Degrees of freedom

On the 7th April, I had given an interview to Mythili Bhusnurmath of ET NOW. It was just after the RBI monetary policy meeting. The central bank has kept interest rates on  hold but announced what amounted to a QE policy. More on that later. I am aware that I had not commented on it. Will do so. During the interview, I had said that RBI had more degrees of freedom than even the Federal Reserve had. Mythili was shocked.

Well, to put it simply, RBI has 400 basis points of its policy rate. The Federal Reserve does not have it. Federal Reserve cannot raise interest rates without upsetting the ‘House of Cards’ that its financial market is.  Of course, RBI cannot expand its balance sheet as much as the Federal Reserve has done without the rupee crashing against the US dollar. But, how long can the Federal Reserve take liberties with the US dollar’s reputation and trust is anyone’s guess.

So, it is an observation that is staple diet for a long and animated discussion. ‘Economic Times’ does not permit me to copy and paste the transcript of my interview here. So, I am attaching the PDF file here.

ET_India has far more degrees of freedom than Federal Reserve_ V Anantha Nageswaran on RBI policy_07042021

Scientists want to know the origins of Sars-Cov2

Reaction to the China-WHO joint study team report

CoV-2 origin hypotheses.”Having read the report entitled‘WHO-convenedGlobalStudy of Origins of SARS-CoV-2: China part’ and reviewed the statements made in the March 30, 2021 WHO-organized press event announcing the report’s release, we have regrettably concluded that our concerns were fully justified.

In addition to the issues regarding the joint mission structure and process outlined in our previous open letter, we wish to express the following concerns regarding the joint study process and report conclusions:

The joint study team saw its priority as seeking a zoonotic origin, not as fully examining all possible sources of the pandemic. Its Terms of Reference did not mention any possible lab-pathway and on the contrary explicitly stated a strict zoonosis origin from the very start (“identify the zoonotic source of the virus”).

The published data supporting the mission report mostly present reviews of Chinese studies that have not been published, shared with, or reviewed by the international scientific community.

Well over a year after the initial outbreak, critical records and biological samples that could provide essential insights into pandemic origins remain inaccessible. This withholding of key resources that could and should have been made available undermined the credibility of the joint study team work.

The joint study team used different evidentiary standards for the four origin theories it considered.No solid justification is provided for why a ‘lab-relatedaccident’(whether a lab-leak or sampling accident) should be considered ‘extremely unlikely’, or why a natural spillover via an unknown animal host should be considered ‘likely to very likely’.

At this stage there is still no direct evidence for either pathway nor any verified data or evidence sufficient to rule any one out, while historical evidence amply supports both.

In particular, a primary conclusion of the report, that SARS-CoV-2 was most probably introduced into the human population through an intermediate host, is not supported by the negative results of all the 80,000 tested samples of wildlife, livestock (35species) and poultry. That pathway remains entirely theoretical, which at the very least shows the necessity to remain open to other pathways.

The joint study report spends a mere 440 words examining the lab-accident pathway – less than 1% of the whole report – and does so in a dismissive and superficial way without considering all the possible versions of that pathway, including a possible infection of a sampling team member by a virus that may never have been isolated or sequenced. The joint study report also makes no mention of the Gain of Function researchon bat corona viruses that was being carried out in Wuhan in the second half of 2019.

The 440-word assessment of the lab-accident pathway is supplemented by Annex D7 of the report, which labels the lab-pathway as a ‘conspiracy theory’ five times while containing disputed, incorrect, imprecise, and contradictory assertions (as detailed in the supplement below).

The final process utilized by the joint study team for assessing the likelihood of the lab pathway – essentially a show of hands by the joint study team members based on an extremely superficial review – failed to reach some most basic standards of credible analysis and assessment. Further, it is at best unclear whether the Chinese joint study team members had the leeway to express their fair evaluation of all hypotheses in the presence of Chinese government minder

Against these significant limitations and procedural failures that call the conclusions of the China-WHOjoint study report into question,we fully support the March 30, 2021 statement by WHO Director-General Dr.Tedros AdhanomGhebreyesusthat all origin hypotheses must still be examined, including the possibility of a lab-related incident, that China must be more forthright in sharing essential data and biological samples, and that WHO is prepared to send additional missions and experts to China in order to thoroughly examine all origin hypotheses. We welcome this courageous defense of the WHO’s integrity and recognize the organization’s potential to lead a comprehensive investigation into pandemic origins, if given the mandate and necessary support.

We further welcome the March 30, 2021 Joint Statement on the WHO-convened COVID-19 Origins Study by 14 countries underscoring the need for “a transparent and independent analysis and evaluation, free from interference and undue influence” and voicing their shared
concern that the joint study “lacked access to complete,original data and samples.” We also recognize the EuropeanUnionStatementon the WHO-led COVID-19OriginsStudy underlining that the identification of the source of the SARS-CoV-2virus will “require full and transparent cooperation by all WHO Member States and a collaborative effort by scientists from various disciplines.


