Wednesday, April 21, 2021

Aadhaar in eligibility identification - a reality check

There is no doubt that Aadhaar has been a game-changer and a market catalyst in many areas of the Indian economy. The India stack has been truly transformational in areas like fintech. But what about its role in welfare services delivery?

When conceived, one of the primary motivators of Aadhaar was the need for a unique identifier to enable more effective targeting welfare benefits. Then, state and central governments in India were grappling with the problem of egregious inclusion errors - duplicate and non-existent beneficiaries for various schemes, especially the Public Distribution System (PDS). Aadhaar was thought to be the solution to this problem.

And it cannot be denied that Aadhaar has nearly eliminated the issue of duplicate or bogus (the person itself not alive or existent) through enrolment and physical screening. However, sceptics argued that in the process of Aadhaar screening, significant numbers of eligible poor would be screened out, as a collateral damage. But it was thought that over time - as technology improved, databases got cleaned up, stakeholders got used to it, and redressal mechanisms were streamlined - this problem of exclusion errors would disappear. Unfortunately, that has not proved to be reality.

The real problem lies in the use of Aadhaar in the targeting of beneficiaries, especially through screening them out by linking multiple databases. It was all along known, though not explicitly acknowledged and clarified by all concerned (including the government), that beyond elimination of duplicates and non-existent beneficiaries, in the Indian context Aadhaar's role in targeting was limited.

The supporters of Aadhaar argued that, apart from the duplicates and the non-existent, it could provide the accurate unique identifier that can help link multiple databases on employment, vehicle registration, tax payments, electricity consumption, bank loans and so on. This, it was claimed, could be a game changer in targeting social benefits. 

The problem with this argument/claim lies in the quality of the validating databases. Apart from 10-20% of Indians who are either employed, or own vehicles, or have taken loans, or purchased property, the vast majority have no formal signatures of their existence. In other words, at least 80% of Indians have no formal database on which they exist reliably so as to be used for Aadhaar-based validation. 

In this scenario, the government ends up using various questionable datasets for Aadhaar screening. Governments also force people into various formal database inclusion requirements so as to generate digital trails for subsequent Aadhaar validation. 

Most importantly, since their primary objective is to eliminate inclusion errors, none of the various software applications of state and central governments to enrol and process welfare schemes do not have  the requisite safeguards to prevent egregious exclusion errors. This is a manifestation of the inclusion errors elimination bias within governments. I blogged about it here

Finally, and surprisingly, technology itself has not held up well and has been a major contributor to the problems with Aadhaar implementation. The apparently simple activity of biometric validation - biometric capture, validation with Aadhaar database, and the data communication - has its struggles, especially but not only in the rural areas of the country.

The consequences of all these efforts to use Aadhaar in welfare services delivery end up doing great damage, often more than offsetting their beneficial effects. 

A recent article in the Indian Express points to the problems with Aadhaar-linked validation on accessing PDS and other welfare schemes benefits. It reproduces the salient findings of a Lokniti-CSDS Survey conducted during the 2019 LS elections.

And the denials rates were very bad in the Bimaru states,
The survey findings speak for themselves and presents strong evidence to support the concerns about the unqualified use of Aadhaar in welfare services delivery, especially in targeting. I've blogged earlier on Aadhaar's targeting challenge here

The point here is not to advocate abandoning the use of Aadhaar in welfare services delivery. Instead it is required to acknowledge the limitations of Aadhaar and the potential damage it can cause, use it where it serves the purpose, and also put in place mechanisms to address them while using Aadhaar. 

I have been surprised about the absence of good research which points to the collateral costs of Aadhaar-linked targeting. After all, it only required some surveys. It's also perhaps a testament to the misallocation of social sciences research priorities in and about India that issues of first-order importance not only get little or no attention but also get marginalised by bandwagon studies conducted by foreign researchers (which unfortunately only ends up fuelling the dominant but misleading narratives). 

It's interesting that these findings have come as a collateral benefit from an election survey conducted by an opinion polling agency, and not from mainstream research. 

See also this oped by Jean Dreze on the absence of a mechanism for poor for grievance redressal if their benefits are terminated due to Aadhaar validation problems. 

Monday, April 19, 2021

The problems with explaining development and planning implementation

Human beings are caught up with the urge to have logically consistent explanation for every thing and an operationally detailed plan for the implementation of any idea. Unfortunately, in reality, with many things and ideas, especially all-encompassing phenomena and public policy ideas, there are no such explanations or plans. Worse still, even their (explanations and plans) pursuit is a signal of having lost the way. 

Francis Fukuyama (I am only using his speech as an opportunity to highlight them, for these insights have been made by others too) illustrates both these points in a brilliant and educative lecture here.

Consider some of the biggest problems in development. Why are some nations poor and some rich? What does it take to establish stable democratic institutions? How does civil society emerge? How do countries develop capable states? How can markets be created? 

