This newsletter is really a weekly public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?
PS: If you enjoy listening instead of reading, we have this edition available as an audio narration courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.
India Policy Watch: Rajan-Acharya on PSB Reforms
Insights on burning policy issues in India
Raghuram Rajan and Viral Acharya have a new paper titled, Indian Banks: A Time To Reform?, that looks at a comprehensive set of reforms that will enable public sector banks to drive the Indian economic growth engine instead of being a drag they currently are. Rajan and Acharya have held leadership roles at the RBI and know a thing or two about issues relating to the banking sector.
So, what to make of them?
There are 4 points we’d like to raise:
Is this the time? Rajan and Acharya argue maintaining status quo is untenable. The huge strain on government finances now shifts the Overton window for much-needed reforms of the public sector banking system. This is their hope. In my view, shifting the status quo at this time carries the risk of falling off the brink. There’s a fog of uncertainty about the duration of the pandemic, the state of our public finances and the nature and length of recovery. More than any immediate reform we need some stability, however precarious, at this moment.
What about the empire? The paper reiterates the need for a systemic solution to the bad loan problem. The idea for a nationalised and a private “bad bank” is revived along with a strict time-bound process for bankruptcy procedure. The recent books by Urjit Patel (who succeeded Rajan) and Acharya have outlined in great detail how there’s no incentive for anyone in the political economy or in the banking sector to implement the IBC process. Everyone is happy kicking the can down the road. Any attempt at enforcing strict insolvency guidelines is met with resistance. Patel named the relevant chapter in his book ‘The Empire Strikes Back’. And this resistance to change was the state of affairs before the pandemic. So, to expect a serious reckoning by the government now is out of question. In fact, we seem to be going the other direction. The suspension of IBC is to be extended by another quarter and the restructuring proposal by Kamath committee leaves the discretion with the bank on triggering default procedure. We will have to learn to live with elevated levels of NPAs and banking system stress especially in public sector banks (PSBs).
Who will implement them? There are proposals to improve the performance of PSBs through greater operational freedom, performance-linked bank financing plans and winding down the Department of Financial Services (hah!). While these are good intentions, operationalising them in a system that has bloated cost structure, unionisation and relatively lax performance management culture won’t be easy. There are suggestions that are akin to the Kamath committee on giving loans based on cash flow and liquidity position of the companies instead of their assets. More aggressive norms for provisioning for bad loans and making sure the promoters have skin in the game in long-term infrastructure projects are also suggested. There are other suggestions to manage banking system risks better that have been around for some time. But implementing them will mean standing up to the ‘empire’.
Is stake sale the panacea? Finally, we have the issue of the ownership structure of banks. The paper proposes bringing the stake of the government below 50 per cent (state-linked banks) and gradual privatisation of select PSBs. While this step to create a distance between it and the everyday operations of the bank is necessary, this alone won’t address the governance issues of the PSBs. There’s an entire superstructure (the ‘empire’) that manages and lives off the PSBs that includes unions, bureaucrats, various oversight committees and temporal political interests. This influences everything from recruitment, performance management, promotions, disbursement guidelines to risk management practices. This won’t change overnight merely because the government stake is below 50 per cent.
The paper brings together all the extant issues relating to banking reforms in India. In that sense it is a valuable compendium of ideas – most old, some new. The key question remains: what’s the political will to take up these reforms now? The authors are aware of this too:
“While we have put together a variety of suggestions, many of these have been discussed in the past. Many concern public sector banks and their governance. Is there any reason to be more confident they will be implemented now?”
And they bring up the issue of incentive. What’s in it either for the bureaucracy or the government (either this or any in future) to take up these urgent reforms? As they write in conclusion:
“The government obtains enormous power from directing bank lending. Sometimes this power is exercised to advance public goals such as financial inclusion or infrastructure finance, sometimes it is used to offer patronage to, or exercise control over, industrialists. The government also has potential access to an enormous amount of sensitive information through its state ownership – for instance, the identity of purchasers of electoral bonds is known only to the State Bank of India. The government can oblige party members by appointing favorites to positions in public sector banks, including on their boards – and once there, some of these appointees use their influence to direct bank loans to favored parties. Parliamentarians of all parties are not immune to the lure of public sector banks – the banks are often asked to arrange the logistics for their fact-finding committee meetings in enjoyable locales across the country. And Finance Ministry bureaucrats are reluctant to let go of the power that allows a young joint secretary to order the chairpersons of national banks around.”