Colin D. Butler, Honorary Professor of Public Health, Australian National University, Canberra,Australia ORCID 0000-0002-2942-5294
Jean-Michel Claverie, Emeritus Professor of Medicine, Virologist, Aix-Marseille University,France(ORCID 0000-0003-1424-0315)
Fabien Colombo, PhD Candidate, Communication and sociology of science, MICA, UniversitéBordeauxMontaigne,France
FranciscoA. de Ribera,IndustrialEngineer,MBA,MSc(Res),Data scientist,Madrid,Spain (ORCID 0000-0003-4419-636X)
Rodolphede Maistre,MSc engineering,MBA,IHEDN,France(ORCID 0000-0002-3433-2420)
GillesDemaneuf,Engineerand DataScientist,BNZ,Auckland,NewZealand, (Co-Organizer)
RichardH.Ebright,Professorof Chemistry and ChemicalBiology,RutgersUniversity,USA
Andre M.Goffinet,Prof.em., Neurobiology,Universityof Louvain,Belgium
Francois Graner, biophysicist,Research Director, CNRS and Universite de Paris,France, (ORCID 0000-0002-4766-3579)
José Halloy, Professor of Physics, Biophysics and Sustainability, Université de Paris, France(ORCID 0000-0003-1555-2484)
Makoto Itoh,Dr.Eng.,FullProfessorof Engineering,Informationand Systems,University of Tsukuba, Japan
HidekiKakeya,Dr.Eng.,Associate Professorof Engineering,Informationand Systems, University of Tsukuba, Japan (ORCID 0000-0003-3788-9133)
MiltonLeitenberg,Senior ResearchAssociate,School of PublicAffairs,Universityof Maryland,USA
Filippa Lentzos,Senior Lecturerin Science& InternationalSecurity,King’sCollege
London,UnitedKingdom(ORCID 0000-0001-6427-4025)
JamieMetzl,Senior Fellow,AtlanticCouncil,USA (Co-Organizer)
DominiqueMorello,Molecularbiologist,formerly DRCNRS, science communicator, France
NikolaiPetrovsky,Professorof Medicine,FlindersUniversity,Australia(ORCID 0000-0002-1580-5245)
StevenQuay,MD,PHD,FormerlyAsst. Professor,Departmentof Pathology,Stanford
University School of Medicine,USA(ORCID 0000-0002-0363-7651)
MonaliC. Rahalkar,PhD,Scientist D,BioenergyGroup,Agharkar ResearchInstitute, Pune,India
RossanaSegreto,PhD,Departmentof Microbiology,Universityof Innsbruck,Austria (ORCID 0000-0002-2566-7042)
Günter Theißen,Dr.rer.nat.,Professorof Genetics,MatthiasSchleidenInstitute,
FriedrichSchiller UniversityJena, Germany (ORCID 0000-0003-4854-8692)
Jacquesvan Helden,Ir.PhD,Professorof Bioinformatics,Departmentof Biology,
Aix-MarseilleUniversité,France (ORCID 0000-0002-8799-8584).
RolandWiesendanger,Dr. phil.,Professorof Physics,Universityof Hamburg,Germany [Link]

The full letter can be downloaded from here.

The transcript of a CBS 60-minutes conversation recorded late in March on the origins of the virus is a useful one to go through.

The prism of Taiwan

Extracts from Kevin Rudd’s speech before the Alaska meeting between American and Chinese officials:

 In Xi Jinping’s China, most of Xi’s senior officials are terrified of him. They are highly unlikely therefore to be providing frank and fearless advice internally. Under these circumstances it’s critical that Chinese intermediaries are able to convey accurately and concisely messages they are receiving from their American counterparts directly to China’s paramount leader himself. In the Chinese system, Xi Jinping is the decision-maker. Nobody else.

Over the last five years, Xi Jinping has taken his country further to the left in its domestic politics, to the left in its domestic political economy, and to the right in its promotion of Chinese nationalism. As a result, Xi is now more powerful than ever. This is despite a number of self-inflicted wounds in China’s emerging economic model….

Indeed, the level of China’s self-confidence at present is problematic as it may blind some Chinese leaders to the extent of China’s own continuing domestic and international vulnerabilities, just as they may  also be blinded to America’s ability to rebuild its economy, politics, and global standing.

Overall, however, Beijing believed Donald Trump was a paper tiger on any question of hard national security, having read his language and behavior carefully over both Syria and North Korea, and concluded that Trump would never take up arms against “his great personal friend Xi Jinping.” For these reasons, and because Trump had weakened the U.S. alliance structure in both Europe and Asia, the Chinese national security hardheads, despite all of Trump’s unpredictability, would on balance have preferred to see his re-election rather than the Biden alternative.

The bottom line is that across the multiple measures put in place by the Trump administration in trade, investment, technology, individual sanctions, Taiwan, student and journalist visas, and consulate closures, practically all these measures have so far remained in place under Biden.

Two months into the administration, tariffs remain in place. Some technology bans have been strengthened, while a limited number of others have been placed under review. The number of sanctioned individuals has increased as retaliation for recent changes to the Hong Kong electoral law. One category of student visa bans has been deferred while the others remain in place. And the consulates that have been shuttered remain shuttered.

The core political messages conveyed in the Party’s “inward-facing” statements on national security and commentary over the several months since Biden’s election are as follows:

First, that despite the current turbulence in international relations, there is an inexorable trend that favors China. 

Third, given these threats, Chen, on Xi’s behalf, reminded the party that “security is now the cornerstone of development” and that “without security we cannot achieve anything.”

Fourth, these domestic and international threats and their impact on national security writ large mean that China must now engage in protracted “struggle” or douzheng against its adversaries. This term is important in both Chinese domestic and international behavior….. Significantly, on March 1, 2021 Xi Jinping delivered a speech to the Central Party School in which he urged cadres to “dare to struggle,” and said that “struggle is how our party got to where it is today,” and that “we must rely on struggle to win the future.” Equally significantly, nowhere does Xi identify that the “struggle” he is calling for should be nonviolent in nature.[iv]

…. On top of this, Defense Minister Wei Fenghe stated that strategic confrontation with the U.S. had now entered a period of essentially equal balance and stalemate and that “containment and counter-containment will be the main theme of bilateral ties in the long term.”[v]

Finally, all these factors have come together in hardline language on Taiwan…. And in the context of U.S.-China relations, Wang added that this was “a red line that should not be crossed,” and where there was “no room for compromise.”[vi]

While the language about the “rise of the East and the decline of the West” is relatively new in the current context, variations on this theme have been used by Xi in the past, although not with its current frequency and intensity. It was also a favored phrase of Mao.

The language on the need to face “Thucydides Trap” rather than avoid it is for the Chinese military also new, as is the language on Chinese-American military parity and the reality of military confrontation.

