#318 Reversals
IT Services and AI, Schmittian politics in the US, Subsidies and Freebies ahead of Bihar elections, and Pakistan's Rentier State Moves
Global Policy Watch: Friend-Enemy
Global policy issues relevant to India
—RSJ
About six months back, I had written about my first-hand experience of the potential disruption to the business model of the IT services firms from generative AI tools. Unlike previous trends that these firms could ride (digital and cloud in the past decade) successfully, the generative AI disruption was different. It would eliminate, in a significant measure, the low to mid-end coding work that formed the bulk of the revenues of these firms. Unlike in the past trends, the client organisations could now use such tools with ease and experience the extent of automation possible, themselves.
This would make it difficult for IT services firms to convince their clients why they need hundreds of programmers billed hourly for a development or maintenance project. The ease of testing generative AI use cases takes away any asymmetry between the clients and service providers on its implementation complexity and the possible savings. The client will either challenge the key assumptions in the headcount-based pricing model or will move away business to a new disruptor who doesn’t have any revenues to protect, unlike the incumbent.
The other problem for IT services providers is whether they can train and equip their workforce (running into hundreds of thousands) on such advanced tools faster than their client organisations. This will mean they have to invest in training a huge workforce with the express aim of automating a huge chunk of work that brings them revenues. This will be a significant cost while simultaneously bringing down revenues from the traditional work.
What I saw was that many large client organisations were already ahead in training their IT workforce (running into thousands at best) on these advanced tools. This trend will continue because clients have much smaller IT teams with staff who are now being rewarded for automating as much of the business-as-usual work. I found the employees of IT service providers looking with envy at their client colleagues who were getting better access to AI tools to train on and richer AI work experience than them. It is an asymmetry of a different kind. This seemed like a trend that would accelerate, and my prognosis, back in April, was that we would see this disruption beginning to impact their financials soon, and the next three years would be hugely disruptive for them.
This week, Accenture, the biggest IT services firm by market cap, declared its Q4 results. As the FT reports:
“Accenture has reduced its global workforce by more than 11,000 in the past three months and warned staff that more would be asked to leave if they cannot be retrained for the age of artificial intelligence. The IT consulting group on Thursday detailed an $865mn restructuring programme and an outlook for the year ahead that reflects continuing sluggish corporate demand for consulting projects and a clampdown on spending within the US federal government. “We are exiting on a compressed timeline where reskilling, based on our experience, is not a viable path for the skills we need,” chief executive Julie Sweet told analysts on a conference call.
It predicted revenue growth would slow to between 2 and 5 per cent in the fiscal year just started. The range would have been a percentage point higher but for the clampdown on spending by the US federal government, which has historically accounted for about 8 per cent of Accenture’s revenue.
Accenture shares dropped 2.7 per cent on Thursday to close at their lowest level since November 2020.”
This is possibly the best placed firm to tackle the AI disruption to its business model based on its consulting capabilities and ‘AI resilient’ revenue streams in the shape of managing large transformation programs for clients across the globe. And that’s their future outlook.
The Indian IT services providers have to contend with everything that Accenture is dealing with plus a few additional headwinds: a more ‘headcount reliant’ business model, Trump H1B and immigration clampdown, over-dependence on the US economy for business and the increasing difficulties in laying off employees in India, where employment growth has been tepid in the economy.
The viable way forward here is to embrace AI, proactively offer to cannibalise their own revenues by automating current work and shrink the business in the medium term to align with a future operating model built on AI. And then start to grow again.
But to do this requires a risk-taking chief executive to articulate a strategy that bears the medium-term market pain for a better future. However, the quarterly result treadmill doesn’t allow for this luxury. So, I see the impact of this disruption going from bad to worse, with accompanying benign commentary on how AI is a huge opportunity for the IT services sector till investors vote with their feet. For India, this is more than just an impact on a particular sector. IT services is the engine of growth in 5 out of the seven biggest cities in India, and it is a significant contributor to the urban consumption growth for India. The health of this sector is material to the economy.
In other news, this week also had the public memorial service for Charlie Kirk that was attended by Trump, J.D. Vance and other prominent voices of the MAGA movement. In a moving and conciliatory speech, Kirk’s widow, Erika, spoke of love and forgiveness: “This past week, we saw people open a Bible for the first time in a decade. We saw people go to a church service for the first time in their entire lives. The answer to hate is not hate.”
However, the biggest cheer of the night went up when Trump took the stage at the very end and delivered this: “He did not hate his opponents, he wanted the best for them,” Trump said, before breaking from his prepared remarks to add: “That’s where I disagreed with Charlie. I hate my opponents, and I don’t want the best for them, I’m sorry.”