In the context of development, Fukuyama talks about the challenge of "getting to Denmark" - achievement of rule of law, strong state, accountable government, and efficient markets. It's really difficult. As he says, even the Danes don't know how they got there! Every country will have to chart its own unique path to Denmark.

But this has not deterred social scientists from trying to formulate theories that can explain these questions with logically consistent explanations. Leave aside popular story tellers like Jared Diamond or Yuval Noah Harari, even serious academic researchers have struggled to avoid this trap. 

As Fukuyama says, institutions develop organically in ways that are dependent on the particular histories and cultures of each country. Successful examples of countries nurturing modern institutions have invariably involved countries taking into account their own traditions while trying out these social, political and economic ideas. This has involved adapting ideas to their contexts and experimenting and iterating over long periods to develop acceptable and stable models. No two trajectories have been the same. 

This post by Dietz Vollrath nicely captures the point being made - differences in development are about incredibly persistent antecedent differences in populations, their cultures and institutions, and not countries. 

In a recent book, Radical Uncertainty, John Kay and Mervyn King talk about the difference between puzzles and mysteries. You can try to solve puzzles, whereas mysteries are inherently unsolvable. The questions raised above are not puzzles. They are mysteries and will remain so. 

Explanations are relevant only to the extent of being able to draw from history and inform about the challenges, pitfalls, and opportunities. It provides a perspective and an analytical framework to make better sense of the underlying processes in the unavoidable, uncertain, hard, and long journey. It cannot tell us what needs to be done in the form of actionable steps.

The book Narrow Corridor is a good example of an "explanation" of this kind so as to better comprehend such phenomena (related to development and economic growth). 

On the second point about plans to implement public policy ideas, Fukuyama again refers to how China implements policies. 

He describes what we all know about China, the Communist Party has complete control over rule of law. It can take over property and do whatever it wants. It can dispossess people and hand it over to developers who can construct malls and condos. It can also build roads and high speed rails. It's just so that most of those dispossessed unjustly are the poor and voiceless, and rarely the elites. But it does serve the purpose of facilitating economic growth. 

This is a teachable example of the limitations of "theoretical explanations" approach. The classic institutional theory and its explanation of economic growth claims that if you don't have western-type inalienable property rights - the rule of law and legal economic system that protect property rights - then you cannot realise modern economic growth. But we know that while this applied to the west, it cannot explain the growth in East Asia and China, which had none of these institutional requirements

In the context of comparing China and the US, Francis Fukuyama makes a very important remark about how both look at policy making. He says, 

The real challenge to western economic theory is this... If you don't have western property rights but have mechanisms to skew property rights in favour of those who can use it more productively, then you may actually get superior growth compared to a neutral system... That's the secret to Chinese growth than any (theoretical explanations)... What's most impressive is that they will roll out an experimental program in one province. If it doesn't work they pull the plug on it, and if it works they scale it up and move it elsewhere.
And in that sense, they are more pragmatic than Americans. I think one of our problems is that we are full of all these ideological theories of how the economy works like if you lower taxes then you'll get more growth and there are certain parts of our society that takes it as gospel and no amount of empirical information will make them not believe this anymore. Whereas the Chinese, if they try something and if it works they do it and if does not, they stop doing it.

There are no grand nation-wide scaling plans, in the sense we imagine of plans (in case of projects or the private sector). This is "crossing the river by feeling the stones". It is also similar to the framework that Horst Rittel and Melvin Webber formulated to make the distinction between wicked and tame problems. Or the idea of Minimum Viable Product and iterative execution that is often used in management thinking. 

A few observations in this context:

1. History is important. It informs with knowledge and illuminates with perspectives. It guides on the direction, and exposes to challenges and possibilities.

2. Theory is useful, but only unto a point. Theorising beyond that point is not only not useful but can be damaging. 

3. All that matters is whether the idea gets implemented or not. If this is the objective, then the only focus should be to support with implementation.

Sunday, April 18, 2021

Weekend reading links

1. In the context of the new Production Linked Incentive (PLI) scheme of the government, the Business Standard examines the air conditioners market in India. 

This is a good summary of India's manufacturing challenge, the much smaller size of local market than expected,

Currently, in the Rs 18,000-crore local AC market, 70 per cent of the cost material used in assembly are imported. Key parts like compressors, variable speed motors in indoor units, and high quality copper pipes, among others, are imported. But with no incentive for incremental assembly, manufacturers are now hoping that large global component makers set up shop here. Since key components that are being imported require huge investments to manufacture locally, setting up such facilities will not be a viable business proposition for entities in India, clarified companies. To turn such investments profitable, the kind of scale that is required does not exist in the local market. At 6 million units a year, India’s AC market is much smaller, compared to leading global markets like China (50 million units), the US (17 million), and Japan (12 million).

