#166 Putin' Vodka In Bihar

India Policy Watch #1: Love For Putin

Insights on burning policy issues in India

- RSJ

You must have noticed a distinct anti-west, pro-Putin tone in the media outlets that toe the government’s line in India. The intellectual right has been busy with columns equivocating on who has to shoulder the blame for the war. What could be the reasons for this? 

There’s of course the strategic autonomy argument. We are dependent on Russia for our defence and oil requirements. It has been a reliable friend of ours in the past. And we cannot trust the US anyway. There’s also the added hypocrisy of western Europe which continues to trade gas with Russia while lecturing us on our purchase of oil. Everyone is looking out for their interests and so should we. It is best to keep equidistant from any particular formation and act as a ‘swing power’. Pranay has written in the past few editions on why strategic autonomy as a policy isn’t suited for the likely emerging world order. But that aside, you can somewhat understand the anti-west stance if its origins lie in the traditional suspicion of the west and reflexive desire to be non-aligned in the policy circle in India. 

But there’s more here. The anti-west stance is also about fighting the favourite imaginary global nexus of liberals and wokes. So, you will notice almost every television debate on Ukraine will devolve into some kind of liberal and Biden bashing. If you are so concerned about Ukraine, why don’t you put your troops on the ground instead of hectoring India - is the usual line taken by anchors. Implicit in it is some kind of ‘Putin envy’ that I have noticed among the right-wing intellectuals in India. The idea that a strong man like Putin has revived national pride among Russians and brought it back into the superpower league from where it was languishing in the aftermath of the Soviet meltdown. This is obviously rubbish if you bother to look at the data. Russia is a small power whose economy has gone from bad to worse under Putin. It has a huge nuclear stockpile from its past that gives the rest of the world the only reason to pause before dismissing it as a nobody. But there’s a fascination among the right intellectuals to make the case for a Putin-like revival of India.

I remember just before the 2014 elections, Swapan Dasgupta made this argument in the Sunday Times of India (Mar 9, 2014):

“However, to a people exasperated with prolonged uncertainty and decline, Putin is the antidote to the unending sadness and deprivation that defined 20th century Russia. He has created the conditions for the average Russian to feel good, get rich and, for a change, indulge. This exuberance is unlikely to last indefinitely but, for the moment, the Russian context favours a Putin-like robustness......To the west, Putin’s reclamation of Crimea (and, earlier, a slice of Georgia) and his assertion of Russia’s stakes in Ukraine may seem ominous. For Russia, it is, however, symbolic of the bid to reverse the historic defeat in the Cold War. 

But Putin’s bid to reclaim Russia’s status as a Great Power was only possible because the economic and political foundations for an enhanced role have been firmed up over the past decade. In India, on the other hand, the fierce desire of the past 25 years to transcend mediocrity, shoddiness and look the world powers in the eye has floundered. It is not that the UPA government has no achievements to its credit. India has progressed but it has seriously under-performed in terms of its potential... 

Whether faith in Modi encapsulates the anger at a dismal present and a brighter future will be tested in a free election. If Modi prevails on May 16, we shouldn’t be surprised if his detractors paint him to the world as India’s Putin. If he lives up to the liberal demonology, those with a stake in India’s future should be elated. Just as Russia is with Putin.”

I remember this column distinctly for two reasons. It was already so wrong back then in thinking that Russia was becoming a Great Power under Putin. But, importantly, it gave me an early indicator of what kind of aspiration the right has from its political dominance in India. Some kind of muddled civilisational nationalism with akhand Bharat fantasies whose best example for them was an expansionist Russia of 2014. Putin was their best answer to western liberalism and the wokeism that accompanied it. It worried me then and it has only gotten worse.

The right intellectual ecosystem has continued in the same vein in the last two months. Here’s R. Jagannathan writing in the Swarajya on how NATO is past its sell-by date:

“The reality is that Europe is the most fractious of continents, and just as France and Germany decided after the two world wars that enemies must be part of the same economic union to avoid future wars, Russia needs to become a part of both the mutual defence pact and the European Union. This way Europe’s security needs will be buttressed with a mutual economic zone where Russia’s energy can power Europe, and Europe’s markets Russia’s economic revival.

