#86 Production-Linked Subsidies & Decoding Charisma

  
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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?

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India Policy Watch #1: Production-Linked Incentives

Insights on burning policy issues in India

— Pranay Kotasthane

Production-Linked Incentives (PLI) — that’s the name the government’s recent, most-favourite industrial policy instrument goes by. It seems elegant on paper: the government will reward companies for incremental sales of manufactured goods with a subsidy. More the sales (either domestic or exports), more the subsidy amount.

The intent seems sound too: encourage companies to up their manufacturing game.

First introduced for the electronics sector earlier in the year, PLIs worth ₹2 lakh crore for ten disparate sectors over the next five years were announced by the Union Cabinet earlier this month. These sectors are automobiles and auto components, pharmaceutical drugs, advanced chemistry cells (ACC), capital goods, technology products, textile products, white goods, food products, telecom and specialty steel.

Let’s assume that the size of the incentive is big enough to change companies’ investment decisions at the margin (that’s a big if). What are the consequences likely to be in that case? Can we anticipate some unintended consequences beforehand?

Let’s parse this policy through the framework discussed in edition #48. Three unintended effects are possible:

  1. “Reasonable regulation drifts toward overregulation, especially if the costs of overregulation are not perceptible to those who bear them.”

    The PLI scheme for the electronics sector has specific eligibility criteria both on incremental investment and incremental sales a company needs to commit over the next five years. This is supposed to be cross-checked by a Project Management Agency (PMA), a government-body formed under the Ministry of Electronics and Information Technology (MeitY).

    The PMA will further submit its recommendations to an Empowered Committee (EC) composed of CEO NITI Aayog, Secretary Economic Affairs, Secretary Expenditure, Secretary MeitY, Secretary Revenue, Secretary DPIIT and DGFT which will make the final decision. The EC is also empowered to revise anything — subsidy rate, eligibility criteria, and target segments.

    In short, more bureaucracy and predictably unpredictable delays. The speed of incremental investments might get decided by the speed of government decision-making. EC’s powers to make any changes to this policy in the future is also filled with possibilities of regulation becoming overregulation.

    There’s one more gap. In order to increase innovation, the PLI scheme will not consider incremental investments towards land and buildings towards the eligibility criteria. Only investment towards plant, machinery, equipment, research, and development is allowed. This might incentivise companies to fudge their land dealings and for government officers verifying the real quantum of incremental investments to cut deals for themselves.

  2. “Moral hazard increases.” The ten sectors chosen by the government might see a crowding-in of investment at the cost of all other sectors. Are these ten industries strategic for India while others aren’t? I don’t quite know the basis of this selection.

    Next, every policy move has an associated opportunity cost. It’s a bane of Indian policymaking that policy decisions are rationalised solely by looking at projected benefits; by ignoring opportunity costs. In the context of PLIs, the government needs to pay up ₹2 lakh crore over the next five years to a few companies in these ten sectors. The government will most likely rake in this revenue in the form of taxes. Using the Kelkar/Shah Marginal Cost of Public Funds (MCPF) estimate for India of 3, the total cost to India from this subsidy would be of the order of ₹6 lakh crore. The scheme would make sense if the benefits are projected to be higher than this number. Whether an analysis of these costs has been taken into account, we don’t know.

  3. “Rent-seekers distort the program to serve their own interests”. Companies that benefit will seek to modify the eligibility criteria to suppress competition thus leading to more market concentration. They might even try to extend the sunset clause of this scheme in order to keep benefiting from the discount.

These unintended consequences might substantially diminish the benefits that the PLI schemes are aiming at.

What are the alternatives?

Read this statement by the chairman of the India Cellular and Electronics Association (ICEA):

“The disability stack runs deep in the economy. For example, the taxes on fuel. Second, electricity is not subsumed under GST (goods and services tax). So how do you become competitive?

This is the key point. Perhaps PLIs are a much-needed band-aid solution for a wounded economy but it cannot transform manufacturing in India. Doing that would require consistent and simpler tax, policy, business, and trade environments. Improvements on these grounds will benefit all sectors and investments will follow sectors which show higher productivity. In other words, we’re still waiting for a reforms 2.0 agenda.