……..the repeated language about domestic threats to security also seems to reflect a high degree of regime anxiety about the underlying strength of its rule. In this context, the graphic depiction of the great external threat of the United States is designed to further justify the securitization of everything…. The bottom line is that Xi Jinping’s external security discourse is measurably hardening, also making it more difficult over time for the system to compromise on any critical future challenge on Taiwan, the South China Sea, or even the East China Sea.

…..Chinese diplomats understand that this combined narrative of American strategic misunderstanding of Chinese intentions, grave American policy errors, and the need for the Americans to now repent of their mistaken ways is no longer of any practical use. The fact that it is still used, however, is a reflection of the rigid articulation of a long-standing foreign policy dogma and domestic political narrative that has now passed its use-by date.

……..Secretary of State Blinken in his confirmation hearings had already agreed with the previous administration’s characterization of actions in Xinjiang as genocide. That was despite stern warnings from the People’s Daily the previous day… The reason I mention this here is that whatever else may unfold with the U.S. and China this year, this single issue has the capacity to unravel the entire relationship. 

… on March 16, Taiwan’s defense ministry confirmed that the Biden administration had approved the sale of three categories of advanced submarine parts of unspecified value to Taiwan. Two of these had been provisionally approved by Trump in December and January, but Biden approved an additional category as well. 

… On Xinjiang, as with Hong Kong, Xi Jinping’s China is now doubling down against the West, is increasingly indifferent to international political opinion, and is reinforced in this by its ability to garner sufficient international support in multilateral fora including the UN to defray any attack….

…. On technology, the Biden administration on March 12 informed Huawei suppliers of tighter conditions than previously for approval of export licenses, including banning items for use in or with 5G devices. Commerce Secretary Gina Raimondo had earlier promised to use the entity list “to its full effect.” On the same day, the U.S. Federal Communications Commission designated five Chinese companies, including Huawei and ZTE, as threats to national security under a Trump administration law.

….In our examination of China’s official national security discourse over the last several months, it is relatively clear that Beijing is as hardline as ever — and arguably more so. Xi Jinping’s language about the “rise of the East and the decline of the West,” has now become all pervasive within the Chinese system. Similarly, the language of his military commanders has become remarkably unguarded in terms of the hard, strategic competition in which the Chinese leadership is now engaged in against the United States.

The expectation of China’s political and security apparatus for its diplomatic establishment (referring to re-establishing high level strategic dialogue with America) is to extract as much as they can from their American counterparts about America’s strategic intentions; to provide as little as possible about China’s; and to take the strategic temperature down in the relationship overall by embedding and enmeshing it in a complex of dialogue mechanisms.

Chinese strategy remains building its comprehensive economic, military, and technological power over the course of the decade ahead in order to achieve its territorial objectives without ever having to fire a shot. Tactically, China’s objective is to continue to provide its military, economic and technological establishment the time necessary to prepare for the day of their choosing.

In many respects, Xi Jinping has been emboldened over Taiwan because of the pusillanimous response of the U.S. and the collective West over the passage of Hong Kong’s new national security law and its just-announced new electoral law. The U.S., even under Trump, declined to take any hard financial or economic measures against Beijing, primarily because too many Western financial interests were at stake….

…For Xi Jinping, Taiwan remains the pearl of great price. No other Chinese leader since Mao has burnished the same level of ambition to return Taiwan to Chinese sovereignty. … Xi has concluded that China no longer needs to be as dependent on the United States. While access to the American export market and high technology suppliers continue to be important, for Xi Jinping such access is no longer deemed to be essential. Hence his newfound doctrine of national economic and technological self-sufficiency. For Xi, the future of the U.S.-China relationship is now seen primarily, if not exclusively, through the prism of Taiwan. 

Remember, Xi Jinping’s tactical objective is to buy as much time in the immediate period ahead to enable the relativities of Chinese and American military economic and technological power to move more decisively in Beijing’s favor.

China continues to have many vulnerabilities that are often invisible to Western political elites — just as America’s great national strengths, including its capacity to politically and economically rebound from national disasters, has never really been understood by the CCP. [Link]

Self-sufficiency has a context

A strange combination of circumstances found me writing three articles in three days for Mint. On Tuesday, it was my regular weekly column. On Wednesday, the newspaper published my long-form article on the opportunities and dangers of import protection for solar manufacturing. It was the same day when the government announced its 45 billion rupees (600+ million US dollars) Production-Linked Incentive scheme for solar panel modules and cells. 

On Thursday, I wrote on whether self-sufficiency, per se, was a wrong policy. In the current context of geopolitics, I wrote that it was not the case.

Earlier in the week, I had blogged on Matt Pottinger’s article in the Wall Street Journal and his interpretation of Xi Jinping’s remarks made in April 2020.  I thought Pottinger was deliberately misinterpreting Xi’s remarks. At least, that is what I had meant with the title of my blog post. Now, two days later, I may have reasons to rethink. First, I learnt that Pottinger is an expert Mandarin speaker and knows the language so well that he delivered a full speech in Mandarin last year. So, it was not the case that he was relying on a ham-handed translation.

While a literal translation did not suggest – I checked with three people who speak, read and write Mandarin as natives do – what Pottinger suggested, it is also becoming evident that Pottinger may be anticipating something here and, to that extent, he is rendering a useful service.

The bone of contention was whether Xi was trying to shield China from the arbitrariness of other nations in denying China access to global supply chains or was he actually seeking to build domestic capabilities, build international dependence on China and then hold them to ransom.

While a literal interpretation of his speech (this was delivered by Xi in April 2020) refers more to the former, the ‘dual circulation’ strategy does not preclude the latter. Going one step further, it may actually be part of the strategy. In that sense, Pottinger is spot on. Now, how did I come to this re-thinking?

