#96 A Lazy Start To 2021🎧

This newsletter is really a weekly public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

PS: If you enjoy listening instead of reading, we have this edition available as an audio narration courtesy the good folks at Ad-Auris. If you have any feedback, please send it to us.

— RSJ

Happy 2021 everyone!

There’s no logical reason to believe that turning over to a new year will make a difference in the fortunes of humankind. But we are an optimistic lot.

So, we hope the spectre of 2020 is behind us. It was what it was. If you are a believer, you’d think there was a cosmic message to us through the year.

Like Alexander Pope wrote in that great defence of the ways of God to men – An Essay On Man:

“Hope humbly then; with trembling pinions soar;

Wait the great teacher Death; and God adore!

What future bliss, he gives not thee to know,

But gives that hope to be thy blessing now.

Hope springs eternal in the human breast:

Man never is, but always to be blest:

The soul, uneasy and confin'd from home,

Rests and expatiates in a life to come.”

Pope concludes with:

“All nature is but art, unknown to thee;

All chance, direction, which thou canst not see;

All discord, harmony, not understood;

All partial evil, universal good:

And, spite of pride, in erring reason's spite,

One truth is clear, Whatever is, is right.”

We must accept whatever is, is right

We will continue to write to help us make sense of the world around in 2021. But a year like 2020 helps put things in perspective. The world works in mysterious ways. You can’t control it. Spontaneous order is ordained.

Ten (or Fifteen) Predictions For 2021

The laziest way to start a new year edition is to post predictions. Admittedly, I’m basking in my garden with the late winter morning Bangalore Sun warming my toes. So, let’s do the lazy thing here.

#1

By the end of 2021, we will all realise we overrated the long-term impact of the pandemic on everything. There won’t be any ‘new normal’ to write home about. Things will be more of the same. There will be a plethora of books on the post-pandemic world (hey, Pranay has edited one too😊) and the lessons to be drawn from the pandemic. But my guess is barring the strange experience of the lockdown that will linger in our memories, the world at the end of 2021 will be quite similar to how it was at the end of 2019. There will be fewer business travels and more people will work from home, but this will be a mere acceleration of the long-term trend than a radical departure from the past. That apart there won’t be any great reset.  

#2

Global financial markets will be one area where the impact of the pandemic will be felt in the (really) long term. Don’t worry we will all be dead by then. The size of the stimulus in most developed economies and the amount of liquidity pumped into the system will mean two things – eventual inflation and a repeat of the taper tantrum in future. In some ways, we have subscribed to the modern monetary theory (MMT) without admitting to it. Deficits have come to mean nothing and any future slowdown in the economy or fall in markets will mean more stimulus. Someone in future will be left holding the can. We can’t see them nor can we feel deeply empathetic about them. ‘Deficit is all a myth’ line of argument will gather momentum.

#3

The stock markets are in bubble territory now. But there won’t be any reckoning in 2021. The stocks doing well during the pandemic will continue to do well. Others who were impacted by the lockdown will limp back to normalcy. With interest rates at historic lows and excess liquidity all around, the top 2-3 per cent who invest in equity will have no other options but to park surplus funds in the market. The millennials (who believe the markets only go up?) will enter the markets in large numbers on the back of zero-fee platforms like Robinhood and Zerodha. The divergence between the real economy and the street will continue to confound all of us.

#4

We spent a lot of time in 2020 thinking about economic recovery. What policy actions will aid it, what will be the shape of it and how quickly will we get back to the pre-pandemic levels on a sustained basis? The early signs are of a K-shaped recovery around the world. This will be strengthened in 2021. A small set of companies and people will see a rising graph of growth and prosperity. The long-term impact of the pandemic will be to worsen inequality. The early but definite signs of this will show up in 2021. In India, this K-shaped recovery will have a second-order impact. We will measure recovery on the rising part of the ‘K’ since the data there is available at a greater frequency. Expect terms like ‘roars back’, ‘strikes back’ to be in vogue in the second quarter of the year while describing the economy. There will be limited economic rationale behind such commentary.  

#5

The Indian economy will trundle along. The twin balance sheet problem will persist. The impact of the moratorium on the financial services sector will show up in the latter part of the year. PSU banks will need more capital once they are done with their consolidation. The government will find it difficult to do that. Some kind of divestment will be attempted that will be stalled by the usual protests from the opposition, unions and public opinion. Banks and NBFCs will be extremely careful with lending, especially to new projects or new customers. Credit offtake will be weak and the revival of consumption story will be dampened because of this. Private investments were trending downwards anyway before the pandemic. Its revival seems unlikely in 2021. Government finances will continue to be under strain and its borrowings will crowd out others. Expect RBI to continue to bear the burden of holding up the economy.

#6

The Chinese economy will lead the global growth engine. Despite its misadventures during the pandemic, China will continue its rise to the top. The Biden administration will take a more accommodative stance towards China. The trade war will subside and the EU will continue to strengthen its relationship with China. The anticipated move of global supply chains away from China will be insignificant in the larger scheme of things. China will continue with bullying its neighbours and those who don’t toe its line. India’s reluctance to be seen in the US camp and the new Biden administration will mean there won’t be any real Quad counterpoint to China in Indo Pacific. Most of US attention will be on domestic issues where race and identity politics will consume everything in the next year. There will be the usual handwringing about a democratic coalition of the willing to take on illiberal Chinese authoritarianism. But those will be words. There won’t be any real US response to China’s rise to the top.