Just reading that passage is kind of depressing. Besides the above, the ordinary citizen isn’t exercised by the deteriorating condition of public sector banking in India. It will never be an issue in any election. Rajan and Acharya believe the pandemic and the enormous resource constraints it will place on the government will make it difficult to recapitalise the banks. This in turn will curb credit flow and impede growth in the economy.
“With government deficits and debt levels reaching enormous levels, there simply are not enough budgetary resources to recapitalize banks. An encumbered, under-capitalized public sector banking system will not lend well, which will be a huge tax on growth, as it has been for the last six years. More worrisome, without reform the banks will cumulate further losses. Status quo is simply not an option.”
“It is important that the government use the urgency of the moment to draw key players together to develop a reasonable reform path; it should be comprehensive and not just a one-off “tick-the-box” exercise dealing with a thin sliver of issues. It should then reach a consensus with concerned players such as unions and political parties, and then embark on the reforms.”
We aren’t as sanguine as they are. The political capital that will need to be spent (or invested) in implementing the reforms they have suggested in this paper is enormous. While this government and the PM enjoy unprecedented goodwill and support, this is a bet that might just be too big even for it. The PM has shown an appetite for ‘bold’ steps. But they tend to be one-off events. A deeper and deliberate structural reform of this kind that will take years to implement will be a genuine bold measure. One can only hope he take that step.
A Framework a Week: Nine Competing Visions of Equality
Tools for thinking public policy
— Pranay Kotasthane
Assume the Indian government plans to distribute ₹50,000 crores to 50 crore Indians this year, how would it go about doing this equitably? The intuitively obvious solution is to divide the sum equally — ₹1000 to everyone. Simple, isn’t it? Think again.
Isn’t it unfair to the nearly 80 crore people left out of this distribution in the first place?
Even amongst the chosen 50 crore Indians, isn’t equal division unfair to some who need this money more than others?
Isn’t it unfair to the socially disadvantaged groups who might not even have access to prove their identity?
This is what Deborah Stone calls the paradox of distribution in her textbook Policy Paradox:
“equality often means inequality, and equal treatment often means unequal treatment. The same distribution may look equal or unequal, depending on where you focus.”
This is a key insight. Stone lays out a useful framework for thinking about what equality means. She lists nine ways in which one can use equity language to distribute, often in ways that you would consider to be unequal. Each of these ways equalises along one dimension and can be considered as being ‘unequal’ on another.
These nine ways are split along three dimensions — who gets something, what gets distributed, and how is the distribution done.
(Deborah Stone, Policy Paradox, Page 47)
Way 1 deals with membership. It’s easy to say that things should be divided equally amongst all but who constitutes this all is a tricky question. Citizenship, for example, is a membership criterion that is exclusive by nature.
Way 2 deals with merit. It argues that the more deserving should be rewarded for their accomplishment. Hence, any distribution problem should also be resolved by identifying achievement or aptitude.
Way 3 is a claim that resources should be allocated based on ranked subgroups. For example, employees in all organisations are paid according to rank. Equally ranked get equal pay, unequally ranked get unequal payouts.
Way 4 is a claim for group-based distribution. Caste-based reservation is an example of this kind of equality.
Way 5 expands the boundaries of the item. If the government were to distribute the Rs 50000 crore only to those Indians who haven’t received their rations from the public distribution system in the last one month, the boundary of the item being distributed changes from only cash to a basket comprising of cash and food.
Way 6 is a claim on distribution according to the value that the recipients ascribe to that item.
Ways 7, 8, and 9 are about equalising the process. Way 7 talks about distribution based on fair competition between all players. Way 8 talks about distributing based on a lottery so that chances are equalised. Way 9 calls for a vote to decide who gets what.