America can at best be an observer in this alliance. The world cannot allow its over-grown military-industrial complex to decide who should go to war against who just so that this complex can protect its commercial interests.

India’s own security architecture would be better protected by aligning with this expanded Europe, and especially with France and Germany, with Russia and Japan being other big partners. A Franco-German-Russo-Indo-Japanese QUINT (rather than an America-led QUAD) could lead to a less threatening relationship with China.”

It is quite an intellectual leap to first contemplate some kind of QUINT with those powers coming together. What specific long-term interests bind them? None, except for the author’s fantasy to somehow shoehorn Russia as a legitimate and peaceful power under Putin. At its heart lies the same revivalist admiration and fantasy that Swapan Dasgupta spoke of in 2014. 

There’s, however, a different reason I can think of about the stance taken by these pro-government media channels on Russia and the war in Ukraine. And this credits the government with a lot more intelligence in managing its position on Ukraine. It is about the government playing the two-level game really well here. As we know, all negotiations in international relations are a two-level game as Putnam put it. At any time, a state is negotiating with other states (intergovernmental) while simultaneously managing its domestic constituency and its concerns on the issues. A clever negotiator will look to use his position on one ‘table’ to influence the outcome on the other in a way that gets him a ‘win’ that’s part of his ‘win-set’.

Maybe, just maybe, the government is playing a clever two-level game. It is using its phalanx of friendly editors and journalists to talk up India’s dependence on Russia, its historical special ties with it and how dumping Russia at this moment will be perceived negatively by the people of India. This seems like a good tactic to follow because it allows the ministry of external affairs to sit at the international table and show the constraints India has to give its unqualified support to the west. “See, this is the domestic mood on Russia. What do you want us to do beyond a point” - that’s what India might be telling the west. This seems like a good way to continue sitting on the fence on the issue and hoping for the war to end to have things sort themselves out. 

I would like to believe this is what the government has been doing to keep itself away from western sanctions while it continues to engage with Russia. Is it working? Well, it seemed to have worked for a while. However, the US patience seems to be wearing thin as this warning from Brian Deese, the White House National Economic Council Director, suggests:

"Our message to the Indian government is that the costs and consequences for them of moving into a more explicit strategic alignment with Russia will be significant and long-term. There are certainly areas where we have been disappointed by both China and India's decisions, in the context of the invasion."

Hmm. So, what changed?

One of the going-in assumptions in Putnam’s two-level game theory is about the credibility of the constraints and options each state might have in its hands. If you have to show you have a domestic compulsion because of which you will need some flexibility on the international table, it must appear credible to the other state at the table. India might be emphasising its domestic compulsions in supporting Russia by showing what’s appearing in the media as the mood of the nation. But for the US to consider it credible, it must be convinced that this domestic ‘view’ is emerging independently. Beyond a point that must be difficult to swallow for the US considering how a large section of our media has turned into government mouthpieces in the past few years. 

Of course, a fair and independent media is necessary for the domestic polity. But it is good for international negotiations too.

India Policy Watch #2: RBI’s Tough Act

Insights on burning policy issues in India

- RSJ

The Monetary Policy Committee (MPC) of RBI met earlier this week and based on its assessment decided to change its policy stance 

from 

remaining accommodative “as long as necessary to revive and sustain growth on a durable basis” 

to 

remaining accommodative “while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”.

I hope you were able to spot the change. Essentially, RBI has prepared the ground for an increase in policy rates in the second half of this year. One of my predictions for the year was that we will have a total of three policy rate hikes cumulating to 75 bps. The stage is set for that prediction to come true. 

