RoDTEP/PLI replaces MEIS or does it matter?

My friend Gulzar Natarajan had alerted me to this story in Business Standard a while ago. I just read this. I did not know, until I read the article, as to what MEIS stood for. ‘Merchandise Export of India Scheme’ is what it stands for. It had expanded to Rupees 43500 crores from around Rupees 20,000 crores when it was introduced five years earlier. The WTO ruled against it in November 2019 calling it unfair competition. I do remember that, in September 2019, the Finance Minister announced another scheme to replace MEIS. The acronym was more complicated than MEIS. The new acronym is RoDTEP.

Reading between the lines, one gets the impression that the Government wanted to convince WTO that it had given up on its ‘duty drawback’ scheme and was doing something else that was WTO-compliant. The article is not sure if the new scheme is different from the old one except for the slightly more complicated acronym.

It is interesting that the article makes the point that the MEIS did not lead to any improvement in exports except to provide exporters some cash back. The dollar value of the exports had remained the same as it was some five years ago.

This would be a classic public policy case study for public policy schools and will be rather useful too.

My instinctive feeling is this. Think of it this way. A duty drawback is like a price discount. Or, rather, it enables exporters to compete on price to some extent or helps them offset domestic cost increases. But, if the importing countries are not growing or if competitors had become more efficient or if they offered better value for money, then, this would not help much. Perhaps, it is possible to argue that export growth might have been worse without that. The counterfactual is hard to establish.

But, it will be worth studying because India’s export performance was better than that of Bangladesh and Vietnam in the global boom years of 2002 to 2007. Since then India’s export growth rates have trailed these two Asian countries. These are based on World Bank data on ‘Export of goods and services in current $’:

Brazil and Indonesia have done worse than India. Clearly, to the extent that one can draw inferences (a perilous exercise, no doubt) from such a basic superficial chart is that Vietnam and Bangladesh rather than India might be considered as alternatives to China for certain products, by businesses seeking to relocate from China.

More than duty drawbacks or such export subsidies, Indian businesses need to have quality consciousness, productivity consciousness and honour commitments on delivery times, etc.

On the government part, whatever it can do by way of easing compliance formalities – reducing or eliminating them and simplifying them, reduce port turnaround time, etc., – would help. Beyond that, global demand is an important factor. But, when global demand is likely weak, these things become more critical than otherwise, as India’s performance pre and post-2008 demonstrate rather vividly.

This column by T.N. Ninan, first published on June 29, 2018, is worth a re-read. I had blogged on it here.

A response to “Reflections on RBI-Government relationship”

I went through your post carefully and found it a very good and useful summary of the last six years of this government’s tense relation with the RBI, and how both sides made errors of judgement, both on their own and each other’s roles, and how that created trouble for the Indian economy.

RBI is not an independent body, but an autonomous one. Dr. Y.V. Reddy has made that clear in several of his speeches. RBI remains one of the islands of excellence in our body politic, simply because it has managed to do some good for our country without being explicitly corrupt. It values keeping its nose clean than pick fights with the sovereign over matters of fiscal excesses/governance of PSU banks and being an agent of change in a preemptive manner, unless two things happened:

(i) An encroachment on RBI’s powers (think of the FSDC episode)

(ii) A general hostility towards any major change in way things are run within RBI, almost an insider/outsider approach which is often seen with incoming governors being ‘institutionalised’ in a year.

The major difference between the RBI of last 10 years and the one from 1990-2008 was that outsiders began coming in the latter period (starting from Dr. Gokarn, who was the first outsider to be appointed to the RBI coming from outside the civil service. Unfortunately, he was a victim of the conflict between the government and RBI, as chronicled by Dr. Subbarao in his book. Some of the people who came in perhaps did not fully appreciate the symbiotic relationship between government and RBI, especially in the wake of the hubris – on the part of the government – of navigating the 2008 crisis without much damage.

Specifically, with respect to the last six years, like you, I was very welcoming of the inflation targeting framework in 2014 and firmly believed that solving inflation was the number one priority. But, there was almost a religious zeal across the economist community back then even when fiscal policies were being run tight and we never course-corrected monetary policy from that.

The biggest error in judgement, I think, came from this idea that the media and RBI’s external leadership could coerce a popular government into submission by making public pronouncements. It probably did more damage to RBI than to the individuals, who made it all about themselves. Hence rather than shielding the institution, they went about making martyrs of themselves, whether it was Dr. Rajan or Dr. Patel or Dr. Acharya.

If one goes back and looks at their pronouncements on inflation, growth and fiscal, nothing fundamentally has worked out in the way they pronounced, largely because of policies partly run by RBI in terms of shrinking its balance sheet in % of GDP terms by almost 4 pp (from 24% of GDP in 2013 to less than 20% by end-2018), despite RBI’s foreign reserves growing by almost 50% and the currency depreciating as well. This coupled with fiscal policy being largely contractionary (at least till late 2017) turned out to be a double whammy for the economy. 2018 was a slight exception largely given an external wind which positively affected India and partly on account of a relatively low base too. However, by and large, RBI’s policy actions during that period compounded issues, despite low income growth and low credit creation. In sum, the monetary policy committee systematically over-predicted inflation, kept policy tight and dragged economic activity down.

 As you very pertinently note, the erroneous GDP data has done tremendous damage to India as well, much more than we realise. Yet, RBI, even as it cast aspersion on the accuracy of the data (RBI thought that GDP growth was being overestimated under the new methodology), chose to ignore the high frequency indicators which were signalling more modest growth and set policy purely on inflation, in a puritanical or perverse (or both) manner, shifting goalposts as it saw fit to run tight monetary policies (remember the debate on WPI vs CPI between Dr. Arvind Subramanian and RBI).

One area which you alluded to but not delved into completely, I thought, was the problem of material leverage in the NBFC sector, which was a direct consequence of demonetisation and excess liquidity in banking system that followed. It was completely done under the watch of Dr. Patel and Dr. Acharya. Payments banks and lack of follow-through on Dr. P.J. Nayak Committee report were other major failures. Most of these things were troublesome and required patient diplomacy with the government to push them through on part of the RBI, rather than making throwaway public comments. This “us vs them” mentality escalated into multiple conflicts – whether on the infamous February circular or with respect to board nominees – culminating ultimately in the resignation of several outside leaders.

While I sympathise with the individual thoughts of these excellent economists and thinkers, looking back, I realise that the system is not beholden to them and this idea that an individual’s departure would trigger runs on currency or money markets – like many, I was guilty of thinking  that when Dr. Rajan left – has been conclusively disproved. In fact, I would argue that Shaktikanta Das has been gracious, cooperative and patient in understanding issues in the system and has gone about mitigating several open threads left for him to solve. The jury is still out on him but, in my personal view, he is doing quite well.