I read an article by Mark Leonard of the European Council on Foreign Relations in ‘Project Syndicate’. It is an extremely well-written article in the sense that it was an eye-opener for me. The key paragraph which reinforces Matt Pottinger is this:

The purpose of dual circulation is to make China more self-reliant. After previously basing China’s development on export-led growth, policymakers are trying to diversify the country’s supply chains so that it can access technology and know-how without being bullied by the United States. In doing so, China will also seek to make other countries more dependent on it, thereby converting its external economic links into global political power. [Link]

Even before reading Mark Leonard’s article, I had written this in my article for Mint today:

The Information Technology and Innovation Foundation conceded that “tariffs and other forms of trade protection, which have been ineffective in the past, may have a role to play” in a report last year (The Impact of China’s Production Surge on Innovation in the Global Solar Photovoltaics Industry, 5 October 2020).

Their full research note is worth a read. But, it can be not-so-interesting reading for those not interested in solar panels or modules or cells.

Although, former India’s foreign secretary Shyam Saran’s article appeared in the ‘Business Standard’ on the 9th and the blog post was completed on the 8th April and posted, it makes sense to add the key portions of his column here than to make a separate post out of it:

…. the target of creating a “world class military” by 2049 parallels and goes hand in hand with the aim of creating a modern and developed country. This is akin to the concept of total mobilisation, which decades ago was pioneered as People’s War by Mao Zedong. Perhaps we are witnessing the emergence of its contemporary version under Xi Jinping…

…. President Xi’s remarks at the Economic and Financial Work Conference do not reflect the “win-win” formula that he often advocates. It is rather about how China’s modern mercantilist strategy could expand Chinese power at the expense of its trading partners, adversaries and “friends” alike…..

Economic exchanges are aimed at creating not mutually beneficial global interdependencies but “global dependencies” on China, which could be weaponised…. [Link]

How to make the policy on solar manufacturing succeed?

The dark side of India’s solar gamble

Almost 75% of India’s solar power capacity is built on Chinese solar cells and modules
10 min read . Updated: 07 Apr 2021, 05:47 AM IST

V. Anantha Nageswaran, Venugopal Ramakrishnan

SINGAPORE/CHENNAI : In December, news reports indicated that the ministry of new and renewable energy had proposed a 20% basic customs duty (BCD) on solar module and cell imports. Fast forward three months, that has gone up to a proposed duty of 40% on solar photo-voltaic (PV) modules and 25% on solar photo-voltaic cells from April 2022. There is an existing safeguard duty which was first imposed in 2018. That is expiring in July.

One of the usual objections, i.e. that India’s duties can be contested in the World Trade Organisation (WTO), is easily addressed. WTO takes a long time to adjudicate. The judgements can be appealed. Both the Trump and the Biden administrations in the US have refused to appoint appellate judges to the WTO. Of course, the flip side is that it means that India’s import duties can be met with export duties on the part of China.

Therefore, the touchstone for the proposed BCD on solar panels and cells is not ideology but efficacy. Are there enabling conditions for industry to respond? And will the BCD need to be supplemented with other measures to enhance the chances of its success in spurring domestic capacity creation in solar manufacturing?

Chinese dominance

When it comes to making solar panels, there are modules, cells, ingots and wafer and polysilicon—in the reverse order of ‘finished’ to ‘raw material’. According to a 2017 World Intellectual Property Organisation working paper, China’s share of global manufacturing capacity in the different segments of solar energy generation was 81% in ingots, 84% in wafers, 66% in crystalline photovoltaic (PV) cells and 82% in crystalline PV modules. But these data were as of 2012. A more recent article published in The American Prospect (24 March 2021) puts the numbers at 95%, 99%, 80% and 75%, respectively. Further, it adds that China’s share in solar-grade polysilicon capacity is 64%. In fact, the industry is now moving from multi-crystalline silicon to monocrystalline silicon and the technology required to produce mono ingots and wafers is both sophisticated and capital intensive.

If the intent of the proposed BCD is to help Indian manufacturers develop capability in modules and cell manufacturing, the near-total reliance on China for the inputs that go into the production of cells and modules raises doubts over that possibility. China can retaliate by imposing export duties on the export of ingots and wafers and polysilicon. It is also possible for Chinese manufacturers to relocate to other countries which are not affected by the duty and export to India from those countries.

While, in principle, it makes sense to raise duties on ‘finished’ goods rather than on intermediate or basic inputs, it is important to remember two things: first is that one industry’s finished good is another industry’s input. Steel is a good example. It may be a finished good, but it is also an important input in the manufacture of automobiles. We must also keep in mind the ability of other countries to retaliate.

So, if the purpose of the proposed duty is to ‘Make in India’ such that India’s renewable energy ambitions and targets are realised through indigenously made photovoltaic solar panels, then, it is imperative to take into account China’s dominance and examine the record of the domestic industry in delivering on expectations in the past.

Low ambitions and quality

Take the specialised glass used in solar panels, for instance. It is made by Borosil in India but cannot meet the required domestic demand. It is the same for specialised plastics which are required to complete the electric circuitry for the panels, where existing capacity is insufficient to meet demand. That needs to be imported as well.

Perhaps the biggest challenge for many solar power producers in India is that energy efficiency of Indian-made PV cells is less than what is claimed, leading to the actual cost of power generation being higher than what it ought to be. There are reports that some manufacturers falsely label their 380W cells as 400W because there are no government entities to ensure the quality of these cells. This lack of quality control undermines power generator’s ability to deliver cheap solar power. Naturally, the result is that the financial viability of solar power producers comes under strain.

Solar Energy Corporation of India (SECI)’s manufacturing-linked solar tender was, in effect, the government’s attempt to link manufacturing with the permit to develop solar parks at pre-determined tariffs. The idea that solar energy developers will also have the capability and interest in manufacturing was flawed and, therefore, the tender faced many obstacles, twists, turns, and multiple deadline extensions.

SECI has also amended various clauses of this tender to make it appealing for the interested developers. Initially, the idea was to have the solar energy sale linked to complete value chain manufacturing but, in the end, it seems it has also been limited to cells and modules only. China has huge global ambitions in almost every sector and has an artificially engineered lower cost of capital to finance such ambitions.