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India Policy Watch #2: The Many Hues Of Charisma

Insights on burning policy issues in India

— RSJ

The recent Bihar election results confounded many. First, the consensus from multiple opinion and exit polls suggested a clear majority to the UPA. They got it wrong. Second, there was view the NDA coalition was going into the elections with a triple disadvantage – anti-incumbency, the particularly severe effect of lockdown on Bihari migrants and the disappointment among the youth about the economic progress in Bihar despite many years of promise. There was no regional face of the BJP to counter the rising popularity of Tejaswi Yadav. The pandemic also limited the ability of the NDA to field the PM and other star campaigners on the ground to mobilise the workers and make a case for their government. Despite such odds, the BJP had its best performance winning 74 seats out of the 121 it contested.   

What explains this?

Politics of Vishwaas

There are multiple theses here. The decision of AIMIM to field candidates across the state ‘cut’ the Muslim vote bloc is one. That women voted overwhelmingly in favour of the BJP is the other. These might have played a role in the electoral arithmetic but at a macro level the win reaffirms the strength of what Neelanjan Sircar has called the ‘politics of vishwaas’. As Sarkar writes:

“…is a form of personal politics in which voters prefer to centralize political power in a strong leader, and trust the leader to make good decisions for the polity – in contrast to the standard models of democratic accountability and issue-based politics.”

Sircar suggests two factors leading to this:

“First, like much of the world, there is an increasingly strong axis of conflict between those who believe in a unitary (Hindu) national identity for India and those who view India in ‘multicultural’ terms. This obliges supporters of Hindu nationalism to support political centralization to stymie federalism, which would require negotiation across regional, linguistic, caste, and religious identities. Second, the BJP’s control of media and communication with the voter, in tandem with a strong party machinery, give the party structural advantages in mobilizing voters around the messages of Narendra Modi.”

Vishwaas apart, the Bihar win suggests voters aren’t yet disappointed with the absence of achhe din the PM had promised in 2014. The charisma of the PM endures, and he’s still seen as an outsider upending the established order and the elites. This is a remarkable feat of narrative-building where even missteps like demonetisation or the severe lockdown are judged on their intent instead of their outcomes. The ‘politics of vishwaas’ is anchored on the personal charisma of the PM.

So, how should we think about this charisma? There are several ways.

Cometh The Hour

First, leaders build their charismatic appeal on the back of a deeply felt need in the society for change. In the run-up to 2014 general elections, two distinct needs coalesced. One, the simmering discomfort about how the constitution and its institutions had over the years infringed on the personal domain of Hindu lives while staying away from those of minorities (termed appeasement by many). Two, the shambolic performance of UPA 2 on economy driven by transactional corruption and policy paralysis.

All societies have inherent in them a set of core beliefs that in tandem with everyday issues of roti, kapda and makaan drive their choices and actions. Often, they are in opposition. Sometimes they coincide as they did in 2014.

Despite the liberal and secular constitution project that aimed at engineering a social revolution in post-independent India, the core belief, however suppressed, among the majority was always guided by their religion. This suppressed belief found a credible voice in the persona of PM Modi. They saw in him an agent of change who will restore personal belief and faith above the liberal ideas of the constitution. Those ideas were never in sync with our society anyway.

Therefore, so long as there are actions that suggest progress on this axis – CAA, revocation of Article 370 and building of the temple in Ayodhya – the relatively poor performance on roti, kapda, makaan issues will not matter. Even a raging pandemic and a 23% shrinking of the economy in Q1 hasn’t mattered. Charismatic leaders emerge in times of great need and so long as they deliver on their core promises (even those unstated but commonly understood), they will retain their hold on their followers.

Max Weber in his classic ‘On Charisma And Institution Building’ explained this eloquently:

“Charisma knows only inner determination and inner restraint. The holder of charisma seizes the task that is adequate for him and demands obedience and a following by virtue of his mission. His success determines whether he finds them. His charismatic claim breaks down if his mission is not recognised by those to whom he feels he has been sent. If they recognise him, he is their master – so long as he knows how to maintain their recognition through ‘proving’ himself. But he does not derive his ‘right’ from their will, in the manner of an election. Rather the reverse holds: it is the duty of those to whom he addresses his mission to recognise him as their charismatically qualified leader.”   

