#286 In a Flux

Senseless Alcohol Retail Regulations, Trump2.0 Begins, and Strengthening the Indian Republic

India Policy Watch: Policy Whiskey Tango Foxtrot

Insights on current policy issues in India

—RSJ

It is difficult to write anything apart from the flurry of executive orders and policy directions emerging from Trump’s first week in office for this edition. We will come to that but before that a quick detour to one of the great loves of Indian policymakers - liquor.

The Delhi excise policy has been in the public eye since November 2021. Back then, to maximise revenue, the Delhi government decided to award new licenses for retail sales of alcohol and divided the city into multiple zones with a quota of shops for each zone. Instead of the four state-run firms that ran liquor stores, the policy was to encourage private players to come in. It also allowed these players to price at a discount to the MRP (maximum retail price). All these meant more competition, better quality retail outlets that were safer for customers instead of the old, caged, dingy exteriors of the government-run shops and longer hours of operations. However, within nine months of the new policy, political games came into play. Old lobbies who loved the status quo got into action, charges of favouritism in licensing were raised, and soon a CAG report accused the party in power, AAP, and its key leaders, of causing over ₹2000 crores in notional losses to the exchequer because of the discounting done by the big retailers. “Notional loss” is a unique Indian contribution to the world of public policy. Governments have fallen, ministers have gone to jail, and government audit officers have become president of the cricket governing body in India, among other things, on account of it. Someone should write a monograph on it.

Anyway, the new policy was scrapped back in September 2022, the licenses were revoked, leading to multiple stores shutting down, and the four state-run retailers were back with their monopoly. Then the Delhi police and the MHA got going, putting a succession of senior AAP leaders behind bars. Only recently did the Supreme Court grant bail to them, and they are out free. In the continuing saga, on 10 January this year, four government firms met private players with a circular that lamented the lack of range of affordable liquor (more so whiskey) because a few lesser-known Punjab-based whiskey brands have colluded to keep other well-known national brands out. As many of you might already know, Punjab famously consumes more Scotch whiskey than that’s made in Scotland. Now I realise they probably brew more Scotch, too. The circular has named 10+ brands popular in pan-India and need to be brought into the Delhi market to counter the Punjab-based whiskeys. Some kind of quota system that would prioritise the national brands was also suggested. Soon enough, the empire struck back, and now this circular has also been set aside. Delhi is back where it started. It is a wonderful lesson on how liquor policy works in India.

But the long arms of law are on an overdrive on that notional loss. Last week, the Ministry of Home Affairs (MHA) gave a go-ahead last week to the Enforcement Directorate (ED) to prosecute the two key AAP leaders, Arvind Kejriwal and Manish Sisodia, who have spent a fair amount of time in prison already. The ED chargesheet calls Arvind Kejriwal the kingpin and key conspirator for defrauding the exchequer. The Delhi assembly elections, where AAP is in a direct fight against the BJP, are just a couple of weeks away. In politics, timing is everything.

In other liquor policy news, last week, the Madhya Pradesh (M.P.) CM Mohan Yadav announced the decision to ban liquor in 17 cities, towns and villages of religious significance across the state. I also learnt that Madhya Pradesh had already banned alcohol sales within 5 kms of both sides of river Narmada a few years back. I don’t know how that policy is working because its implementation should run into the old “coastline paradox”. What, after all, is a coastline's length and shape? It is difficult to determine. You will run into fractals here.

The paradox helpfully defined by Wikipedia is:

“The coastline paradox is the counterintuitive observation that the coastline of a landmass does not have a well-defined length. This results from the fractal curve-like properties of coastlines; i.e., the fact that a coastline typically has a fractal dimension".

Essentially, you can never have a specific point to measure the 5 km distance from the Narmada coastline.

Coming back to the point, the Hindu reports:

“Addressing the media after the meeting, Mr. Yadav said that the decision was part of the government’s plans to impose a liquor ban across the State.

“We have decided that the State moves towards a liquor ban gradually and in this regard, we have taken a policy decision that in the first phase, liquor shops will be shut down permanently in 17 Nagar Palikas, Nagar Parishads, and Nagar Panchayats,” Mr. Yadav said.

Later in the day, the Chief Minister addressed an event in Maheshwar where he said that liquor was equivalent to a curse in families and that women have to deal with men who come home drunk.”