Almost 75% of India’s solar power capacity is built on Chinese solar cells, and modules. India’s solar cell manufacturing capacity stands at 3GW and for modules it is 5GW, whereas the country’s solar power generation capacity stands at 32GW. India adds about a gigawatt of solar power generation capacity every year. There needs to be another way to go about it.

One of us wrote in 2014 to the power ministry that India could become a world leader in the manufacture of ingots and wafers. The manufacturing of ingots requires high purity silicon and good quality electrical power. The skills and knowhow required are metallurgy and material science. The skillsets too are available in the country in both industry (steel and aluminium) and in the academia. In fact, the department of science and technology has installed a crystal growth centre in Anna University in Chennai. When wafers are manufactured in India, the cell and panel (module) manufacturing capacity that is already available can be expanded. Much of what was written, nearly seven years ago, is still relevant.

In the United States, there has been a favourable investment response to its government’s efforts to achieve self-sufficiency in solar manufacturing. According to The American Prospect piece cited earlier, “The tariffs that the Trump administration placed on foreign solar modules motivated three foreign producers (Hanwha Q Cells, Jinko, and LG) to open US module plants in response to the tariffs.”

The article also notes that the ultra-low-carbon solar alliance launched in October 2020 with the goal of increasing the market demand for solar panels manufactured with low embedded carbon is talking to federal and state agencies to institute a purchase preference for PV modules with an ecolabel. This will favour US and European producers since China-made cells and modules come from plants that are coal-fired. Therein lies another clue for India.

Ultimately, the big question for India is whether the industry will respond to the government’s proposed window of protection with a ramp up in investment and quality of production. Technology in solar power generation is evolving rapidly and is becoming ever more capital intensive. The hope is that, with lower corporate taxes and with the offer of even lower tax rates on the table for production that commences before 2023, the Indian corporate sector will step up to the plate and respond with enhanced rates of fixed capital formation. If it does not, the government may have to reassess the overall costs and benefits of its protectionist policy.

Here, it is encouraging to note that Borosil glass will be doubling its solar panel glass manufacturing capacity to 900 tonnes per day and that the enhanced capacity would be available by April 2022. One of the reasons behind the capacity addition—coming at a cost of ₹500 crores—is that Borosil glass is protected by the anti-dumping duty.

The ‘me first’ virus

Pursuing an active industrial policy, per se, is not wrong. Many countries have done that in the past. Further, ‘me first’ attitudes and policies are making a definite comeback. The European Union (EU) is practising vaccine nationalism openly by restricting the export of vaccines produced in EU territory.

However, in an industry that involves sophisticated technology, which is also rapidly evolving, the specialised domain knowledge that is required and that is expected of policymakers to pursue and implement an active industrial policy have grown manifold. With discretion comes the risk of policy capture.

Once the industry realises that the government is inclined towards supporting enhancement of domestic manufacturing capabilities, demands will proliferate, and the bureaucracy may not have the time, skill or experience that is required to make informed decisions that can assess costs and benefits for the nation. Setting up a benchmark to assess such costs and benefits is rather difficult.

While it is sound, in principle, to extend protection in return for performance, setting up performance criteria for the industry to meet and choosing relevant and realistic time horizons for its delivery are not easy. Additional factors such as the cost of capital and evolution of technology have a substantial bearing on the outcomes. In the end, the country may be left with protection with no commensurate domestic capability acquisition as a payoff to show for it. This will be the worst of both worlds, as consumers pay more, producers do not produce, and government policy fails.

Keeping these considerations in mind, we make some suggestions on how the government can provide a window of opportunity for the domestic industry to expand solar manufacturing capacity without jeopardising its renewable energy goals.

A tangible support that the government can offer is through the provision of public goods at least in select industrial areas. These are in the form of state-provided worker housing, power backup systems and environmental management systems. Full operating cost recovery takes place but only on actual use basis. The capital costs are incurred by the state /industrial area authority. Bank loans are secured by escrows on rentals and become self-liquidating. Loan tenures are long dated.

The net impact is that while the project investment cost reduces very sharply, there is no immediate fiscal burden on the state. This, however, requires that the industrial area authority be a state enterprise but functions as a pure non-profit service provider. The signalling generated by this support system may be as effective as, if not more than, the protection envisaged through customs duties.

Indeed, a World Bank blog post from November 2010 points out that the ‘plug-and-play’ facilities made available in Chinese industrial zones “played a critical role in facilitating the growth of Chinese SMEs from family operations to global powerhouses, avoiding the ‘missing middle’ problems that other countries still face.”

In the final analysis, the best protection that the government can offer to Indian businesses is to lower the cost of operating or doing business in India. India’s Licensing, Inspection and Compliance (LIC) regime at all levels of the government—local, states and federal—is intricate, time-consuming and costly without a clear sense of the benefit derived from maintaining such a system. Small businesses have neither the financial nor manpower resources to comply with the LIC Raj. Once these are simplified, there will be a huge unlocking of domestic production and costs at all levels of production will come down. India will have ushered in an era of self-sufficiency blended with competitiveness.

The government is keen on technology innovation as a formula for growth and competitiveness. Unless there is a large manufacturing capability, there will be no innovation. Considering that in the early-2000s India had a capacity for solar modules manufacturing that was larger than China, the onus is on the industry to target at least 30% of the entire solar energy value chain to be ‘made in India’ in the next 5 years. That is a reasonable expectation and will be a creditable achievement for starters.

[V. Anantha Nageswaran is a member of the PM’s Economic Advisory Council and Venugopal Ramakrishnan is the promoter of TORP Systems, a Chennai-based rooftop solar integrator. These are the authors’ personal views.] – Link

Readers should remember that the column headers are given by the newspapers. I gave a different title, ‘How to make the policy on solar manufacturing succeed?’.

