow tempted to abandon forbearance and try to win at all costs. This may encourage the rise of antisystem groups that reject democracy’s rules altogether. When that happens, democracy is in trouble.”

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India Policy Watch #2: Hum Nahin Sudharenge*

Insights on current policy issues in India

— Pranay Kotasthane

In edition #276, I asked the question: What is the smallest possible set of political choices that can explain China’s economic trajectory? I proposed three, one of which was bureaucratic decentralisation. A staggering 51 per cent of government spending in China happens at sub-provincial levels, and municipal funds of prominent cities invest in leading electric vehicle companies and semiconductor manufacturers.

In sharp contrast, you only need to feel the AQI levels in Delhi or experience the crumbling roads of Bengaluru. The state of urban governance in India can flatten the optimism of the most fervent patriot. RBI’s annual report on municipal finances published earlier this week makes the problems more obvious (not that we need another reminder). Nevertheless, here are the important points:

1. Even though urban areas contribute 60 per cent of India's GDP, the total self-generated revenue of all municipal corporations combined is merely 0.4 per cent of GDP (the report is based on finance data of 232 corporations).

2. Even in an urbanised state like Tamil Nadu, which has several mid-sized cities, the ratio of the tax revenue raised by all municipal corporations to the tax revenue raised by the state government is an abysmal 1.8 per cent.

3. Of the large states, only in Maharashtra is the ratio of Municipal Corporations’ revenue to state government revenue greater than 10 per cent.

4. Municipal corporations' dependence on transfers from higher levels of government has increased in the post-GST period. These transfers are now the largest source of revenue for cities. With this hand-to-mouth subsistence, no wonder that cities have no capacity for expanding and improving public services.

These numbers are symptomatic of the poor livability in Indian cities. None of these issues are new. State governments continue to complain about unfair treatment by the union government even as they gleefully strangle city governments. Union governments, on the other hand, haven’t been able to think beyond grant-making for city development.

Thus, it is a welcome change that the union government is finally planning a model Municipal Act under the aegis of the Ministry of Housing and Urban Affairs. Here’s what a report from ThePrint says:

The working groups will examine five key areas: reforms at political level, administrative reforms, redefining the role of parastatal organisations, transition systems for rural-urban continuum, and capacity building at local level.

They will submit a report that will recommend models for a municipal Act, recruitment rules, human resource policy, framework for transition system for rural-urban continuum, among others, within three months, the order said. …

One of the key deliverables of the working group is to recommend a model municipal Act by examining the possibility of redefining the role and responsibility of the mayor and elected representatives.

The present municipal acts in states provide administrative power to executive functionaries (bureaucrats) and involve a limited role of mayors. 

Apart from empowering mayors, the working group will also look into the role of councillors in decision making, and improving citizen participation in area development and involvement in preparation of municipal budget, among others. [Risha Chitlangia, ThePrint]

A ground-up review of municipal government structures is perhaps the most significant leverage point for India’s economic trajectory, so this effort is on the right track. But all that the Union government can do is produce a “model” Act, as city-level governance changes are ultimately the constitutional domain of the states. It is equally important for the Union government to align the cognitive maps of state governments on this issue. For there will be no Viksit Bharat without functional, livable, and well-governed cities.

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India Policy Watch #3: Hardware Insecurity

Insights on current policy issues in India

— Pranay Kotasthane

For good reason, all electronic hardware and software coming out of China is being seen with a security-first lens. From chips to cranes, every product coming out of China is being seen as a potential loophole that the CCP can use against an adversary.

Citing these concerns, the solution is obvious: do not buy chips, networked equipment, or complex machinery from China. However, we also know that this solution is rhetorical. While building domestic capabilities is justifiable, the reality is that doing this will take a few years. Even if we assume that all such domestic efforts will eventually succeed, what are we going to do until then?

This question is particularly significant for India, given its low advanced manufacturing base. From Tunnel Boring Machines (TBMs) to driverless metro trains and from low-end chips to server equipment, India relies on imports from China. In most cases, these products are made by foreign companies with a manufacturing setup in China. Sometimes, no real alternatives exist because even the alternatives eventually come from China.

What, then, are some practical ways to mitigate the threat of espionage and sabotage? In my view, there are two underrated solutions.

First is hardware supply chain security. The Indian government has already initiated measures to assess the integrity, quality, and authenticity of hardware components and products throughout their lifecycle - from design and manufacturing to distribution and installation. By including guidelines for trust sourcing, hardware audits, component traceability, and compliance with industry standards, we can reasonably mitigate security risks.

The second is to invest in technical research to tackle hardware vulnerabilities. The idea here is to bake security into the chip and system design stages. DARPA, for instance, has been running several programmes for hardware security since 2017. One such programme, System Security Integration Through Hardware and Firmware (SSITH), has produced proof-of-concept implementations. In some of these programmes, the US is collaborating with the UK. It is here that the Indian government can pitch in by prioritising research in hardware security and collaborating with partner countries.

A ban on all hardware coming from China seems to be an industrial-age solution to an information-age problem. We can do better.

P.S.: I think many people are under the impression that India buys some super-specific chips from China that the latter can hack into. Indian firms mostly buy commoditised low-end chips from China, most of which are designed and manufactured elsewhere but merely assembled in China. Reasonable hardware supply chain security measures should be enough to mitigate the risks in such cases. These chips are neither strategically significant nor specifically vulnerable.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Article] Dr Govinda Rao clears the cobwebs around the phrase “cooperative federalism.

2. [Report] This Centre for Science and Environment report says that India faced extreme weather events for 93 per cent of the days in the first nine months of 2024.

3. [Primer] My colleagues have a great primer out on AI Chips.

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* A 1980 movie title featuring Asrani, rated an unenviable 5.4/10 on IMDb