Note: I have respected the sender’s preference for anonymity but yet wanted to post it given the highly thoughtful (in my view) observations made.

As I was posting this, my young friend Sriram Balasubramanian had forwarded a comment by Sriram Ramakrishnan, resident Editor at Economic Times, Mumbai, on the books by Dr. Urjit Patel and Dr. Viral Acharya and on the topic of government-RBI relationship. He deals rather well with the allegation that the government had set out to wreck the Insolvency and Bankruptcy code. Read here.

Reflections on RBI-Government relationship

There has been much grist to the mill in the ‘elite’ circles in the last week or so with the impending release of books in quick succession – perhaps, arranged that way? – by Dr. Viral Acharya and Dr. Urjit Patel. They were respectively Deputy Governor and Governor of the Reserve Bank of India. Their terms considerably overlapped.

In general, Dr. Patel carried with him a reputation for being a fiscal hawk and Dr. Acharya has dealt with banking sector restructuring issues and has had a stellar academic career.

I have mentioned it more than once in my blog posts that Viral responded positively to my request to put all data from RBI quarterly industrial outlook inflation expectations, consumer confidence surveys in downloadable excel formats. It was done. It is very useful to crosscheck macroeconomic trends with such survey data.

I read the extracts of Viral’s interview with Ira Dugal. There is an online launch of his book on the 31st July. Dr. Subbarao is presiding over the launch function. Dr. Y.V. Reddy had written the foreword for his book which, I gather, is a collection of his speeches while in office as the Deputy Governor of the Reserve Bank of India.

(1) The NDA Government of 2014-19 was actually too fiscally tight in the first 24 months of its rule when it did pro-cyclical tightening due to the fiscal situation it inherited from the previous government.

(2) It either believed in it itself or was sold a lemon by those who advocated demonetisation – on the extent of unaccounted wealth that would be realised. What is under-reported is the bank-client nexus that resulted in most cash being returned as accounted. In a way, this nexus shows up in the rise in bank frauds amounts every year. (Parenthetically, it makes the case for privatisation stronger and for opening the bank license taps more freely).

(3) Having done the demonetisation and seen it not deliver the cash that they expected, the design of GST could have been simpler. I wrote this in my first blog post after demonetisation on Nov. 9, 2016. I had also anticipated a fairly large GDP shock.

(4) Given that the Union Government was guaranteeing 14% CAGR for five years to State governments, it had the moral right to push through a simpler design. May be, they had their own reasons for not holding firm, for the sake of consensus.

(5) Having done (2) and (3) and given the track record of the Indian State in implementation historically, analysts too erred big time in predicting substantial GDP gains after GST. This too is under-scrutinised as a reason for the Government believing that GDP growth would simply accelerate, post-GST implementation.

(6) Then came the Insolvency and Bankruptcy Code too.  All of these forced behavioural change on the part of businesses and households in short succession and even now, all these changes are barely three years old, not to mention the pursuit of tax revenues, the reluctance to put GAAR and retrospective taxation behind us firmly and anti-corruption drive in bureaucracy.

(7) In the end, (2), (3) and (6) were negative GDP shocks. The Government did not have enough time for a growth recovery and a feel-good factor arising out of natural economic activity before the elections. So, it did open the fiscal taps – farm loan waivers, LPG, construction of toilets, affordable homes, MGNREGA allocations, etc. Therefore, the fiscal space deteriorated. But, this was not egregious in and of itself but together with the negative growth shock in India on account of the three things above and the global growth slowdown (in developed countries and in the EM space in particular), the fiscal ratios worsened more significantly than they would otherwise have.

(8) Further, (and this was not necessarily political at that stage), MoSPI with its new base year (2011-12), new methodology and new dataset (MCA 21) over-estimated growth for 2016-17. I still believe it was not politically motivated but a statistical estimation and methodological error. What could have been avoided was both the form and substance of the downward growth revisions for 2005-06 to 2011-12. More accurate (more reliable) growth estimation would have induced some fiscal restraint in the 2018 budget and in the interim budget for 2019.

Tax revenues were either not in flowing in, to the extent reported growth rates would have warranted or the zealous tax revenue mobilisation in the face of the above negative growth shocks further aggravated the growth outcome.

(9) Now, let us examine what the Reserve Bank of India did in these years. The RBI cut interest rate only once in 2017 in the face of the massive liquidity shock. The RBI tightened interest rates twice in 2018 even as economic growth was slowing. The inflation rate averaged 3.3% in 2017 and 3.97% in 2018. Of course, the Federal Reserve was tightening in 2017 and in 2018 and RBI might have been worried about the rupee in the face of the appreciating dollar given external debt repayment obligations. But, there was room for nuance because choking off economic growth would not make external debt servicing any easier.

RBI’s response to IL&FS collapse was not to provide liquidity (it was a Systemically Important NBFC) but to obsess too much on avoiding moral hazard. But, addressing systemic impact and fixing accountability can and should be two different things. RBI got both mixed up.

Further, its role in not identifying the fault lines in IL&FS early enough as the regulator is not being subject to scrutiny unless there are aspects to the story that indicate that RBI was hamstrung by other considerations.

Frankly, there has to be a conversation on whether the RBI’s monetary policy committee interpreted the inflation targeting mandate too narrowly in 2017 and in 2018.

(10) In any case, the suitability of the inflation targeting regime for a developing country which has a large food component in the CPI basket has to be examined afresh. That lends an anti-farmer, anti-rural bias to the inflation targeting framework. While a central bank in a developing country is expected to be as much focused on facilitating economic growth as it should be on curbing high inflation (there is no agreement among economists on what constitutes ‘high’ inflation). The Monetary Policy Committee of the Reserve Bank of India, in its five years of existence, has, more often than not, interpreted the ‘Flexible Inflation Targeting’ regime too narrowly and too inflexibly.

Disclosure: I wrote in a Mint column sometime in 2014 welcoming the inflation targeting regime given the history of double-digit inflation over the previous five years. But, it is one thing that can and must be reviewed now, in the light of the inflexible attitudes surrounding the Flexible Inflation Targeting regime. However, in June 2017, I argued for two important changes to the inflation targeting regime.

(11) On the RBI circular of February 2018 on the recognition of non-performing assets, the unhappiness of the Government might have stemmed from the process followed as much as the content of it. Second, it did run the risk of being pro-cyclical in terms of accentuating the growth slowdown. It did not recognise that the Government itself was the cause of non-performance of certain banking assets with its own contractual compliance failures. Here, ‘Government’ means Union and State governments.