I would summarise our recommendations as such:

a) Given Chinese dominance in the entire value chain, the policy of imposing higher Basic Customs Duty (BCD) may have unintended negative consequences, if they impose export duty on wafers and ingots. Be aware of that.
(b) Be prepared to withdraw protection via BCD if private sector investment does not come forth within a reasonable time-frame.
(c) Invest in creating world capacity in wafers and ingots.
(d) Create ‘Plug and Play’ infrastructure which would lower capital costs
(e) In general, keep chipping away at the LIC regime. That benefits solar manufacturing industries too.

Further thoughts on inflation targeting

I am creating a post out of two email replies I had sent to a friend who wrote to me after reading my column in Mint yesterday.

I would like to start off by placing these four quotes here first:

(1) “He was pondering why the price of provisions should have risen by so much more than could be accounted for by any deficiency in the harvest. He did not, like Ricardo a few years later, invoke the quantity of money. He found the cause in the increase in working-class incomes as a consequence of parish allowances being raised in proportion to the cost of living. …”

Original source: ‘Essays in biography’ by John Maynard Keynes on Malthus cited by Andrew Batson in his blog (5th April, 2021)

(2) I don’t know, since I don’t understand the relationship between monetary policy, fiscal policy, and inflation, and I don’t think anyone yet does.

Source: Noah Smith, (4th April 2021). This long article by Noah Smith is a very good read, even if one does not agree with it in entirety. It is a great learning material.

(3) Central banks misinterpreted these global, demographic trends for the success of their inflation targeting regimes which were introduced from 1990. The over-confidence of central banks in their ability to control inflation, volatility and financial stability contributed to the under-regulated rise of house prices. The rest, as they say, is history.

Goodhart, C. A. E.. The Great Demographic Reversal (p. 55). Springer International Publishing. Kindle Edition. 

(4) Normally inflation is treated as a monetary phenomenon. Given the expansionary monetary policies in recent decades, trying to explain current disinflationary pressures in this way would be a struggle.

Goodhart, C. A. E.. The Great Demographic Reversal (p. 102). Springer International Publishing. Kindle Edition.

Charles Goodhart and Manoj Pradhan refer to the paper ‘The Primary Cause of European Inflation in 1500-1700: Precious Metals or Population?- The English Evidence’ by Anthony Edo and Jacques Melitz (Oct. 2019). The paper assigns equal weight to monetary and real factors in explaining the ‘Great Inflation’ of that period. You can access the paper here.

It is true that interest rates have to impact both output (growth) and inflation both being nominal variables. It does not preclude the possibility that real economy variables affect inflation outcomes more than what the central bank does. That may well be the case in both the developed world and in the developing world. Those real economy variables may differ between developed and developing nations.

The original economic logic or premise of inflation targeting is that central banks print money (they are not the only ones who create money  ) and therefore they should be responsible for protecting and defending its value is logical. But, the reality of influence need not follow from the aspiration or desire to influence. Of course, we know that inflation targeting was as much a political project as it was an economic project. Second, we now that central banks do not create money as much as commercial banks do. If anything, central banks adjust bank reserves to the amount of money that commercial banks create.

There are other nominal variables over which central banks may have better control than they have on inflation. For example, credit growth. So, if they wish to, central banks can control credit growth by raising the cost of credit creation by commercial banks in a few ways. They influence that both with the price of credit (interest rates) and with their role as a regulator of the credit system. 

The problem with inflation targeting in the developed world is that central banks neglect other indicators of overheating. That happened pre-2008, post-2009 and is happening post-2020. IN the developing world, given structural rigidities, the central bank may commit the opposite mistake: tighten on signs of inflation when other signatures of overheating are absent. Both are two sides of the same coin and are the consequences of slavishly adhering to an inflation regime.

In India, in the first decade of the new millennium, the Indian Rupee gained against the US dollar 7 out of the 10 years. In the second decade, it gained in only one year. That was 2018. It happened because the Reserve Bank of India tightened monetary policy. If the rupee strengthened in a year when the Federal Reserve was raising its policy rate, then one can imagine how excessively high India’s real policy rate was. The inflation rate came down from a peak of around 5.2% (below the upper end of the range) in Dec. 2017 to a low of 2.0% in January 2019. That was at the lowest end of the band. After demonetisation happened – which sucked out liquidity – the central bank cut the policy rate by 25 basis points in August 2017 (just once and ten months later!) and raised the policy rate twice in the course of 2018 based on its wrong (as it turned out) inflation forecasts. It squeezed the economy in the face of an ongoing NPA crisis and in the face of the emerging NBFC Funding crisis in the wake of the collapse of IL&FS.

Such an obsessive monetary policy regime was due to a slavish and rote obsession with Flexible Inflation Targeting (FIT). That obsession sacrificed economic growth in 2018 for sure. Residual effects must have been felt in 2019 as well, at least partially. Unwinding that took time. There were time lags and then Covid happened.

In sum, I do believe that central banks are far more able to control inflation when it is high because there is no ceiling on the interest rate. They are far less successful in stimulating it. In trying to do that, they are creating unacceptably high costs. This is happening in the developed world.

In countries like India, inflation is far more of a real phenomenon than a monetary phenomenon. It should be noted that it is a relative statement and not an absolute statement that rules out any role for monetary (or nominal) influences. Certainly not.

This statement applies for developed countries too except that the real factors can be different between developed and developing nations.

For India, in particular, I do feel that the Government of India has abdicated its responsibility for inflation by making RBI responsible for it. In doing so, it has failed to recognise or avoided recognising that India’s inflation problem is its creation due to the high costs and supply inefficiencies it imposes on the economy with its LIC Raj.

Since the central bank has been mandated to keep inflation within a range when its monetary policy actions are not the key driver of it, its actions can only have unintended side effects.

For central banks, overheating and financial & economic stability should matter. Inflation is only at best a partial and at worst, an imperfect indicator of both overheating and financial & economic stability.

