#153 Hope Is A Thing With Feathers*

India Policy Watch: Prediction Time

Insights on burning policy issues in India

— RSJ

Happy New Year!

This is a time of hope, optimism and new beginnings. But 2022 has signalled it has no time for such niceties. It is already hitting high notes on all kinds of wrong metrics - peak COVID-19 positivity rates, deeper social polarisation and dangerous levels of toxicity on social media. And it is only the first week. Maybe 2022 intends to get all the bad news out early and then coast on calm waters. That’s the hope. 

Hope, like Andy Dufresne taught us, is a good thing; maybe the best of things. We write this newsletter because we are hopeful about the future. We believe we can make an impact, however small, on the demand side of the policy equation. That making people aware of policy choices and helping them anticipate the unintended will lead to a change in the supply side of politics. There are two preconditions for this to happen which we have assumed to hold true. One, people have time and mental space available for discussions that matter to their lives. Two, a belief we can arrive at what’s good for us through those debates and discussions.

But there are days when you wonder if these hold. The cacophonous noise on issues of identity, validity and nationalism drowns all other conversations. There’s no conceding of ground regardless of the merits of an issue. Any factoid that questions your existing hypothesis isn’t seen as worthy of contemplation. The more perceptive might register a mild dissonance. Instead, you wait for your side to dig out a counter that reconfirms your bias and negates the dissonance. Politics is often considered to be performative for the audience that’s the electorate. Now, the audience has donned the makeup and is declaiming on stage. The possibility of consensus on what’s good is increasingly remote. And once you are in this territory, the public part of public policy goes out of the window. Whatever remains then is no different from a fiat. 

But then hope is a good thing. And so we begin the new year with hope. 

Like those last lines from The Great Gatsby:

“...tomorrow we will run faster, stretch out our arms farther…And one fine morning-

So we beat on, boats against the current, borne back ceaselessly into the past.”

Like last year, we start with that timeless lazy way to fill pages during this time of the year.

Here is my random list of predictions for 2022.

Economy

#1: It will be more of the same for India on growth, inflation and fiscal deficit. Factoring in the Covid base effect, we will be in the 5-5.5 per cent growth range (if you take the base of FY 21). Inflation (CPI) will be around 5 per cent with an occasional jump to 6 per cent during the year despite threatening to go out of control. Maybe three interest rate hikes (a total of 75 bps) during the year will keep a lid on it. Public markets will moderate a bit (around 10 percent upside). Private market valuations will continue to be in bubble territory. There’s a lot of liquidity that’s already raised and ready to be deployed for start-ups. China won’t attract it as it will continue to go down the path of self-reliance and its notion of an equal society. So, expect even more than the $36 billion that flowed into startups in 2021. There will be more gushing commentary on the Indian entrepreneurial energy. That will be appropriated to show how well the economy is doing. The money flowing for Indian startups is good news, of course. But it cannot be the only metric to determine the health of the economy. The divergence between the formal and informal economy and the K-shaped recovery that we have written about (“Two Indias”) will continue.

#2: There won’t be much to write about reforms. Some attempts at piecemeal MSP reforms will be attempted to make up for the repealed farm laws. The National Monetisation Pipeline will get going but the progress will be modest. A couple of more disinvestment proposals of PSUs (including banks) will be taken up. But this will be for raising revenues rather than a planned strategy to make PSUs market competitive. The LIC IPO will just go over the line and that will be the big event to showcase reforms. All of this doesn't mean we will be short of big announcements about reforms or intention to reform.

Politics

#1: BJP election machine will continue its winning run barring the odd defeats in Punjab and Goa. The big prize, UP, will be fought hard but BJP will win a safe majority. The bahujan vote of the depleted BSP will shift to it more than to SP and that will make all the difference. By the end of the year, there will be a more formal coming together of regional parties as opposition. Some sort of a “front” will be formalised.