The Union Government felt that the circular of February 2018 was ‘excessive use of force’ and the Supreme Court found that circular to be unconstitutional. The Government’s view of the circular was, thus, vindicated by the Court’s judgement. My column on the Supreme Court’s judgement is here.

Disclosure: I wrote a column in February 2018 praising the RBI’s circular. But, subsequent discussions with several people on the ground helped me understand the situation better. Hence, the column that I wrote after the Supreme Court judgement.

(12) The government’s focus on RBI’s excess reserves and its dividend policies were partly due to the short-term pressure and partly due to structural considerations that others like the previous CEA too had highlighted.

(13) Finally, based on history, it is right to be cautious about pursuit of policies that might be construed as deviations from the path of fiscal prudence, financial stability, etc. such as deficit spending, deficit monetisation and restructuring, etc. However, the more the growth rate declines and stays low, these outcomes would be in the list of endangered species anyway.

Economic orthodoxies are not religious edicts but context-specific practices. Advanced nations which espoused them are demonstrating them yet again just as they did in response to 2007-08 crisis while they preached something different to the Asian nations in 1997-98.

So, a judgement call has to be taken now on certain policies which, going by past record, are risky but which might be essential now. To reiterate, pursuing them with the usual political economy risk of excesses might be a less risky proposition than not pursuing them and risking long-term economic damage.

(14) Yes, the time has come to relook at the government’s occupation of the commanding heights of the economy. The Finance Minister hinted as much in the Atma Nirbhar Bharat Presentation in May 2020 about government-owned entities in strategic and non-strategic sectors. Hence, that would apply to the banking sector too.

Additional (unrelated) points:

(15) Amidst the clamour for restructuring of loans and import protection, the government should hold the line on governance standards in the private sector especially in the treatment of MSME suppliers and environmental compliance; on productivity and export performance on the part of large non-financial business entities.

(16) Relentless focus on the Ease of Starting a Business and Doing Business at the Union and State Governments’ levels is critical. Teamlease has given an excellent starting point for the exercise.

(17) Related to both of the above is the issue of augmenting state capacity (in numerical terms in critical areas like health, law and order, to name just two) and enforcing accountability for service outcomes. If the latter starts with the top echelons of bureaucracy setting an example, then there is a better chance of lasting success.

Retired policymakers would be making a signal contribution to future policymaking and to the nation if they write self-critically on their roles, their acts of omission and commission, on the failings of the institution that they served in, etc.

For example, Dr. Subbarao wrote in a recent column:

India is inflation prone. Note that after the global financial crisis when inflation “died” everywhere, we were hit with a high and stubborn bout of inflation. In hindsight, it is clear that the RBI, on my watch, failed to tighten policy in good time. [Link]

Of course, I am not going into the causes of high inflation in India post-2008. But, it takes enormous moral courage to write what Dr. Subbarao wrote there. Hats off. That lends enormous credibility to his views, even if we don’t agree with them partially or fully.

MSME package would help small businesses Atma Nirbhar

I had to rub my eyes more than once to believe what I was reading. I am referring to the article titled, ‘Why MSME package won’t make small businesses Atma Nirbhar?’ written by Prof. R. Nagaraj and a Ph.D. student Vikash Vaibhav. I rubbed my eyes when I was reading it.

Then, I called two of my friends and asked them to read it. When they came up with angles that I had missed, I had to rub my eyes again! Quite disappointing and sad to see such analysis appearing in Mint delivering a damning indictment of the government policy without any reasonable basis at all.

When a government expands or enlarges a criteria, more firms will become eligible for the expanded definition. It is impossible, even now, for me to understand that the expanded definition of ‘small’ firms would lead to 496 firms from the CMIE Prowess firm-level database being excluded.

Let me see if it is possible at all. Earlier, the criteria for a firm to be called ‘small’ was investment less than 5 crores (Mfg.) and 2 crores of Rupees (Services). There was no sales turnover criteria. Now, the new criteria for a ‘small’ firm are as follows:

Investment less than Rupees 10 crores (Mfg. and Services) and

Sales Turnover of less than 50 crores of Rupees

Even if one of the two criteria is exceeded, the firm will graduate to the ‘Medium’ category.

The only way 496 firms that were classified as ‘small’ could drop out (become ‘Medium’ or ‘Big’) is if they had an investment of less than 2 crores of Rupees but had achieved a sales turnover of Rupees 50 crores or more already.  

Then, one can argue that they would have been considered ‘small’ under the old definition but now, even with the larger limit for investment, they would be deemed ‘medium’ because their sales turnover was above Rupees 50 crores of Rupees.

In general, asset turnover ratios are less than 2 for manufacturing firms. Look at the data that they present. It is from 2006-07! We will come to that later. But, the average revenue for the registered MSME firms as per 2006-07 figures is Rupees 45.0 lakhs and Fixed Assets of Rupees 29.0 lakhs. The asset turnover is less than two.

It is possible that services firms would be asset-lite and they could achieve a higher sales turnover. Even then, for them to achieve a sales turnover of Rupees 50 crores on investment of less than Rupees 2.0 crores is well-nigh impossible. However, in the unlikely event that they had achieved that, they would be very unlikely to need government support.

However, there is no explanation as to how a ‘small’ firm would drop out with an expanded criteria.

(2) The second objection that one can raise (my friends pointed that out to me) is that they are presenting all their analyses based on data from MSME Census of 2006-07 – 15-year old data. So much has changed in the Indian economy in the last fifteen years. How useful or policy-relevant it is, to criticize a policy decision taken in 2020 with data from 2006-07?

(3) They write:

The MSME ministry annual report says the MSME sector includes the entire non-agricultural informal sector consisting of 63.4 million enterprises, contributing 29 per cent of GDP in 2015-16. However, the proportion of units registered with the official agencies – eligibility for government assistance – form a minuscule fraction of the total. As per the last MSME census of 2006-07, there were 1.6 million registered enterprises, employing on average 6 workers, and producing gross value of output worth Rs. 46 lakhs per enterprise.

The number of registered enterprises is from 2006-07 while the base they show is from the Annual Report of the Ministry of 2015-16! That is rather strange.

The percentage of registered MSMEs must be much higher now.

(4) Any MSME that is registered, that has a bank account and that has had a good credit history was eligible to borrow up to 20% of its existing Working Capital and Term Loan outstanding. It does not matter how small they are. If they are formal, they would be eligible to avail of the loan under the MSME Credit Guarantee Scheme.

(5) If they were informal – street vendors, for example – the Government of India announced a separate scheme for street vendors on day 2 (14th May 2020) of the Atma Nirbhar Bharat Package. That was a 5000 crore special credit facility for street vendors.

(6) Further, there was a 1500 crore interest subvention for ‘Shishu’ loans under the Mudra loans scheme. Loans up to Rupees 50,000 are categorized as ‘Shishu’ loans. This was also part of the announcement on 14th May 2020.