Inflation targeting is neo-classical

What RBI policymakers should be mindful of this fiscal

4 min read . Updated: 05 Apr 2021, 10:44 PM IST

V. Anantha Nageswaran

Recently, I read a paper, titled ‘Overcoming the Tragedy of Super Wicked Problems: Constraining our Future Selves to Ameliorate Global Climate Change’ (May 2012), that presented a framework for tackling climate change. The paper was about how to win public support and participation and sustain it in the efforts to address carbon emissions, etc. It recognized climate change as a ‘super wicked problem’, as per the definition of Ritter and Webber in their paper, ‘Dilemmas in a General Theory of Planning’, published in 1973. Wicked problems defy neat solutions and linear approaches that are technocratic in nature. The paper acknowledges that path-dependent processes tend to happen by accident, and that they can even exacerbate super-wicked problems, rather than resolve them.

The paper contained references to two classic papers, ‘God Gave Physics the Easy Problems’, published in 2000, and the 1985 classic by Paul David, ‘Clio and the Economics of QWERTY’. Paul David’s paper on Qwerty Economics points to the influence of ‘software’ on hardware. Investment in skills required to type using the Qwerty keyboard created scale economies for it and entrenched it as the global standard, even though it did not optimize the efficiency of using both hands for typing. Neither did it keep widely-used letters of the alphabet apart to prevent manual-typewriter keys from jamming. Yet, it survived.

Separately, the authors of the first paper referred to here note that big questions in social science involve contingent and complex causality, and that the search for ‘laws’ and invariant causal relationships can be frustrating. It called for constructive humility in the current context of our attraction to deductive logic and falsifiable hypotheses. The advice is rather timely, given the deterministic statements that are frequently made about the path of institutional autonomy, the cause of liberty, and the role of businesses in influencing the two, etc. The advice is equally relevant to questions that financial investors and policymakers confront.

Two recent crises in financial markets illustrate the mistakes that continue to blight the policy approaches followed by central banks in developed nations for well over a decade (or three, depending on which one you look at). First came Greensill. A firm that offered supply-chain finance went broke. It brought back memories of 2008. Then, last week, a family business named Archegos fell victim to the debt and derivatives it had accumulated. More interesting than its failure was the evaporation on Friday morning of the cooperative arrangement that banks had agreed upon just the night earlier. It was the Prisoner’s Dilemma at work. So much for Homo Economicus.

We have just entered a new financial year. The Reserve Bank of India (RBI) will hold its first monetary-policy panel meeting this week. In the spirit of the above discussion, it is appropriate to recall what Willem Buiter wrote in ‘The Unfortunate Uselessness of Most ‘State of the Art’ Academic Monetary Economics’ (6 March 2009). He was one of the ‘founding’ members of the monetary policy committee of the Bank of England after it was given an inflation mandate by the UK Treasury. Given the extreme monetary and fiscal stimuli that pass for economic policy in the developed world, his observations will be useful for RBI policymakers as they look ahead to a new financial year.

Buiter wrote that the conventional economics training of academic and other professional economists at the Bank of England proved to be a handicap when the crisis of 2008 struck. They had to switch from targeting inflation under orderly financial conditions to dealing with conditions of widespread market and funding illiquidity. Such exigencies may not arise in India this year. But, it is possible that global financial markets would face such situations with spillover effects on India. In such a situation, will India’s inflation-targeting framework be an inconvenient shackle on policymakers? We should not forget that inflation targeting is a product of neo-classical economics that ignores the path-dependency of economic outcomes.

A recent paper, ‘Inflation Targeting: Much Ado about Nothing? Examining the Evidence’ (March 2021) by a group of distinguished policy economists had established that India’s inflation rate was coming down even before flexible inflation targeting (FIT) was introduced. Second, this was the case with other countries, too, that really had no FIT target. Third, they show that given the lopsided weight for food and related components in the Indian Consumer Price Index (CPI), the index was prone to overstating inflation when food prices were elevated, resulting in a more restrictive monetary policy than necessary. Fourth, this was one of the reasons for India’s growth underperformance in recent years.

India recently affirmed that it is sticking to its FIT framework for another five years with the very same parameters. The good news is that RBI is blessed with a leadership that interpreted the framework so flexibly in 2020 as to handle the risks of instability competently in the course of the year. [Link]

It ain’t so funny

A friend of mine sent me the following sentences from an article in Wall Street Journal and asked me if I could help locate the original Chinese language version of President Xi’s speech mentioned in these sentences:

he (Xi) said China “must tighten international production chains’ dependence on China” with the aim of “forming powerful countermeasures and deterrent capabilities.” [Link].

The article was authored by one Matt Pottinger. This is the by-line for the article:

Mr. Pottinger served as deputy White House national security adviser, 2019-21. This is adapted from a speech he delivered at the Hoover Institution March 10.

Thanks to some friends in Singapore who follow China for their living, I received the URL for the original Chinese language version of President Xi’s speech. Now comes the interesting part. I am going to give three other translations. The first of them is from a Google translation of the relevant sentence. The other two are from very fluent Mandarin speakers and readers.

(1) Google translation: 

The dependence of the international industrial chain on my country has formed a powerful countermeasure and deterrent capability for foreign parties to artificially cut off supply.

(2) From a native speaker:

… and deepen China’s involvement in global industrial chains. By doing so, we will develop effective deterrent against attempts by other countries to sever our supply chains.

(3) From another Mandarin speaker/reader but not Chinese (former China Bureau Chief of an international newspaper):

We will enhance the global value chain’s dependence on China and develop powerful retaliation and deterrence capabilities against supply cut-offs by foreign parties,” Xi said

In an email exchange that followed my thanking him, he further clarified that what was meant was this:

from a close reading of this – the meaning is very clear…China wants to bind the international supply chains closer to itself, so as to create deterrence against attempts by foreigners to cut supply chains.

Coming to think of it, it is on the basis of such loose translations that one can start trade wars or much worse.

Now, back to my friend who started this all with his query. He wrote the following:

This sounds right. The context is established clearly. What’s interesting and significant is the civilisational thinking…this is before Biden and much before the supply chain resilience came into the discourse. As with Zhou En Lai, this guy (President Xi) too can see far ahead.