One of the underrated and less-read philosophers of the 20th century is Carl Schmitt (not surprising given his Nazi leanings). A key idea of Schmitt is that ultimately politics is about people categorising themselves into friends and enemies distinction and directing all their actions toward annihilating the other. There is no finer point in this distinction of considering the other side as a worthy adversary or someone who is the same as you except for an ideological point or two. Schmitt argued that those benign categories might work in other spheres, but not in politics, where it eventually comes down to friend or enemy at a visceral level. With Trump, most of liberal, open-minded Americans are getting a first-hand experience of living in a Schmittian world. They will benefit from reading Schmitt during these times.
I have extracted a couple of key passages from Schmitt’s book ‘The Concept of the Political’ below:
“The specific political distinction to which political actions and motives can be reduced is that between friend and enemy. This provides a definition in the sense of a criterion and not as an exhaustive definition or one indicative of substantial content. Insofar as it is not derived from other criteria, the antithesis of friend and enemy corresponds to the relatively independent criteria of other antitheses: good and evil in moral sphere, beautiful and ugly in the aesthetic sphere, and so on….The distinction of friend and enemy denotes the utmost degree of intensity of a union or separation, of an association or dissociation…The political enemy need not be morally evil or aesthetically ugly; he need not appear as an economic competitor, and it may even be advantageous to engage with him in business transactions. But he is, nevertheless, the other, the stranger; and it is sufficient for his nature that he is existentially something different and alien, so that in extreme cases conflicts with him are possible.
The friend and enemy concepts are to be understood in their concrete and existential sense, not as metaphors or symbols, not mixed and weakened by economic, moral, and other conceptions, least of all in a private-individualistic sense as a psychological expression of private emotions and tendencies. Liberalism in one of its typical dilemmas of intellect and economics has attempted to transform the enemy from a viewpoint of economics into a competitor and from the intellectual point into a debating adversary…The enemy is not merely any competitor or just any partner of a conflict in general. He is also not a private adversary whom one hates. An enemy exists only when, at least potentially, one fighting collectivity of people confronts a similar collectivity. The enemy is solely the public enemy…
The political is the most intense and extreme antagonism, and every concrete antagonism becomes that much more political the closer it approaches the most extreme point, that of the friend-enemy grouping.”
Trump might exit the American political stage in 2028, his policies might get rolled back in future and we might go back to ‘normal’ eventually. But, more than ever before, Trump is ensuring American politics moulds itself into the Schmittian ‘friend-enemy’ distinction where there will be no truck with the other except its complete destruction. This rupture will outlast Trump.
India Policy Watch: Low-level Equilibria
Insights on current policy issues in India
—Pranay Kotasthane
Ten years ago, Arun Shourie had this to say about the difference between government promise and delivery:
I don’t want to use harsh words but the consensus seems to be that when all is said and done, more is said than done. I am sure sincere efforts are being made and they may yield results, but as Akbar Allahabadi said, ‘Plateon ke aane ki awaaz toh aa rahi hai, khaana nahin aa raha (The plates’ sound can be heard but the food is not coming)’…
We always think of reforms as one scheme — GST aayega ya nahin, insurance Bill pass hoga ya nahin. But the real theme of reforms has been to reduce the role of the State in our lives. We continue to do the opposite. That’s why things don’t happen. And rationalisations develop for this….
He [PM Modi] may be an agent of change as an individual. But no matter how big your oar is, you have to change, reshape an ocean. It’s not just about simplifying reforms. The depth and pervasiveness of reforms has to be great… When people assume office, they forget how deeply the system has to be changed. They get surrounded by an impenetrable fog of self-satisfaction. And media makes the fog more dense. Their photographs are everywhere. The industralists says you are ‘almighty’s gift to us’. I am told secretaries have started speaking this way. They think change has already come. Our job is to keep them awake.
Prescient. I was reminded of this because ten years later, when India is facing a challenging external environment providing the government cover to undertake major reforms, there’s no plan in place. Apart from the GST rate rationalisation—a positive move—there seems to be nothing on the table. The deregulation idea has evaporated and there doesn’t seem to be any talk about reforms by state or union governments. The political compass is pointing towards the Bihar elections, and all reform ideas are on the back burner.
Speaking of Bihar, we had the PM launch a state government scheme literally called the Mukhyamantri Mahila Rojgar Yojana. Under this scheme the Bihar government transferred an initial installment of ₹10,000 to 75 lakh women members of self-help groups to enable them to start a business of their choice. If these businesses take off, there is a further promise to provide up to ₹2 lakh per person.