(7) Lastly, it is natural that given the higher turnover and higher investments that ‘medium’ category firms carry, they would require more support. They also carry 27 times more employees. Mind you, the authors have provided these 2006-07 data only. So, if one ‘Medium’ sized firm gets credit, it saves the jobs that would be saved by lending to 27 average MSME firms. In any case, to reiterate, the government has announced separate schemes for the micro and small firms as per (5) and (6) above.

Micro and small businesses, even if they are numerous, given their very small sales turnover numbers and investment in plant, machinery and equipment that they carry, would not require large sums as loans. That is just in the nature of things. Hence, to compare absolute amounts of loans sanctioned for the relatively larger enterprises as compared to tiny and micro enterprises does not make sense nor do they serve any purpose.

Therefore, under the circumstances, the Government’s Atma Nirbhar Package for MSME appears to be comprehensive and a reasonably good one. Criticisms such as these actually justify politicians and bureaucrats being indifferent to or ignoring the so-called experts. That is an unfortunate and yet, understandable, fallout.

If anything, the problem with the government’s classifications are two-fold in my view:

(a) Micro enterprises should be required to ‘graduate’ to the next ‘small’ category only if they exceed both the sales turnover and the investment criteria. Right now, they graduate to the next category even if any one of the two criteria is exceeded.

(b) Even after they graduate to the ‘small’ category, they should be allowed to avail of the non-tax benefits of the ‘micro’ category for at least two years. A gazette notification issued in November 2013 (No. 3322 dated 4th November 2013) extended such a grace period for 36 months. But, in the recent June 2020 gazette notification (No. 2119 dated 26th June 2020) of the Ministry of MSME, this grace period of 36 months has been quietly dropped. So, the gazette notification of November 2013 has been voided. That should be restored at least for 24 months and that too at least for ‘micro’ category of firms.

The story of India’s growth and growth statistics according to Pramit

Pramit Bhattacharya and Nikita Kwatra have commenced a series of four articles on India’s economic growth situation which, at this moment of writing, looks rather uncertain. In general, Pramit’s columns ought not to be missed. Agree with him or not, it is hard to ignore the points he makes. I will put it differently as well. It is hard to disagree with him because, to disagree with him, you have to be as thorough as he usually is.

His analyses and arguments are data based. There is plenty of it in his writings. This series is no exception. The first of the four articles dealt with India’s growth experience of India since 1979, the last time the economy contracted around 5% in real terms.

Coincidentally, I am in the middle of writing a 5000-7000 word article for the Vivekananda International Foundation on the global economy, post-Covid, and the impact on India. I used the Conference Board data on PPP-adjusted (2019 dollars) per capita GDP for India and China. Unlike the World Bank data that Pramit uses, the Conference Board data shows that China’s per capita GDP (PPP-adjusted 2019 dollars) overtook India’s in 1978 rather than in 1990. Of course, Pramit compares aggregate GDP whereas I used the Conference Board data on per capita GDP.

Of course, I just checked the Conference Board data on aggregate GDP. In the methodology that they have used, China’s PPP-adjusted aggregate GDP has been higher than India’s since 1950, the first data point in their series.

The second article in the four-part series has dealt with the issues in India’s macro-economic statistics. I had written on it for Athena Infonomics in 2016 and Pramit had written extensively in the past on it. If I have to summarise his second article, it would be as follows:

(1) The application of ASI data (formal sector) to estimate the output of informal sector. Of course, ASI means ‘Annual Survey of Industries’ and not the ‘Archaeological Survey of India’.

(2) Misclassification of firms and missing firms in the MCA-21 database

(3) Switch from volume to value and hence, the absence of price indices like PPI, leading to the use of WPI as deflator proxies for different sectors

(4) Allied to (2) and (3) is the issue of misclassification of firms leading to the use of wrong deflators – manufacturing related deflators for service firms and vice-versa.

Initially, this issue was not political. It could have been and should have been fixed by statisticians before it became politicised. It became politicised after the growth rates of the period up to 2011-12 from 2005-06 onwards were revised down, few months before the 2019 National Elections happened. It might have been a genuinely statistical revision but the timing and the government in office then and the government that was making the change in 2018 or 2019 being different made the revisions controversial.

But, all told, the sooner we restore credibility to our macroeconomic statistics, even if it means some downward revisions to the growth data of recent years, the better it is for India’s reputation. The contrast with China would be to India’s advantage.

Look forward to the remaining two articles in the series by Pramit.

The Gated Republic: a compellingly uncomfortable book

I finished reading ‘The Gated Republic’ yesterday. Before I begin reviewing the book, I must confess that I could not help contrasting it with ‘Accidental India’. ‘Accidental India’ was strangely uplifting. It was about India stumbling upon the right answers. It left the readers with the hope that India might eventually land up with answers to vexing problems even as it muddles through.

I enjoyed reading ‘Accidental India’. I did not enjoy reading ‘The Gated Republic’ because the content is not for enjoyment but for reflection. ‘Accidental India’ too provided fodder for reflection but the underlying optimism made us overlook the case for reflection. Clearly, ‘The Gated Republic’ is not about such happy accidents. ‘The Gated Republic’ is in your face. There is no escaping the stark reality when one reads about a patient with a head injury getting his healthy leg removed.

It is about public policy failures and how Indians are forced to find their own answers. It is a relentless documentation of systematic failure. It appears that there are no accidents waiting to happen – in a good way. Does it mean that Shankkar Aiyar himself is becoming more pessimistic on India? I hope not. If so, that is worrisome. I hope the book is not a hint or signal that Shankkar is giving up hope for a better India.

To be fair to Shankkar, he does preface his stories with the two or three examples of perfect execution by the Government or government agencies in India – whether it is the Mars Orbiter or the conduct of elections or building the world’s highest bridge. But, they are soon eclipsed by the powerful stories of failures.

The book features many things that one has to come to associate with Shankkar Aiyar. There is the amazing depth and breadth of amazing research. Shankkar-isms are plenty to find. There is wry humour. The attention to detail. There are the delightful turns of phrases. Then, there are delightful stories. Stories that amuse, make us think and inspire. We know the origins of the name, ‘Bisleri’. We read about a man who got treated for ankle injury through ‘Doctor on demand’ getting the idea to start ‘Doctor Insta’ in India, the story of Sintex water tank, water ATMs, Sunil Bharti Mittal’s schools, the ‘Avasara’ schools of Roopa Purushottaman and her husband and the rickshaw puller Ahmed Ali (who is now 82) who sold his land to start schools and was shy of naming even one school after himself and so on. We also become aware of how the Indian households got their inverters.