This categorisation into nine definitions of equality is useful for a policy analyst. There’s no right answer on which of these is the best method, of course. What can be said is that Way 1 (equal slices amongst all members) and Way 8 (lottery) are intuitively powerful and are used by policymakers when they can't find better reasons to justify their decisions.
So the lesson for a policy analyst is that faced with a distributive problem, look at these definitions of equality and pick one that seems the fairest.
It’s easy to say that inequality is a problem. It’s far more difficult to answer what being equal means.
World Policy Watch: Tool To Change Social Norms
Insights on burning policy issues in India
Should courts be framing social policies? This question is the subtext of a number of articles that have appeared since the death of US Supreme Court (SC) associate justice, Ruth Bader Ginsberg (RBG) last week. The Trump administration is moving with speed to get a conservative judge confirmed by the Senate before the elections in November. The Republicans control the senate and nominating a judge of their ideological persuasion now will decisively swing the 9-member SC bench to a 6-3 ‘conservative’ majority.
Why has nominating a judge to the highest court turned into such a contentious political issue? Not so long back judges would get nominated with overwhelming majority from the Senate. RBG won her confirmation with a 96-3 majority. Justice Antonin Scalia who was on the other end of the ideological divide won his nomination 98-0. The days of such bipartisanship are over. Why?
All About Incentives
Like everything in life, it is about incentives. First, the lifelong tenure of a judge means they have the ability to influence decisions for a long period of time. As the ideological divide has gotten sharper, both Democrats and Republicans are keen on nominating more ‘extreme’ judges. Second, there’s an incentive to nominate relatively younger judges who will sit at the SC for a long time and influence decisions. This has meant nominating less experienced jurists who are ideologically ‘pure’. This riles up the other side. Lastly, an increase in the number of judgments that are decided by the slenderest of margins (5-4) works as a feedback loop to the parties. It feeds into their anxieties of what’s at stake and they have greater motivation to nominate more extreme candidates.
At the heart of these debates is a deeper question about the larger role the SC has taken over the years in legislating social issues in the US. The two most famous examples, of course, are Roe vs Wade and Brown vs Board of Education. Courts have turned into lawmakers is how it appears. Seen from here in India, US is a litigious country. As far back as 1835, Tocqueville had noted ‘sooner or later, every major dispute in the US ends up in courtroom.’ So, it is no surprise when women, minorities and other under-represented sections started contesting the social norms handed down to them, the matters reached courts for resolution.
The Conservative Anxiety
The conservative preference is for any social change to be gradual. Societal change is shaped through the many eddies of debates and protests that resist the flow of the mainstream. As they gain wider acceptance, they begin changing the course of flow of social norms. This could be painstakingly slow, but it makes change acceptable and sustainable. For the conservatives, the role of the judges is to apply laws, not to create them. Going beyond this brief becomes judicial activism. So, the original conservative view was all issues of public or social policy should be discussed and debated by the legislative and executive branches of the state that represents the society. Courts resolve disputes following the written down law while sending back any ambiguities to the legislative arm for approval.
There is a lot of merit in this argument. It is difficult to imagine how a single complainant with a specific grievance in a combative judicial process be the basis for drafting a norm for the society. Isn’t there a risk of the courts overlooking the true costs and benefits to the society while judging a single case? Would the second order impact of their decision be visible to them? Should we allow the judges to bring in their personal values into issues of constitutional merits? And let’s not pretend judges are above this. ‘Judicial activism’ is unavoidable if we let courts decide on such issues. In fact, the current debate in the US about nominations is an implicit acceptance that judges insert their personal code into judgments. When you consider the adversarial nature of many historic social judgments (both in the US and India) and the costs such a process extracts in polarising the society further, it becomes clear litigation is a blunt instrument to carve out social change. Courts shouldn’t pre-empt social and political debates.