#2: There will be a split in the Congress. The party in its current form is untenable and beyond a point, there will be nothing to lose for those who split it. The key question is who will lead it - those who have a political base and think Congress leadership is a liability that cannot be carried along any further, or those without a political base but with strong ideological opposition to the BJP. My guess is it will be the latter. In any case, it won’t make much of a difference.

Society 

#1: Demographic anxiety is now a thing in Indian society. The desire to address it or to be seen to address it will animate much of our social discourse. Expect love jihad and anti-conversion laws in various states, some kind of population control bill, a revival of CAA and a push for a uniform civil code during the year. There’s that early 20th century Europe playbook of stoking demographic anxiety that plays on a threat to the survival of a civilisation or a way of living. The pitch will be queered on this. Indian society is a fertile ground for it. This land can be shown to its people as a palimpsest. But it can, perhaps more easily, be shown as a glorious, ancient civilisation that’s been asphyxiated for centuries by ‘outsiders’. A true revival of it requires setting the past records straight and the right demographic arithmetic. That’s the view and it is open season for this. There will be more performative gestures that will be broadcast as reclaiming of that civilisation. 

#2: The last week saw the mainstreaming of the ‘trads’ and ‘raitas’ nomenclature. If you don’t know about this sharp distinction that’s emerging within the right-wing, here’s a short introduction to it. We have written in the past Schmitt’s ‘friend-enemy’ distinction in politics. Politics is driven by the idea of having an enemy; the other. For much of the last decade, this was the left-liberal cabal (Lutyens, Khan market, NYT, Soros, Amnesty etc). Even when much of news and propaganda came to be dominated by the right-wing, there was a strawman of this all-powerful cabal of anti-nationals that was kept alive because the notion of an enemy is critical. But once you have decimated it, what do you do? You look for the enemy within. That’s what trads versus raitas is all about. It isn’t a surprise really. This is something I discussed in Amit Varma’s podcast last February.  

Miscellaneous

#1: There will be serious big tech regulations that will come into play in America. Others will follow suit. India will have a version of this along with dollops of atmanirbharta. This will mean some tough days for big consumer tech giants in India.

#2: China will struggle for growth. Demographics, debt and delusion have come together in China in a way that will make it difficult for it to sustain growth. China-Russia relationship will get stronger with their support for each other and for other authoritarian regimes around the world. 

#3: Meta, Crypto, Decentralisation, NFT (and everything else pumped up by the Valley tech bros) will see their hype abate (about 25-30 percent drop in asset value). When John Terry starts buying Bored Ape NFTs, you know the whole thing has jumped the shark. About time too. 

Global Policy Watch: A Season of Industrial Policies

Bringing an Indian perspective to burning global issues

— Pranay Kotasthane

On December 29, the union government issued guidelines for another production-linked incentive (PLI) scheme, this time for textiles. In all, there are thirteen sectors — from electronics to steel — where PLI schemes are under various stages of execution. We had given such schemes the full Anticipating the Unintended treatment in edition #86. In this edition, I want to step back and review the merits and demerits of industrial policies, of which PLI is a specific variant.

What’s an Industrial Policy?

Scott Lincicome of the Cato Institute has a neat definition. Industrial policies are

“targeted and directed government interventions intended to achieve specific, market‐​beating industrial and commercial outcomes within national borders. The specificity of these targeted interventions is what makes them different from other kinds of broader, more general interventions.”

In contrast, broader pro-market policies that are not sector-specific such as reducing corporate tax rates, reducing import duties, simplifying labour laws and making land acquisition easier are not categorised as industrial policies.

Why Should You Care?

Industrial policies are all the rage today and not just in India. Industrial policies never went in demand really. The theory of change behind industrial policies is enticingly simple: “to get an uncompetitive business sector of yours to grow, subsidise investment in that sector over the next few years out of taxpayer money.” And as you can imagine, industrial policies are quick-fix solutions that any policymaker would love. So, one or the other industrial policy solution is always cooking in government departments regardless of the sector and the country.