It is also good to note that the Brits did not think too poorly of the knowledge and literature of the natives:

a sum of not less than one lakh of rupees in each year shall be set apart and applied to the revival and improvement of literature and the encouragement of the learned natives of India and for introduction and promotion of a knowledge of the science among the inhabitations of the British territories in India.’

The statistics and the data presented can be dizzying. Perhaps, in future editions of the book, Shankkar should also present them as an appendix in tables with attribution to sources so that they could aid research scholars too.

Even though we are now very used to public sector failures in India, three things made for particularly disappointing reading. The abolition of the anti-copying legislation or Ordinance by Mulayam Singh Yadav; the controversial Enron project in Maharashtra that got India’s private sector generation off to a bad start and Punjab offering free electricity to farmers in 1997 setting off a chain reaction with Maharashtra politicians breaking their unwritten agreement not to offer free power to farmers. The country is paying a big price for all of these until now and may continue to do for years to come. Shankkar lets us know that when the anti-copying law was passed, the pass percentage came down to 14% in the Class X exams in 1992. When Mulayam Singh Yadav abolished the anti-copying law, the pass percentage went up to over 85%.

The book is about how public sector failures have forced Indians to seek private solutions even if it means paying for those services that they are entitled to demand from their governments. In other words, private solutions, innovative though they may be, are the other side of the coin of public failures. That said, many of the non-accountability of the public sector is traced to the private sector criminality or apathy or both.

Whether it is letting pollutants into our rivers, whether it is defaulting on bank loans, whether it is diverting the loans taken for personal purposes, whether it is underbidding and then re-contracting for providing services or goods to the public sector or evading taxes, the private sector feeds into and reinforces public sector apathy. Trust breaks down at both ends. Accountability is weakened all around.

It is not that the citizens of India have retreated into their Gated Republics. Not many of them can afford it. Several millions of them are spending their meagre incomes on educating their children in private schools; in getting treated at private hospitals and paying for safe drinking water or paying for the lack of it with diseases.

We should note that Indian citizens would not have had to seek their gated republics had the public servants themselves not exited first. If only they taste, ‘enjoy’ or experience the government services or the lack of them, there is a very good chance that they would improve dramatically in short time. We can start with something simpler. Forget about government officials taking treatment from government hospitals or sending their children to government-run schools. If they fill in the forms they create online or try complying with the procedures they create to see how ordinary citizens experience them, things will change. Right now, they have exited even these. Their secretaries and assistants take care of their interaction with other government services.

The experience of nominating someone for Padma Awards 2021

An experience that I encountered illustrates the point very well. Take the ‘Padma Awards 2021’. Nominations are now open for January 2021 awards. It has moved online. Someone can nominate themselves and they can also request many distinguished Indians and non-Indians to second them. But, the problem is devilishly complicated. The ‘sponsor’ or the ‘referee’ must register themselves and get themselves a login name and password which will have to go through a OTP hoop on their phone. Then, they will have to upload the personal particulars of the nominee and the nominee’s photo – each and every sponsor has to do it! Then, they have to upload all information about the nominee – their career accomplishments, their awards and recognition, their state and national level awards, their awards at the international level, etc., in seven windows online. They have to ‘copy and paste’ seven different paragraphs at least into each of these windows. Since these are likely to be the same information, every sponsor will be uploading the same information on the nominee. Then, finally, they have to upload a PDF document with their recommendation.

If they want to check if everything they had done had been uploaded correctly before they finally SUBMIT their nominations and click on ‘Print Priview’ (it was misspelt), what they see is a dump. They would be momentarily shocked that all they had done so far had become garbled and mangled. If they recover from that shock and want to go back to the final page, they are in for another surprise. ‘Back’ button takes them back to the very first page. They may be crestfallen thinking that they have to re-enter the information all over again. They have to ‘forward’ the screen at least five times to come to the final submission page which they were on, before they opted to preview their submission.

Moving something online is not about replacing the paper filing with its exact electronic equivalent. The power and advantage of technology can be harnessed to make the process simpler and efficient. Once the nominee uploads all the information about himself/herself and gets some identification number for the nomination, the same can be shared with all the referees and they should simply be required to upload one personal statement about the nominee, give a few personal details about themselves and the matter should be over in a few minutes.

With this kind of needless complexity arising out of unthinking application of technology, how does India hope to attract global enterprises wanting to relocate from China?! Without public servants experiencing public service, redemption for Indian citizens and for India may have to wait. Put differently, if there is no systemic accountability in public service, there is no redemption for India. But, before we delve into the delicate topic of accountability, there is some time and room for optimism.

Is there an answer? Cue Devesh Kapur

Before I even attempt, bravely and yet foolishly, to provide answers, let me offer a different perspective from Devesh Kapur. Devesh Kapur, in his paper in the ‘Journal of Economic Perspectives’ (‘Why does the Indian state both fail and succeed?’) notes,

In this decade, India’s state has successfully opened bank accounts for over 350 million people, delivered gas connections to more than 80 million households, built around 100 million toilets reaching 600 million people, and has begun implementing direct cash transfer schemes that are reaching tens of millions of farmers. While each of these programs has exaggerated numbers and challenges of quality, timeliness, and exclusion, there is little doubt that the Indian state is now developing the capacity to transform inputs into outputs.

In his view,

The Indian state performs better in activities that are episodic in delivery and accountability and where, therefore, exit is automatic once the activity is complete.

In fact, his optimistic conclusions extend further:

The frontline implementation capacity of the Indian state is improving markedly and is manifest in its ability to scale up programs rapidly to reach tens and even hundreds of millions of people. …… there is little doubt that the Indian state is now developing the capacity to transform inputs into outputs.

Where does the Indian state fail?

It does less well where rents and social cleavages overlap. It does least well on issues that require behavioural changes at the micro level. The reasons, we argue, lie in the understaffing of local government, the precocious democracy of India and its anomalous sequencing of universal franchise, and India’s “societal failures” manifest in caste and gender discrimination.

The answer, according to Devesh Kapur, lies in numbers, especially at the local administration:

For all of these, India will need a more effective state, one that is better resourced especially at the local level and whose accountability is more “downward” directed towards citizens, rather than “upward” directed towards the state-level bureaucracy and politicians.

His paper has a chart depicting declining public sector employees per million individuals over time. Public sector comprising local bodies, central government, state governments and quasi-government entities.

At the material plane, it requires that we start somewhere. Ricardo Hausmann and others say that we identify the binding constraints and start working on them. Other things would follow. One starting point could be primary education and then following that thread or using it to figure out the whole fabric or create one, as Shankkar hints at, in the epilogue. After all, government-run Kendriya Vidyalayas were and are a relative success story. There is a model to emulate. Once we focus on issue, getting it right might automatically result in other problems getting attention – such as provision of water, electricity and toilets in schools (and then to the neighbourhoods where the schools are located) and safety of children on the streets (law & order), etc.