The initial instalment is a good 2.5 per cent of Bihar’s annual budget. It seems to be the second phase of targeting the women’s vote, with prohibition being the first one.
A couple of years ago, the PM had criticised state governments for their profligacy in these words: “People of revdi culture feel that by distributing free revdis to people, they can buy them. Together we need to defeat this thinking. Revdi culture needs to be removed from the country’s politics”.
Does this scheme constitute a revdi? The stated intention for this expenditure is that “when a government formulates policies with women at the center, the benefits extend to other sections of society as well.” This is true; women’s employment has multiplier effects.
In edition #183, we had classified freebies as ‘non-merit goods which are explicitly or implicitly subsidised by the government.’ If we define merit good as any good with positive benefits to people beyond the recipient alone, there is some justification to the government’s argument.
Nevertheless, a cash transfer of ₹10,000 isn’t the only bottleneck stopping women from working in Bihar. There are several other constraints that come in the way. Just as giving free bus tickets to women cannot ensure a jump in the female labour force rate, a small cash transfer cannot create massive entrepreneurship. In any case, it is currently just a cash transfer to women registered with a self-help group. In implementation, it is a non-merit subsidy, and hence a revdi.
Even as such freebies proliferate, a decadal analysis of state finances by the Comptroller and Auditor General of India (CAG) office raises some red flags:
There’s been a trebling of public debt of state governments in nominal terms over the ten years between 2013-14 and 2022-23
The share of committed expenditures (pensions, salaries, interest payments) plus subsidies is around 52 per cent of revenue expenditures, which means half of all government spending is locked in even before the budget gets made
In 11 states, net borrowings exceed capital expenditure, indicating that some of the borrowed money is being used not for creating assets but for running daily operations.
As the data and the announcements ahead of the Bihar elections suggest, freebies are a rage.
Matsyanyaaya: Pakistan’s Strategems
Big fish eating small fish = Foreign Policy in action
—Pranay Kotasthane
In recent months, Pakistan has emerged as the uber rentier state—a state that survives on rents paid for the ownership of resources, largely by external benefactors. To China, it has given land (in Shaksgam Valley and Gwadar); to Trump’s US, it has promised minerals in Baluchistan; and to Saudi Arabia, it has formally given its nukes.
One has to grudgingly accept that after being pummelled during Operation Sindoor, Pakistan’s military-jihadi complex has recovered partially and managed to position itself usefully to many countries at once. China continues to be its most reliable ally, one that has supplied it with major conventional weapon platforms, played a key role in its plutonium nuclear programme and given political and economic cover. On the other hand, it has also managed to improve its relationship with Trump with pie-in-the-sky promises of critical minerals, a cryptomining hub, and, of course, the Nobel Peace Prize recommendation. Finally, it has also benefited from the troubles in West Asia. As the Israeli threat has increased at a point when the US wants to step back, Pakistan has managed to sign a strategic mutual defence pact with Saudi Arabia, while sidestepping Iran’s concerns for the time being.
This is an impressive balancing act. But now comes the tricky part. Pakistan is adept at extracting external rents, but that hasn’t taken it too far as a nation-state beyond survival. Once such commitments are made, they need to be acted on. That’s where the troubles lie because Pakistan is not in a situation to meet many of them. Geopolitics is not a three-dimensional game. Its fourth dimension is time. Positions appearing to be assets at one point in time often become liabilities.
But for now, Pakistan has secured a bailout from its benefactors. Meanwhile, I’ll leave you with a table on the Pakistani military-jihadi complex’s key stakeholder relationships, from a chapter by Nitin Pai and me.
HomeWork
Reading and listening recommendations on public policy matters
[Dataset] The CAG’s office has put out state finances decadal data online. Helpful for analysts.
[Article] Why India should have its own markets regulator to review significant foreign mergers and acquisitions.
[Video] In the last edition, we discussed a new debate format called Purva Paksha. You can find the first instantiation of this format here. It’s a discussion on the proposition: India should align with China.
[Podcast] The next Puliyabaazi is a masterclass on the history of India’s nuclear weapons programme, featuring Yogesh Joshi, a top scholar of India’s nuclear programme.
Word: Geopolitics is not a three-dimensional game. Its fourth dimension is time. Positions appearing to be assets at one point in time often become liabilities.
Now with the impending recognition of israel by Pakistan it seems India is getting backed into a corner