#7

Technology sovereignty will be a key theme in 2021. Countries across the western world will assert their technology independence. The most common form this will take is in keeping Chinese technology companies out of strategic sectors like telecom and finance infrastructure services. Some early efforts will be made to create common standards and shared investments in data protection, usage of AI, 5G protocol and cybersecurity in the western democracies. There will be greater regulation of Big Tech and social media platforms with some serious repercussions for Google and Facebook in 2021. The blunt instrument will be hiving off some of their businesses into separate companies. Or you could expect heavy fines for restrictive or anti-competitive practices and heavier hand of regulations on these companies.

#8

How to vaccinate India will be a policy question that will keep everyone busy in the first half of 2021. Everything about vaccines – procurement, pricing, storage, administration and safety – will test our policymakers. My guess is we will do quite well in this entire exercise. We know how to pull off large events of this kind. The state that’s all-pervasive and weak in getting things done is good in one thing. Mobilising people to stand in haphazard queues and getting them to do its bidding. Vaccination drive falls squarely in its sweet spot. Expect many ad hoc regulations, orders and trampling of individual liberties and common sense when this is being done. But we will surprise ourselves on this front. My bet is the PM uses the Republic Day platform this year to have the first person to be vaccinated in India. Expect it to be an old, female health worker from West Bengal.

#9

It won’t be a great year for reforms. The wrong lessons will be learnt from the protests against farm law reforms. Plus, the usual set of assembly elections and the weak economy post the pandemic will continue to weigh on the government. So good, bold and much-needed reforms across sectors will again go into the backburner. The weak economic performance will then be compensated by the unnecessary and illiberal social policies to keep the base enthralled. Expect more states to pass laws against love jihad and cow slaughter. Some kind of population control bill and revoking of the amendments made to the Constitution during the emergency might also be in news. Those worried that India is headed in the wrong direction will be driven to deeper despair.

#10

The BJP election machine will have a mixed year. Barring Assam where it should keep its majority and some gains in West Bengal, it won’t see much success. The campaign and the narrative building leading up to elections in Assam and West Bengal will not be for the faint-hearted. There will be a plethora of fake news, violence and no-holds-barred Muslim bashing. The signs are already there on the news channels. The opposition will remain largely ineffective with some kind of split happening in the Congress during the year. But there will also be the earliest sign of some kind of coming together of regional parties to counter BJP in 2024. This seems inevitable. PM Modi will continue to remain above all of this as he cultivates his spiritual Mahatma image.

— Pranay Kotasthane

There are two kinds of 2021 predictions I have come across. The first kind says that the post-pandemic world will be the same as the pre-pandemic one. The second kind says that the post-pandemic world will have a far-reaching impact on that one phenomenon that the author is deeply invested in.

Both kinds of predictions are susceptible to what Philip Tetlock calls ‘outcome-irrelevant learning’ — a situation wherein no matter the reality, people are in an excellent position to explain that what happened was consistent with their view.

One way to check outcome-irrelevant learning is first to make specific, measurable predictions and then reflect on real-world outcomes at the end of the prediction horizon. Which, for this newsletter, means we will do another post at the end of 2021 reflecting on our hits and misses.

With that caveat out of the way, I have five predictions to add to RSJ’s ten.

#11 Petrol prices in Bangalore will hit ₹100 at least once before the end of 2021.

We have previously written about excise duties on petrol and diesel being the superhero of last resort for state and union governments. Given the resource crunch that’s set to continue in 2021, I expect the retail price of petrol to hit a swashbuckling century in my city.

#12 A maximum of 2 CPSUs will be privatised by the end of 2021.

There are many news reports indicating the union government plans to sell its stake in over 25 CPSUs. My prediction is that in only two of them (possibly, Air India and BPCL), the government will sell all its shares. In the remaining companies, the government will reduce its stake or the sale process might not complete.

#13 GST will continue to have the current five tax slabs.

The fiasco on GST compensation cess has meant that union-state relations are in the wrong place. Negotiations will be more challenging as both sides will harden their stands. They will guard the status quo and resist attempts to simplify the GST regime.

#14 The status quo at Ladakh in terms of territorial control will continue.

Even if there is a reduction in the numbers deployed, PRC is unlikely to back off. A negotiated settlement doesn’t suit the PRC.

#15 The number of US service personnel in Afghanistan will fall below 2500 by the end of 2021.

There seems to be a bipartisan consensus on Afghanistan in the US. Trump administration plans to reduce uniformed US troops from the current 4500 to 2500 by Jan 15. My prediction is that Biden will stay the course.

Finally, I disagree with RSJ’s prediction that there will be no real response from the US to China’s rise. There might be fewer tariff hikes but efforts to slow down China’s progress in advanced technology will gather steam. I did not include this in my list as I couldn’t come up with a specific, measurable prediction in relation to US-China relations. It’s hard to make good predictions!

What are your predictions for 2021?

HomeWork

* [Video] Fareed Zakaria interview on his new book - Ten Lessons For A Post-Pandemic World. Snark alert: a bit amazing that he already has a book about the post-pandemic world while we haven’t gotten over the pandemic yet! But he makes sensible points here. Watch it.

* [Article] What is Wrong with Econ 101. An excellent primer on common misconceptions about economics.

* [Article] Ajay Shah explains the critical difference between Inputs, Outputs, and Outcomes in relation to NFHS data.

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