The reason why such policies are now getting concurrent attention worldwide is because of one reason: China. With all the talk of reducing dependence on Chinese technology and manufacturing firms, entire sectors are being deemed as “strategic” across countries. And once a sector gets termed as strategic, a “strategic” industrial policy is never far away. And so, the US, EU, India, and China itself, are all launching a spate of new incentive schemes to reshore manufacturing and technology firms.

Do Industrial Policies Work?

They are popular, alright. But are industrial policies effective? In this section, I’ll review some arguments for and against them.

Batting for industrial policy, albeit in the American context, Steven K Vogel declares in a Niskanen Center paper that industrial policy is both imperative and inevitable going ahead. His argument is that all critical goals of the future — reducing carbon emissions, mitigating climate change, and strengthening supply chain resilience — would be unachievable without targeted government support. And that achieving these goals cannot be left to private firms because of three reasons. One, only the government can formulate national missions. Two, the private sector is bound to underinvest in R&D due to positive externalities. And three, only government can resolve coordination or network failures.

Batting against industrial policies are people at the Cato Institute (of course). Their paper Industrial Policy: A Bad Idea Is Back is a searing critique of industrial policies due to four reasons that block success.

One, centralised attempts to pick winning critical technologies are more likely to fail as the government does not know it all. Even when the government picks up the right industries for support, it often ends up picking up the wrong products and companies.

Two, as you can guess, targeted support enables rent-seeking. Companies that get government backing block competition and seek to mould the scheme for their own benefits rather than policy objectives. Costs balloon, performance falters, bailouts get demanded, and political considerations become paramount.

Three, industrial policies come at an immense cost to society. Besides the “seen” cost overruns, there are “unseen” opportunity costs, misallocation of resources, and deadweight losses due to higher tariffs.

Finally, industrial policies don’t pick winners but it’s winners that pick industrial policies. This means even in sectors where such policies created a few successful companies, “government support mostly went to companies that could have obtained private funding or produced outcomes that the market could have provided (and did previously without government assistance)”.

Where Does That Leave Us?

From an Indian perspective, I want to amplify two concerns about industrial policies.

First, as the previous section suggests, the real problem with industrial policies is in their design and implementation. Vogel argues that one can get industrial policy ‘right’ by doing three things: set clear priorities, deploy the appropriate policy tools; and structure government institutions to limit political capture and maximize policy effectiveness. Each of them requires high state capacity. While the first two can be still resolved as they are not transaction-intensive, a lack of adequate regulatory capacity to prevent companies from gaming the system is a big challenge in India.

Second, the opportunity cost argument is especially important for a 2000$ per capita income economy. Given that every rupee of revenue raised by the government costs three rupees to the Indian society, industrial policies are by default expensive instruments.

Reflecting on both sides of the argument, my current position is that industrial policies should be deployed very selectively, in sectors that are uber-strategic or where Indian companies enjoy a comparative advantage globally. For example, I would support an industrial policy for building a speciality semiconductor fab in India but I would oppose one that attempts to make display panels in India. Reducing import dependence from China cannot be the driving reason to shower billions of dollars for as many as thirteen sectors.

We shouldn’t forget that incentive schemes are finally band-aid solutions. They might create a few national champions but to eliminate the cost disabilities lakhs of Indian companies face, there is no alternative to improving tax, business, intellectual property, and trade regimes.

Post Script: Industrial Policies for Semiconductors

The union government launched four schemes worth a total of $10billion to build a semiconductor and display ecosystem in India. I’ve given these policies the Anticipating the Unintended treatment here and here.

To understand the European Union’s perspective on industrial policies in this sector, I spoke with Mathieu Duchâtel in an episode for the All Things Policy Podcast.

* from Emily Dickinson’s “Hope” is the thing with feathers

HomeWork

Reading and listening recommendations on public policy matters

* [Book] Diana L. Eck’s 2012 masterpiece India - A Sacred Geography challenges the notion that the Indian “nation” was a project born in response to colonial occupation.

* [Paper] Questioning Industrial Policy: Why Government Manufacturing Plans Are Ineffective and Unnecessary is an insightful read.

* [Article] Noah Smith on “Six reasons 2021 was a better year than people think”

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