But, any implementation would run into the issue of accountability that Devesh Kapur identifies and Shankkar had mentioned in several places. To emulate Shankkar’s penchant for numbers and his frequent references to internet searches and the number of hits, a search for ‘accountability’ yields 32 results in the book.

Enforcing accountability too requires that the political leadership starts somewhere. According to the veteran journalist cum commentator cum economist, TCA Srinivasa Raghavan (TCAS), the source of the problem is Article 311 (1) and (2) of the Constitution of India. Clause (1) says that no civil servant (of the Union or a State or an all-India service) could be removed from office by an authority subordinate to the one that appointed him/her.

Clause (2) says that no such person shall be removed or reduced in rank except after an inquiry…

TCAS writes that the Article 311 was taken from the Government of India Act 1935 which, in turn, drew heavily from the Government of India Act of 1919 which, in turn, was the result of Montagu-Chelmsford reforms of 1918. It was meant to ensure that no ‘white’ officer was removed from office by any ‘brown’ Indian who might be administratively senior or superior to him. But, since the ‘white’ officer was appointed by the Governor/Viceroy, only they could remove him/her! TCAS proposed an amendment to clause (2) which was the equivalent of “Three strikes and you are out.”

I do not know enough if this is the root cause or it is something else. But, I do know that Ms. J. Jayalalitha, the Tamil Nadu Chief Minister, during her second term between 2001 and 2006 tried to enforce accountability among teachers in government-run schools. She appeared to succeed but it did cost her the election in 2006. Of course, there were other factors including the manner in which the protests by teachers were handled, etc. But, clearly, enforcing accountability carries political risks even though Ms. Jayalalitha reversed her decisions and tried appeasement.

So, how does one bell the cat? 

At the spiritual plane, it is about ‘letting go’. It is the same as not making policy from the wrong end – i.e., from the analysis of political consequences. Letting go of political consequences is possible. After all, even with current approaches to decision making, political (election) outcomes are not guaranteed. Why not try something different? That is, why not make decisions with nary a thought for outcomes? There may even be pleasant surprises in terms of political outcomes. As far as I know, there is no tried, tested and guaranteed formula for winning elections or for box-office success for films.

A similar ‘letting go’ applies for the private sector too: putting the long-term horizon ahead of the short-term and putting the collective ahead of the individual interests. The payoff is the larger pie and collective pride. Even a smaller share of the larger pie might be wealthier than the current large share of a small pie.

That is the possibility – the rainbow at the end of the horizon. But, who will grasp it and what will make them grasp it?

I do not think Shankkar Aiyar should be expected to provide the answer. That is not fair. Shankkar has posed compellingly uncomfortable questions. It is for the rest of India to ponder over them and come up with the answers.

Both ‘The Accidental India’ and ‘The Gated Republic’ should be compulsory reading at the Lal Bahadur Sastri Academy at Mussouri, at all schools teaching public policy in the country and for civil servants and for politicians all over the country, in all political parties, who still harbour a secret desire to leave the country a better place than they found it.

Vocal about production, performance and productivity rather than protection

Couple of days ago, my friend Niranjan had told me about his long-form article coming up with two other distinguished Indians. In effect, a formidable trio of thinkers, opinion-makers and writers has penned this article on the ‘Being Open’ to the world imperative for India. Very broadly put, it is a useful and needed message. We should not lose sight of the need for India to remain open, no matter how nuanced it may need to become. At a very broad level, the principle remains valid, even though it has and will undergo contextual modifications.

As I began preparing this post, my son and came to the dining table questioning why it was so difficult to impose gun control laws in the United States of America. There ensued a brief discussion. My response was that ‘the right to bear arms’ might have been enshrined in the U.S. Constitution at a time when it was still a relatively rural society with concern for human and animal trespassing, theft of property, etc. Now, it is a densely populated urban society with social contracts and structures frayed or lost. Shock absorbers have greatly diminshed sponginess or lost their ability to cushion stresses. As human minds become more stressed, the ready availability of guns is a risk to their own and others’ lives. In other words, ‘the right to bear arms’ had a context.

It is not that the ‘pro-gun’ lobby is not aware of this. But, we often feign ignorance of reason or inability to recognise contextual policies and practices, when our short-term interests trump our reasoning instincts. Or, simply persistence of familiar habits wins over reason. Oftentimes.

This digression turned out to be longer than I intended. The point is that context is very important for socio-political and economic policies. Openness to trade and investment from abroad is one of them.

Free trade and fair trade do go together. One without the other is simply not feasible. The arguments made by some economists, using elegant theoretical models, that even unilateral free trade could be beneficial, were mostly ideological than pragmatic or realistic or even useful.

The authors make four arguments as to why India needs to remain open. It is relatively small country in the global context. Two, higher taxes on imports mean higher taxes on exports. Three, reduction in global trade also presents an opportunity and, implicitly, that they cannot be grabbed unless India remains open. Four, labour surplus India should try to take advantage of labour-intensive industries moving away from China and, again, the implicit argument is that it cannot do so unless it remains open.

These are mostly sound and familiar arguments. In fact, the fifth argument – which they make but not number it as such – comes after the four. That is, India still needs foreign exchange. It has a trade and current account deficit (even if it magically finds a way to stop gold imports) and it has to pay for them in foreign exchange. It has to earn those foreign exchange. To do so, one needs foreign investment and export earnings. Both require India to remain open. In other words, being open remains a necessity for India, to a good extent.

This columnist had learnt from reading Ha-Joon Chang and listening to Professor Robert C. Allen that today’s economically developed countries did not become so by practising free trade and open economy. They had huge tariff walls and non-tariff walls too. I had written about it in one of my columns in Mint. Ha-Joon Chang’s book, ‘Kicking away the ladder’ is recommended.

Ha-Joon Chang’s simple point is that the developed nations kicked away the ladder of protectionism that they practised on their way up and demanded that other nations open their markets for the exports of developed countries,since the latter had now developed capacities and had saturated their domestic markets.

The important thing to note is that today’s economically developed countries not just practise restricted and protected trade but they also did well on providing good education, created a single national market and created good physical infrastructure. The problem with protectionists is that they cherry-pick evidence that suits them but ignore that policies work in concert.

Take China for example. Their scant regard for reciprocal obligations or commitments to multilateral organisations is well documented. A very recent story traces the rise of Huawei to the fall of Nortel in Canada. But, China not just favoured its own enterprises and erected tariff and non-tariff barriers against imports. It had also invested heavily in primary education. Read James Tooley’s ‘The Beautiful Tree’ to get an idea of it. It had created world-class infrastructure and, three, its lead over India in science and technology publications and citations would take at least two generations for India to bridge, if not longer. Its economic growth in the last twelve to fourteen years might have been debt-led but in the previous quarter century, it was led by investment and productivity growth.