Hmm. A move towards a total liquor ban over time. That policy has worked out so beautifully all over the world. Societies have turned morally upright because nobody gets drunk anymore. Obviously, no such thing happens. Things only get worse during prohibition with bootlegging, spurious liquor and the mafia taking over the trade. But why bother about consequences? Intentions matter. Such noble intentions and concern for women in a state that ranks among the top 6 in the country on crimes against women. And that gets about 15 per cent of its revenues from liquor sales. Also, if the idea is to help women, why only ban alcohol to help women who have to deal with men who come home drunk? Why not just ban men so that women don’t have to deal with anything else that men might be up to?

Between Madhya Pradesh and Delhi, we have a full spectrum of the policy muddle that has long plagued alcohol manufacturing and sales in our country. There’s morality, virtue signalling, rent-seeking, corruption, entrenched political lobbies, revenue dependence, price gouging, illicit liquor mafia and lack of any regard for an ordinary, law-abiding citizen who might want to buy liquor in a safe and comfortable environment.

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Global Policy Watch: Chaos Begins

Insights on global issues relevant to India

— RSJ

Expectedly, the second Trump administration began with a series of executive orders, random threats to allies and adversaries and a set of divisive announcements on multilateral issues, which means all bets are off at this moment. I see this mad whirlwind continuing for the next three months as each of his cabinet picks gets confirmed and launches their own pet policy issue into orbit. I mean, wait until RFK Jr gets confirmed next week for people to lose their minds. Anyway, there’s a lot to process from the first week, and we will be drinking from the firehose of announcements for the next few months. I have a few observations from this week:

1. Most of the executive orders were focused on “cultural” issues like DEI, free speech and rescinding about 78 executive actions Biden took in the past four years that aim at the so-called “deep state”. These might be important for cultural warriors on both sides of the aisle but have minimal global consequences. Trump can claim with some legitimacy that he has the mandate to course correct on these issues, which his voters believe have gone too far.

2. Immigration is a U.S. domestic issue that will have global ramifications if Trump follows through on his rhetoric. Ending birthright citizenship is a terrible idea that strikes at the root of what has made the U.S. such a magnet for the best talent from all around the world. Apart from that, there’s also a constant stream of commentary about high-skilled labour from India taking away US jobs, which might come to the fore. H1B visa guidelines will be a thing to watch out for. Getting tough on immigration is one thing. The Biden administration had been getting tougher in the past year, too, seeing how laxity on immigration was hurting its poll prospects. But deporting people is a different ball game altogether. It will be time-consuming, difficult to implement and inhumane in most cases. Worse, higher immigration has helped GDP growth and kept wage costs and inflation under control. A rapid clampdown and deportation will negatively affect growth and inflation. Also, with the US closing its borders, the stream of immigrants lining up on European shores will get longer. That’s another problem that Western Europe can ill afford.

3. The tariff wars are still some time away. Trump has kept up the rhetoric, but instead of taking any specific action, he has suggested a review of tariffs and economic ties with China. This suggests some opening for a deal instead of his earlier threat of a unilateral 100 per cent tariff on Chinese imports. Similarly, the new front that Trump opened on getting out of the deal on MNC taxation should be seen as a move to get countries to the table to negotiate. The idea of punishing foreign companies and nationals with a higher tax rate if their countries of origin were in Trump’s bad books for taxing American MNCs is a radical departure from a rule-based MNC taxation approach that Trump had championed in his first term. If he tastes success with this, expect all kinds of unilateral moves to coerce countries to fall in line using the economic might of America. Trump sees India as a ”tariff king” and should be ready with its conciliatory offer when the call comes. Overall, this is all bad for everyone in the long run.

4. The move away from green energy, withdrawing from the Paris climate agreement, declaring a national energy emergency and opening Alaska up for exploration would mean more oil production in the US and a possible thrust on nuclear energy. It might be a year or so before any new production capacity comes into the oil market from these moves, but when it does, we will see a secular decline in energy prices. There’s already a sense of overcapacity there, and China’s move to decarbonisation and its exports of green capacity will mean energy prices will remain subdued. This is good news for big energy importers like India.