In case any of you want to do your own translation, the relevant paragraph is this:


The church, kinship marriage and WEIRD

Thanks to Amol Agrawal’s blog post, I read Ricardo Hausmann’s article in ‘Project Syndicate’. It is worth reading in full. This paragraph was noteworthy for me:

These studies show that meso-structures matter for how cities and countries grow, and how technologies develop. Given the current orthodoxy, these papers have been unpublishable in economics journals, because they cannot show how these structures are linked to individuals making decisions under constraints. But they have been published in prestigious scientific journals such as Nature and Science, as well as in the Journal of Urban Economics and Research Policy. As a result, other researchers can ask questions about how these meso-structures arise from, say, individual decision-making. [Link]

Reading that article reminded me of what Willem Buiter wrote in March 2009:

Charles Goodhart, who was fortunate enough not to encounter complete markets macroeconomics and monetary economics during his impressionable, formative years, but only after he had acquired some intellectual immunity, once said of the Dynamic Stochastic General Equilibrium approach which for a while was the staple of central banks’ internal modelling: “It excludes everything I am interested in”. He was right. It excludes everything relevant to the pursuit of financial stability. [Link]

One of the articles that Hausmann referred to, in his ‘Project Syndicate’ piece was a review of the work of Joseph Henrich by Judith Shulevitz in ‘The Atlantic’, published in October 2020. It is easily one of the best articles I have read in recent times. It solves a puzzle in my head. 

I have been captivated by Prof. Peter Temin’s paper, ‘ ECONOMIC HISTORY AND ECONOMIC DEVELOPMENT: NEW ECONOMIC HISTORY IN RETROSPECT AND PROSPECT,” (Working Paper 20107,, NATIONAL BUREAU OF ECONOMIC RESEARCH, May 2014 and I have used it in my course over the years. 

It tells us that the origin of industrial revolution can be traced to the Great Plague. Thus, the origin of industrial revolution was accidental. A micro-example is the case of the QWERTY keyboard that we all still use.

Recently, I read the short paper by Professor Paul A. David titled ‘Clio and the economics of QWERTY’ first published in 1985. The paper is available here. A very short summary of what Prof. Paul David had written is that we were locked into an inefficient keyboard because many people were trained in that keyboard and that it created its own scale dynamics. Path-dependency.

[Interestingly, an article in Wall Street Journal published in Feb. 1998 challenged this path-dependency theory. It cited the work of two other professors who argued that the inefficiency of QWERTY keyboard was the theory perpetrated by August Dvorak who had developed own his keyboard and wanted to promote that. Therefore, their contention was that the free market did not choose a wrong keyboard and that the market chose well. Those were the heydays of the belief in the efficiency of free markets!]

Similarly, the review by Judith Shulevitz tells us about Joseph Henrich’s theory:

the ability of the West to interact, do commerce with and trust strangers thus creating scale economies and the institutions that sustained and supported them can be traced to the strictures that the Catholic church placed on ‘kinship’ marriages. 

This appeals to me greatly. So, I have bought Henrich’ book, ‘The WEIRDest People in the World: How the West Became Psychologically Peculiar and Particularly Prosperous’  where WEIRD stands for Western, Educated, Industrialised, Rich and Democratic’.

Is there a vaccine against deliberate misinformation?

A friend of mine brought my attention to this piece in ‘The Guardian’. It was aggressive. Nay, even vicious. It somehow manages to blame India for the vaccines not reaching poorer nations. I was nonplussed. I ran this past Dr. Vidyasagar, who is the Chairman of the “COVID-19 India National Supermodel” Committee. This is what he had to say:

One has to read the article carefully to find out that

(i) Oxford U. initially said they would allow anyone to manufacture their vaccine, i.e., “open source” it, and

(ii) on the advice of Bill Gates, Oxford U. then signed an exclusive deal with AstraZeneca, which in turn signed a deal with SII (Serum Institute of India). 

So if Oxford U. had stuck to its original plan, there would potentially have been many plants around the world manufacturing the Oxford U. vaccine.  So how is it India’s fault that Oxford sold an exclusive licence for its vaccine to AZ, which then failed to sign licenced production agreements  with anyone other than SII?

BTW, please see this:

J&J was trying to manufacture its own vaccine in Baltimore, and had to destroy 15 million doses due to quality-related issues.  Perhaps this explains why, when “The Quad” decided to assign the manufacturing rights of the J&J vaccine to some company, they chose Biological E, another Hyderabad-based company.  So it is not all that easy for other countries to replicate India’s vaccine production capacity and quality. 

After he sent me this, I did my own reading. Pl. see this and this.

One of these articles had a reference to another article in ‘Foreign Affairs’ published in March 2012 and the author makes an observation that is quite startling:

Power followed the money, and by 2005 the annual World Health Assembly, which governs WHO, was convening to listen to Gates’ suggestions, and today few policy initiatives or normative standards set by the WHO are announced before they have been casually, unofficially vetted by Gates Foundation staff….

This resonates rather disturbingly in the wake of the decision of Oxford U. to abandon its ‘common license’ idea:

….. Like it or not, the burden of reducing suffering and increasing the health of the world’s poor now falls largely on the backs of the two Washingtons. The Gates Foundation is doing extraordinary work, but it operates without accountability or transparency and needs competition. Bill Gates has admitted as much himself in multiple interviews, acknowledging that his efforts wield an uncomfortably large amount of unchallenged power over global health.

I doubt if this is an ideal state of affairs for the world:

The Gates Foundation, now combining the philanthropic assets of the Gates family and Warren Buffett, is responsible for 68 percent of all private giving for global health, dwarfing the efforts of even the largest public or international institutions. And the United States government is responsible for 52 percent of all public giving. No other donors come close.

The author of the ‘Foreign Affairs’ article, Laurie Garrett, was referred to as a Senior Fellow for Global Health at the Council on Foreign Relations.