The second thing that a policy of restricted trade needs – if it has to stand a chance of succeeding – is internal performance benchmarks. Without holding domestic producers to account for productivity and performance, import substitution becomes a recipe for sloppiness, sloth, costly and inefficient production.

East Asia may have reduced tariff rates substantially because they were mostly small, open economies. Of course, they took the lead of Japan which had growth through exports. The reasons for Japan doing so are as much historical and contextual as ideological, if not more.

Post-WW II, its domestic economy destroyed, it had no choice but to rely on export growth. High import tariff alone would not have enabled it to create domestic investments. It needed to export and imports had to be less costly so that exports won’t be costly. America, which bailed Japan out, post-WW II, would have also wanted competitively priced goods from Japan and not costly ones, in return for all the investment support it provided. Smaller East Asian countries took their cue from Japan because, on the face of it, the strategy succeeded. The strategy required a growing importing economy to absorb Japan’s exports. America provided that market.

While all of these have had their own contribution to the famed East Asian openness, with Japan leading and showing the way, it is also true that they had erected intelligent non-tariff barriers. They offered subsidies, subsidised credit and engaged in infant industry protection. But, that is not the whole story. First, infant industry protection was not maintained into dotage. There were clear expiry dates. Second, they demanded performance from the companies that they supported.

Joe Studwell had written extensively on these in his two books, ‘Asian Godfathers’ and ‘How Asia works?’. I had summarised the learning from his book, for one of my columns in Mint, in April 2019:

It is not that Northeast Asian economies got everything right. Cronyism was there. Tariffs were used to protect domestic industry and additional concessions were offered. Banks were nationalized and loans were directed. However, the emphasis on infant industry protection went hand in hand with external benchmarking through export performance. There were special privileges for local businesses, but there was accountability for export performance. That is how scale, productivity, efficiency and rapid economic growth were achieved. Studwell repeatedly says that Korea punished non-performers more than helping performers, citing that as the crucial difference between the economic transformation of Korea and that of, say, the Philippines and Malaysia. [Link]

He repeatedly points to the contrast between Southeast Asia and Northeast Asia. The latter did far better on economic performance and the policy building blocks. The latter did not engage in premature financial liberalisation and had also undertaken genuine and far-reaching economic reforms. These were documented in his earlier work, ‘The Asian Godfathers’ and I had written about it in a column as far back as in 2007, for Mint.

So, when, with the benefit of hindsight, we criticise India’s import substitution policies of the Fifties and Sixties (which, by the way, were not unique to India), we should be clear about the causes of the failure. It is not just the nature of such policies but the failure to see through the consequences of such a policy. There was no external benchmarking and hence, performance and productivity slipped. In the aggregate, India’s competitiveness continued to slip. That is why despite nominal depreciation of the Indian rupee against foreign hard currencies, India was never really competitive in real terms. Nominal depreciation and inflation played catch up and continue to do so.

Recently, Srinivas Thiruvadanthai brought to my attention an extremely well-written and important paper titled, ‘From Produce and Protect to Promoting Private Industry: The Indian State’s Role in Creating a Domestic Software Industry’ written in July 2018 by Dinsha Mistree of the Stanford Law School. Reading the paper must be made mandatory for civil servants in India. It is a ready reckoner on how to wreck development of capabilities and how to kill economic opportunity, activity and, consequently, economic growth.

The paper does not make a case for import substitution policies. In fact, protectionism can take the form of ‘produce and protect’ or ‘promote’. If anything, the paper indirectly roots for the latter. I would add ‘promote and perform’ should be the mantra of ‘Atma Nirbhar’. That is, promote domestic industry but demand performance. In the case of the software industry, ‘performance’ was automatic because it catered to the foreign market. Hence, they were competing with global providers of such services.

Among the many interesting anecdotes that are liberally sprinkled in this delightful and brief paper, one is that of Seshagiri, the bureaucrat in the Department of Electronics boasting that the DoE broke 26 rules to enable a satellite link for Texas Instruments so that code could be written in Bangalore. If India were to turn the current growth crisis and economic stasis into an opportunity, one needs bureaucrats who would break rules to make things happen rather than those who cite rules to stop and stall. Perhaps, the so-called vigilance departments, then, had better perspectives.

Unsurprisingly, the paper makes the case for strong political leadership and backing that Shri. Narasimha Rao and Shri. Rajiv Gandhi provided. Importantly, IBM comes out looking good in this paper. If true, then it also holds lessons on being open to foreign investment that India still needs. But, openness to investment and openness to trade must go together. Yet, there is both room and need for nuance. Openness cannot be an ideological imperative.

While this is all history, may be, there is an opportunity to learn from it and now apply it. A specific situation has arisen. ‘BusinessLine’ reports:

The manufacturing hub of Morbi known for its tiles and timepieces is making a big play to become the toy factory to the Mattels, LEGOs and Hamleys of the world. It aspires to replace Chinese supplies and become the new playground for multinational toy giants. [Link]

The manufacturers are not only confident of cost but also of quality that the world toymakers might demand. They are also talking to LG, Hitachi and Samsung on consumer durables. Good for them. They have written to the Prime Minister, the article says, for support. If so, it is an opportunity to render assistance (not necessarily protection), consistent with WTO obligations, but do so with clearly spelt out expectations of export performance and also with sunset clauses for such support. Such an approach combines ‘protect’ with ‘performance’. It is consistent with ‘Atma Nirbhar’.

The CPB Netherlands Bureau for Economic Analysis publishes a monthly World Trade Monitor. But, due to the covid crisis, the last one was published in April and the next one is due later this month. World Trade is contracting. Boosting exports is about grabbing and gaining market share at the expense of others because the global trade pie is not growing. The challenge is even harder than in normal times and calls for greater attention to and emphasis on productivity and performance rather than protection alone.

Indian political and bureaucratic leadership have their task cut out and it is very encouraging to note that the government is going ahead with the negotiations to conclude a trade and investment agreement with the European Union. At a micro level, it is encouraging to see that the ban on TikTok is seeing Indian app. producers gaining in market share.

The article in Bloombergquint has this all-important message for India’s private sector in general:

“India’s entrepreneurs didn’t lack talent, they were just short on ambition,” Bhat said. “The combined effect of the coronavirus lockdown and the app ban presents a never-before, never-again opportunity.”

In fact, as much as we exhort and advise governments on what to do and what not to do, the target segment that we, the opinion-writers, must target is the private sector – the private players.