The Liberal Activism
The liberal position, as it has evolved over time, is marked with suspicion of the society reforming itself. The classical liberal approach to this problem was to accelerate the process of change in the society. This was to be achieved through a combined political, social and cultural assault on the bastions of conservatism in the society. This led to the portrait of a liberal as a perpetual activist in a constant state of mobilisation to upend existing norms. The liberal belief that society must change from within was no different from the conservative stance. The difference was on the need to induce change through proactive measures and on the speed of change. This need for speed eventually led the liberals to the courts. To the liberals, this wasn’t difficult to justify. The law isn’t ever ‘value neutral’. Like Sahir Ludhianvi once wrote (Chitralekha, 1964):
“Yeh paap hai kya, yeh punya hai kya, reeton pe dharm ki moharein hai,
Har yug mein badalte dharmon ko kaise aadarsh banaoge?”
What’s right or wrong has always been a compilation of enforceable values. This is a forever changing or evolving construct. Since people use these values in their daily lives, the courts can define their boundaries of ‘reasonableness’.
A couple of other reasons nudged the liberal position closer to supporting judicial activism.
First, it became clear that there can be no regime where every issue of public policy can be resolved through the executive or legislative arms of the state. How representative is the legislature anyway? Or, how compromised? This centralised policymaking unit that changes every few years in a democratic process can’t be expected to draft policies that will be considered the final word and stand the test of time. Also, there are common laws that precede the state and changing them requires blunt force of law itself.
Second, as the legislative environment turned more partisan and dysfunctional, the drafting of laws became more imprecise or vague to accommodate political bargains. This has meant a constant need for interpreting or divining the legislative intent of laws. This act of precise interpretation and proofreading has turned judges into lawmakers by default. Lastly, the liberals who are often blamed for nominating activist judges argue this is a matter of perspective. Only when the issue at hand goes against the conservative agenda, it is considered judicial activism. Not otherwise.
The Perils Of (Any Kind Of) Centralisation
Based on evidence it can be argued the conservatives have lost the argument. The courts are at front and centre of social policymaking today. The many historic judgments that cleave the US society are evidence of it. The legislative arms of the state representing the society aren’t drafting these laws.
But here’s the irony. The conservatives have co-opted the liberal model. With a few strokes of good fortune, the single-minded agenda of turning the US SC bench into conservative majority has been fruitful. The peril of pushing social change into the cabins of a powerful, centralised and an autonomous institution is clear to the liberals now when the shoe is on the other foot. A blunt instrument doesn’t look blunt till it is in the hands of your adversary. The path of wresting back control to the society will be long and arduous.
Matsyanyaaya: COVID-19 Warrants Long Overdue Doctrinal Shifts in Military Planning
Big fish eating small fish = Foreign Policy in action
— Pranay Kotasthane
Lt Gen Prakash Menon and I have a new paper out in the inaugural edition of the Indian Public Policy Review journal.
We argue that the economic shock of COVID-19 makes the current method of defence budgeting redundant. When the GDP itself is set to reduce, defence expenditure demands as a percentage of GDP is less feasible. On the other hand, the situation on the Line of Actual Control (LAC) in Ladakh has demonstrated again that managing China, not just Pakistan, should be the focus of India’s military planning. To overcome these two challenges, a few incremental budget cuts, postponing of capital acquisition plans, and forgoing of salaries for a day would be insufficient.
Instead, we argue that it’s imperative to address the mismatches between India’s political objectives and the kind of force structure put in place to meet those objectives. We identify four such mismatches.
Derived from these mismatches, we propose six doctrinal shifts — a paradigm of employable power, a structure for integrated theatre commands, conversion of manpower to human capital investment, organisational changes to build firepower, and a shift in focus to the seas and new domains.
Do read and let us know what you think.
Reading and listening recommendations on public policy matters
[Article] Excerpts from Charles Tilly classic Misreading, then Rereading, Nineteenth-Century Social Change.
[Article] The P.J. Nayak committee (2014) report on Banking reforms. It has a lot of points that remain relevant.
[Paper] A must-read paper on equality and fairness by Christina Starmans, Mark Sheskin and Paul Bloom. Money quote: “humans naturally favour fair distributions, not equal ones, and that when fairness and equality clash, people prefer fair inequality over unfair equality”.
[Article] Looking beyond reservations for equality.
That’s all for this weekend. Read and share.