5. Lastly, there’s a paradox at the heart of Trump's economic policy based on what we have seen and heard so far. All the tariff moves and the deliberate uncertainty injected into the system would mean the US dollar will continue to strengthen, and the bond yields will continue to rise on higher inflation expectations and term premiums. The dollar only marginally fell when the China tariffs weren’t announced last week else they have been on up since Trump’s win. Bond yields have gone up by almost 90 bps since September. The question is, as the dollar continues to strengthen with tariffs coming through and flight to safety, the cost of imports will fall for US consumers, which will possibly even out a tariff rise. Will there be a real impact on volumes for exporters to the US then? Also, a strong US dollar isn’t great for US exporters so how will it help with their competitiveness and plan for manufacturing reshoring back to the U.S.? I guess we will eventually see a “tax” on foreign companies investing in U.S. securities to get out of this conundrum. That will be another new in this season of novelties.

We will all live and learn, I guess.

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India Policy Watch: “A Republic, If You Can Keep It”

Insights on current policy issues in India

—Pranay Kotasthane

The story goes that when Benjamin Franklin was quizzed by some people about the sort of government the Constitutional Convention colleagues had created, his understated response was: a republic if you can keep it.

That pithy description remains relevant to all democratic republics, including ours. While we often worry about the state of our democracy, it is the republic we fail to keep. In fact, we barely understand what the term means. Most still think the republic is merely about having a non-hereditary head of state. What could be a better day to understand why a Republic matters and why we must strengthen it? Here is an excerpt from our book Missing in Action, that explains the concept.

The cycle of dissent-protest-arrest that we witness so often points to a fundamental paradox: we have compromised the Indian Republic for the sake of democracy. Let us see how.

There is no universally accepted definition of democracy but it literally means the ‘rule of the people’ as against rule by a monarch. In reality, it can be defined as the rule of the majority. What constitutes a majority can vary but at the bare minimum, a democracy means that whatever the majority of the populace agrees to will be carried out by the state.

In a pure democracy, therefore, the majority rules in all cases, regardless of the consequences for individuals or for those not in majority. For example, the city-states in ancient Greece were democratic, and so, it was within the laws of the State for Socrates to be killed through a majority sanction. Centuries later, in the 2016 JNU protests case, if a majority of people support the arrest of a student because what he said is ‘seditious’, it would not violate the principles of democracy per se. But it’s the Indian Republic that prevents a majority from using its coercive power against individuals or groups with lesser power. This might come as a surprise to many of us who have been taught in civics that ‘a republic is merely a State where the leader of the government is not a hereditary position’.

Conceptually, a republic is governed by the rule of law and not the rule of men or women. This means that law is the supreme power in a republic and not a monarch. Rule of law also implies that laws apply to everyone in the State. This does not mean that the head of the State has the same powers as ordinary citizens, but it means that even the head of the State can only act in accordance with the laws that specify his/her duties and actions. In a republic, the highest aspiration of anyone in political life ought to be to obey the rule of law as well as to enforce it.

A corollary of the rule of law is that a republic recognises certain inalienable and individual rights for its citizens, which are formalised in a bill or a charter. Every citizen, by default, possesses these rights and a document such as the constitution specifies how these rights will be protected.

And so, it’s this Indian Republic that prohibits the majority from running roughshod on the basis of its numerical strength. In a republic like India, the Constitution limits the power of governments and groups in order to protect the individual’s rights.

The conflict between democracy and the republic is a long one. There have been many times when individual freedoms have been abrogated in the name of upholding the greater good, of securing India and its citizens. The first strain between the two aims came up with the first amendment of the Indian Constitution, which introduced the concept of ‘reasonable’ restrictions. The amendment made it easier for the State to regulate speech if they violated ‘sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality or in relation to contempt of court, defamation or incitement to an offence’. The introduction of the word ‘reasonable’, along with vaguely defined reasons for the restrictions, added ambiguity—it locked the media, the executive, the legislature and the judiciary in a four-cornered contest which continues to this date.

Our democracy is doing okay; it’s the Republic that demands our attention.

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HomeWork

Reading and listening recommendations on public policy matters

1. [Podcast] A Part Apart is an excellent biography of BR Ambedkar. Here’s a Puliyabaazi with author Ashok Gopal on Ambedkar's life and core ideas.

2. [Post] What was the Delhi Excise Policy 2021-22 about? Our post from August 2022 has the details.

3. [Paper] A foundational paper challenging the conventional notions about technological sovereignty.

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