‘Far Eastern Economic Review’ had quoted the Philippine author, Francisco Sionil Jose in December 2004:

We are poor because our elites have no sense of nation.

So, India should be vocal about performance, production and productivity rather than protection. This is how I would reinterpret the learned writers’ title, ‘India should be vocal about global’

[Postscript: This blog post is neither a response nor a rejoinder to the article by Dr. Kelkar, Dr. Mashelkar and Dr. Rajadhyaksha. Dr. Nageswaran has sought to train his lens on another aspect of the malady and has complemented the three doctors.]

Nursing the economy back to health, post-Covid

An article with the above title that I wrote for the Vivekananda International Foundation is available here.

I enjoyed writing the column two weeks ago on doing away with income tax assessment. Credit for that piece has to go entirely to my school and college mate Rengaswami. He had seen the time-series table on income tax statistics released by the department and noticed how more than 90% of the tax collections are achieved without the department’s assessment. We bounced off the idea with some friends. The familiar but reasonable doubt over the idea was that the public would not pay up.

But, there is enough data with the department to crosscheck and ensure that no cheating happens or ensure that it would be no worse than under the present circumstances. We had also suggested some filters in the article.

But, doing away with income-tax assessment could be a huge signal to the public on facilitating ease of living and ease of doing business.

A few major questions answered

What was surprising was that despite palpable damage to significant parts of the Indian economy, GDP growth in 2017-18 was estimated at 8.2% – the highest since 2012-13. Unfortunately, this was an optical (or more correctly, a statistical) illusion.

Apart from agriculture, Indian GDP estimates are primarily based on data from the organised sector, which is extrapolated to cover the informal and SME sectors as well. Since, as has been already explained, the formal sector actually gained at the expense of the informal and the small, this procedure grossly overestimated the growth rate. Thus, while the higher production of corporates got recorded, the presumptive negative growth of the SME sector was completely ignored.

While there is no data to directly estimate the extent of GDP overestimation, two corroborative datasets suggest the damage was significant.

Employment data from the Periodic Labour Force Survey (PLFS) for 2017-18 indicated that the unemployment rate was 3 percentage points higher than normal. Similarly, household consumption data indicated that per capita monthly consumption expenditure was 2% lower than in 2011-12.

An important footnote in his paper as to how agriculture is reckoned with in GDP estimation is this:

In the case of agriculture, the GDP estimates measure only production, and not income of farmers or losses arising from increased wastage.

This is an extract from the five parts that Dr. Pronab Sen wrote for ‘Ideas for India’. All the five parts are consolidated into a paper and can be downloaded from here. The portion I have extracted solves the riddle (for me) of how India could report a real GDP growth of 8.3% in 2016-17, despite demonetisation.

What this shows is that when shocks affect all sectors equally, then the approximation mechanisms and formulae adopted by statistical agencies (for example, using growth or contraction in the formal sector to gauge the fluctuations in activity in the informal sector) do hold. However, when the shock is idiosyncratic (that is, it affects only one sector – like demonetisation did – for the informal sector that is largely or fully cash-based), then the approximation mechanisms break down and they end up giving misleading results.

That is what happened with the real GDP growth estimation in 2016-17. In a way, the statistical system ends up doing a big disservice to policymakers, for it sends the wrong signal about the health and dynamism of the economy.

(2) The second long-standing puzzle is on China’s growth model that favoured investment in heavy industries, manufacturing and exports as opposed to private consumption. Andrew Batson, in his blog, reviewing the book, ‘Building for oil’ by Hou Li, writes:

The oil produced by Daqing helped save China from major energy shortages during the 1960s. It also restored Mao’s confidence in his idiosyncratic approach to economic development, based on mass mobilization rather than orthodox planning, political enthusiasm rather than material incentives, and heavy industry and defense over agriculture and consumer goods. …

….The discovery of oil, then, probably helped push China back toward industrialization campaigns at a juncture when otherwise it would have moved toward a more balanced and consumer-oriented strategy.  [Link]

So, there we go! A vital clue as to how and why China chose heavy-industry-led industrialisation.

(3) Looks like Andrew Batson is on his summer-reading spree. In another recent post, he has reviewed another book, ‘Mao’s Third Front: The Militarization of Cold War China’. Very interesting and not at all surprising that it was United States’ decision to do business with China and cease being (or being perceived as) a military threat to China that paved the way for China being able to focus on ‘normal’ or ‘civilian’ economic development from the 1980s onward:

A big reason why China under Mao systematically failed to develop the economy was because Mao was, mostly, not really trying to develop the economy. He was instead obsessed with political campaigns against real and imagined enemies inside and outside the country. And although Mao was paranoid, he did have enemies. Meyskens reminds us that the Cold War was only really cold from the perspective of the US, which carefully avoided direct conflict with the Soviet Union; from China’s perspective, it was pretty hot…..

…… It is therefore impossible to separate China’s later successful economic development from changes in the international environment. If China’s leaders had continued to feel threatened militarily by both the US and Soviet Union, they may not have been able to focus on civilian economic development rather than military preparations. Meyskens suggests that the turning point for China’s economic development came with Richard Nixon’s visit in 1972, and the subsequent commitment by both sides to avoid military conflict. Soon after, the Third Front campaign was downgraded in importance, and planners began to direct more resources to light industry and consumption rather than defense and heavy industry…..

…. Deng’s project of enlisting the US as a de facto partner of China against the Soviet Union was thus the necessary international condition for domestic economic reform and the opening to foreign trade. [Link]

Andrew Batson is right in his conclusion. That the United States of America no longer sees itself as having to favour or not be an obstacle to China’s rise is well established. The speed and intensity with which it is pursued may vary depending on the personalities and political parties in power in the United States.

This also explains, at least in part, China’s recent aggression against India.

Public indifference to public property

Second, we started auctioning properties charged to us in a big way on a monthly basis. Once this process started, the borrowers became alert and they came and regularised the loans. So, that way some NPAs have come down. [Link]

It made me think. One of the reasons – among many – that public sector banks end up with NPA problems at the end of every economic expansion cycle is that the borrowers probably consider a public sector bank as the ownership of no one in particular but of everyone, in general.

So, I hypothesise that there is relatively less compunction in defaulting on a loan to a public sector bank than to a private sector bank.

I am in no way minimising the other reasons – lack of risk management (evaluating the business prospects of the borrower and thus assessing the riskiness of a loan better), performance culture, political influence, outright collusion (between bank staff and the borrowing clients, etc.).

Apart from these, I think the carelessness and indifference to public assets (spitting and littering and damaging public property during agitations) and the consequent lack of accountability to public assets is a factor.

If so, does it make the case for a better mix of privately owned and government-owned banking system?