Broadly, there were three messages from the MPC meeting:

* The input cost pressures will continue to impact the economy buffeted by global supply chain disruptions, commodity price increases and continuing uncertainty because of the war in Ukraine. RBI sharply revised its own estimate of inflation for FY 23 from 4.5 per cent to 5.7 per cent. This 120 bps increase was a belated recognition of the inflation risk in the economy with the likelihood of it breaching the 4 (+/- 2) per cent range. Once it goes beyond 6 per cent, the RBI has to explain it to the parliament. Though I don’t see why it should be such a concern if it is in lock-step with the Finance ministry and the government enjoys a brute majority in the house. But it seems like that 6 percent mark is some kind of Rubicon. That apart it made it clear that inflation control is now its chief priority over growth for the year. And that’s a big shift. My view is CPI inflation will go over 6 per cent during the year unless we see normalisation in Ukraine sooner.

* On growth, the RBI lowered its forecast from 7.8 per cent to 7.2 per cent for FY 23 citing a broad range of risks to it - a surge in commodity prices, hawkish policy stances in developed economies, supply-side disruptions, weakening global demand and geopolitical risks. The huge government capex cycle that was promised in the Budget isn’t going to happen in a hurry. The disinvestment proceeds have also been delayed because of the choppiness of the equity market and the big LIC IPO might happen at a more realistic and muted valuation than earlier projections. These are all weighing down the growth outlook. The good news on tax collection buoyancy, robust rural demand and a steady urban consumption trend have meant the RBI still expects the growth to come in above 7 per cent. That will be tested going forward.

* The liquidity in the banking system continues to be quite high (Rs. 8.5 lakh crores) and RBI was extremely careful about how it will suck this liquidity out in the future. RBI will follow a “gradual and calibrated withdrawal of this liquidity over a multi-year time frame in a non-disruptive manner”. In other words, they will stretch out this excess liquidity scenario as long as they can. RBI has been holding variable rate reverse repo (VRRR) auctions to absorb liquidity on a periodic basis while continuing with variable repo rate (VRR) auctions simultaneously to meet liquidity shortages. This ‘Operation Twist’ will continue. It has also increased the held to maturity (HTM) limit for banks from 22 per cent to 23 per cent and allowed them to have G-secs under this category. The RBI also introduced the standing deposit facility (SDF) as an uncollateralised form of reverse repo or liquidity absorption tool. What this means is that banks can now park overnight liquidity at RBI at the SDF rate of 3.75 per cent without RBI having to put G-secs as collateral into Bank accounts. In effect, the liquidity adjustment facility (LAF) corridor which is the difference of rates at which RBI takes in and infuses liquidity into the banking system, is back at the pre-pandemic level of 50 bps without RBI specifically increasing the reverse repo rates. Among the numerous RBI has already adopted, these are another set of ways to support the government borrowing programme for this fiscal. 

In summary, for the number of economic and global variables it has to juggle while keeping the government happy that it is doing everything to support growth, the RBI has the toughest job in the country.

And I will say it makes a fair fist of it.   

A Framework a Week: The Three Binding Constraints on Technological Progress

Tools for thinking public policy

— Pranay Kotasthane

In an excellent essay for Works in Progress, Brian Potter has an interesting insight on technology governance. He writes:

There’s a pattern that we frequently see in the development of a new technology. Initially, the practical functionality is limited by the technology itself – what’s built and used is close to the limit of what the technology is physically capable of doing. As the technology develops and its capabilities improve, there’s a divergence between what a technology can physically do and what it can economically do, and you begin to see commercialized versions that have lower performance but are more affordable. Then, as people begin to build within this envelope of economic possibility, capability tends to get further constrained by legal restrictions, especially if the new technology has any (real or perceived) negative externalities.

A framework from microeconomics can be used to visualise this insight rather well—production possibility frontiers (PPF).

A PPF curve results from trade-offs. Given finite resources, producing more goods of one kind leaves less resources on the table for another. Thus, given a fixed budget constraint, a PPF curve shows the production options available for a society. All points below a PPF curve are the available options (like points A,B, C & D in the figure), and the ones above it (like X) are unavailable due to resource constraints.

What Potter’s insight adds is that we can probably imagine three distinct production possibility frontiers in technological development—economic, policy, and technological, as shown in the chart below.

In the first stage of technology developlent, the technological PPF is itself a binding constraint as newly intriduced products have several bugs. In Stage 2, however, the technological PPF is no longer the binding constraint. At this point, it’s the economic PPF that sets the limits for what is producible. In the final stage, the limiting constraint is policy rather than economic or technological.