Charisma Trumps Economic Structure

The somewhat forced reforms carried out by the PM in the last 18 months have challenged the status quo. The success of these reforms will depend on their implementation. The opposition has protested against a few of them especially the farm sector reforms. But barring pockets in Punjab and Haryana where the MSP economy looms large, there isn’t a groundswell of opinion against these reforms. Even the poorly thought-through reforms in labour and the swerve towards atmanirbhar Bharat have been difficult to counter. It is politically infeasible to defend the status quo while being in opposition. The ruling dispensation has taken on the mantle of change despite being in power for over 6 years.

On the economy, the track record of this government is weak; yet PM Modi’s charisma stays above it. Pratap Bhanu Mehta writing in The Indian Express captures this well:

“Despite economic headwinds, it has not been easy to use the economy as a point with which to attack the Modi government. It has still positioned itself as a breaker of the status quo. The opposition will have to think more intelligently about the political economy of protest to counter the new political economy of reform.”

This is the unique feature of charisma. India Gandhi had it when she went about destroying the Indian economy to consolidate political gains in the early 70s. The mission of the charismatic leader subsumes everything else, even their glaring flaws. More so on economic matters.

Weber had considered this in his ruminations on charisma and this is particularly applicable to the ‘fakir’ narrative that’s often associated with charismatic leaders in India:

 “In its economic sub-structure, as in everything else, charismatic domination is the very opposite of bureaucratic domination. If bureaucratic domination depends upon regular income, and hence at least a potiori on a money economy and money taxes, charisma lives in, thought not off, this world. This has to be properly understood. Frequently charisma quite deliberately shuns the possession of money and of pecuniary income per se… (charisma) always rejects as undignified any pecuniary gain that is methodical and rational. In general charisma rejects all rational economic conduct.

..In its purest form, charisma is never a source of private gains for its holders in the sense of economic exploitation by making of a deal. Nor is it a source of income in the form of pecuniary compensation, and just as little does it involve an orderly taxation for the material requirements of its mission. Pure charisma…. is the opposite of all ordered economy. It is the very force that disregards economy.”

The Transfer Of Charisma

The primary challenge to a structure that’s based on charisma is in the determination of transfer of that authority. The transfer comes about through various means – bloodline (Nehru-Gandhi family), search (Dalai Lama), revelation (prophets) or through a new need for a change (Obama or Trump, PM Modi etc). The core question for BJP is what after 2024? Clearly, it’s difficult to see the PM continue for a third term after he turns 75. How will it transfer the charisma to an anointed successor? The work on it will begin soon.

This won’t be easy.

Because PM Modi hasn’t used his charisma to build institutions that will sustain it beyond his time. In his introduction to Weber’s Charisma and Institution Building, S.N. Eisenstadt writes:

“… the test of any great charismatic leader lies not only in his ability to create a single event or great movement, but also in his ability to leave a continuous impact on an institutional structure – to transform any given institutional setting by infusing into it some of his charismatic vision, by investing the regular, orderly offices, or aspects of social organisations, with some of his charismatic qualities and aura.”

This is where Nehru was a genius. For the opposition, the fact that Modi hasn’t been an institution builder in Nehru’s mould offers them their only ray of hope. That this charisma won’t transfer in the post-Modi polity.

But till then the electorate will continue to confound pollsters.  


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HomeWork

Reading and listening recommendations on public policy matters

  1. [Article] Economists Ila Patnaik and Radhika Pandey on Production-Linked Incentives (PLI) scheme.

  2. [Article] India’s defence financing crunch can’t be solved by the Ministry of Defence alone. Lt Gen Prakash Menon and Pranay explain what needs to be done.

  3. [Podcast] If Business-State relations interest you, listen to this Puliyabaazi with Rohit Chandra.

  4. [Article]: ‘Can Democracy Handle Charisma?’ Review of David Bell’s Men on Horseback by Ian Beacock in the New Republic.


That’s all from us, folks.

In case Indian subcontinent geopolitics interests you, tune in for this event in context of the recently concluded elections in Myanmar.