Development of cryptocurrency technology is a relevant example. In the first stage, the total currency that could be churned out was limited by the technology itself. Soon enough, those constraints were overcome and a number of different currencies proliferated. The binding constraint then became economic, as mining new currencies became tougher. With more energy-efficient mechanisms such as proof-of-stake on the horizon, the binding constraint is no longer economic. Instead, it’s the policy and legal constraints that limit production.

The closer the policy and economic PPFs move towards the technological PPF, the faster the technological development. At the same time, the policy PFF can be used to avoid production at the technological limits. Broadly, two approaches are available. Start with a tight policy PPF and then expand it slowly. Or start with a really loose PPF and reduce it depending on the observed negative effects. In low policy capacity situations, the latter approach offers more opportunities for growth. Easier said than done.

PolicyWTF: Bihar Prohibition Saga

This section looks at egregious public policies. Policies that make you go: WTF, Did that really happen?

— Pranay Kotasthane

Prohibition is a gift that keeps giving. Six years ago, the Bihar government criminalised the manufacturing, bottling, distribution, transportation, collection, storage, possession, purchase, sale, or consumption of alcohol. You very well know how that would’ve turned out. First, deaths due to consumption of spurious alochol became a regular occurence. Second, prohibition cases and ‘convicts’ overwhelmed the state’s already anaemic law and order machinery.

Eventually, the Supreme Court issued an order in February this year, stating that:

We find a number of cases coming to this Court arising from proceedings initiated under the Bihar Prohibition and Excise Amendment Act, 2018. The trial Court and the High Court are both being crowded by bail applications to an extent that at some stage 16 judges of the High Court are listening to bail matters and prosecutions under the Act concerned forms a large part of it. Denial of bail would also result in crowding of the prisons.

In response, the Bihar government now proposes to amend the Prohibition Act of 2016. Instead of getting rid of prohibition, the amendment focuses narrowly on the Supreme Court’s objections. For instance, being caught the first time for drinking now attracts a penalty of Rs 2000-5000 instead of imprisonment. And to reduce the burden of cases, the bill proposes that consumption offences will be heard by executive magistrates who will be appointed by the state government especially for such offences. It seems that the Bihar government is also recruiting ‘prohibition constables’ for better enforcement.

Anticipating the unintended consequences is easy. With different punishments for the first and subsequent offences, these rules will boost the Police’s rent-seeking powers. The Police will treat everyone as repeat offenders by default. On payment of an amount sufficiently greater than Rs 5000, the offence will be magically converted into a first offence, settled with a fine. Instead of focusing on Bihar’s terrible law and order situation, the Police and Executive Magistrates will take special interest in catching people for drinking alcohol.

The Supreme Court’s immediate problem might well reduce but the lives of Biharis will become worse. Bihar government would do well to heed to Ambedkar’s vehement rejection of prohibition:

“From the point of equity, there is no justification for prohibition. The cost of prohibition is borne by the general public. Why should the general public be made to pay the cost of reforming a lakh or two of habitual drunkards who could never be reformed ? Why should the general public be made to pay the cost of prohibition when the other wants of the public such as eduction, housing and health are crying for remedy? Why not use the money for development plans? Who has greater priority, the Drunkard or the Hungry? There are pertinent questions to which there is no answer except arrogance and obstinacy. Whatever happens, the policy of prohibition must be reversed and this colossal waste of public money should be put a stop to and the resources utilised for advancing general welfare.”

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HomeWork

Reading and listening recommendations on public policy matters

* [Magazine] Works in Progress is emerging as an exceptional storehouse of exceptional ideas. There are few other online spaces where the signal to noise ratio is as high.

* [Blog post] Yiqin Fu’s post on the unintended consequences of a mobile-first walled-garden internet on knowledge creation is an eye-opener.

* [Forecasting Tournament] We have written earlier about the educational value of making precise predictions. Check out the Metaculus forecasting tournament on the Ukraine conflict, and force yourself out of what Philip Tetlock calls “outcome-irrelevant learning”.

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