2. On the importance of manufacturing to developed economies, Rana Faroohar writes,

In the US, for example, although manufacturing represents just 11 per cent of gross domestic product and 8 per cent of direct employment, it drives 20 per cent of the country’s capital investment, 30 per cent of productivity growth, 60 per cent of exports and 70 per cent of business R&D, according to figures from the McKinsey Global Institute... A fascinating study by MGI, to be released on April 15, examines 30 main manufacturing sectors in the US. It finds that 16 of them stand out for their economic and strategic value, as measured by their contribution to national productivity and economic growth, job and income creation, innovation and national resilience. Apparel is not on the list. But semiconductors, medical devices, communications equipment, electronics, autos and auto parts, and precision tools are.

And this very interesting snippet about China

Chinese producers exported 71 per cent of finished apparel goods in 2005. By 2018, it was just 29 per cent.

3. I've never understood the case for lowering corporate tax rates in India. This is a good set of graphics.

4. Larry Summers makes a very persuasive critique of the post-Covid fiscal policy in the US,

If you look at the economy at the beginning of this year, prevailing forecasts were that Covid would reduce wages and salaries to American households by $20bn-$30bn a month, with that figure declining over the year. So, that would be a $250bn-$300bn hole in wages and salaries over the course of the year. So, I look at this hole and then I see $900bn of stimulus in the December package, $1.9tn of stimulus in the recently passed package and $2tn in the savings overhang, which is also likely to be spent. I see the Fed with its foot on the accelerator as hard as any Fed has ever done... That could manifest itself, as a much smaller period of excess did during the Vietnam war, in rising inflation and a ratcheting-up of inflation expectations. It could, as has often happened, manifest itself in the Federal Reserve feeling a need for a sharp and surprising increase in interest rates, and the subsequent deceleration of the economy into recession. It could manifest itself in a period of euphoric boom and optimism that leads to unsustainable bubbles, or it could all work out well... 

There’s not much argument that the 2009 stimulus, in retrospect, was too small. It was 4 to 5 per cent of GDP over a couple of years, so it was 2.5 per cent of GDP in the first year, against a gap that was 6 or 7 per cent of GDP and growing, so it was perhaps a third or half of that gap. Today’s stimulus is above 10 per cent of GDP in the face of a gap that is 3 or 4 per cent of GDP. Relative to the gap, this stimulus is already of the order of five or six times as large as in 2009... I could have been comfortable with a headline figure well in excess of $1.9tn if it had been a large-scale, multiyear programme of public investment responding to our deepest societal concerns. But that’s not what this is. It transfers to state and local governments that don’t have any new budget problem, according to the latest figures. It’s paying people, who have been unemployed, more in unemployment insurance than they earned when they were working. It’s giving cheques to families in the 90th percentile of income distribution. It doesn’t seem prudent on resource allocation grounds, as well as being problematic on macroeconomic grounds.

5. Mahesh Vyas points to the informal market distress,

As people lost jobs and jobs became scarce in 2020-21, labour that lost jobs moved from one kind of occupation to another. Large numbers eventually migrated to agriculture, apparently, when all other possible occupations failed. As a result, employment in agriculture in March 2021 was nearly 9 million higher than it was in 2019-20. This implies an eight per cent increase in labour in agriculture. Agricultural output is estimated to have increased by 2-3 per cent in almost each of the four quarters of 2020-21. The 8 per cent increase in labour implies a sharp fall in labour productivity. We believe that this huge influx of labour into agriculture is largely disguised unemployment. It hides the greater employment challenge in March 2021 than the 5.4 million net jobs lost. The biggest loss of employment in 2020-21 was among the salaried employees. As of March 2021, there were 76.2 million salaried employees. This was 9.8 million less than the 85.9 million salaried jobs observed in 2019-20.

Salaried jobs are mostly in urban India. Urban India accounted for 58 per cent of all salaried jobs in 2019-20. But it accounted for only 38 per cent of the 9.8 million salaried jobs lost. Over 6 million salaried jobs were lost in rural India. Most of these are likely to have migrated to farming. Rural India also saw nearly 3 million business persons being rendered unemployed. These could also have migrated to farming. Farming saw an increase of 9 million jobs in rural India. So, the churn in rural India seems to have been people losing salaried jobs and losing their business and these unemployed people moving into agriculture for unproductive employment. The increase in agricultural jobs in March 2021 was essentially a migration of people who lost non-farm jobs in rural India into farming. This was not an urban to rural migration.

6. More disturbing news, which points to outright fraud, about Sanjeev Gupta's business activities,

Last week the FT reported that several loans to Liberty Commodities, part of GFG, were based on suspect invoices and that Credit Suisse executives were becoming increasingly concerned that their clients were victims of fraud. Several European metals businesses told the FT last week that they had not carried out any business with Gupta’s groups, despite invoices linked to them being repackaged as notes by Greensill and sold to Credit Suisse investors.

7. The Government of India has approved the Russian vaccine Sputnik V for use in India. It has also accepted a recommendation by the National Expert Group that vaccines approved by health regulators in the EU, US, Japan, and the UK and by WHO should be granted emergency-use approval in India. Till now India had insisted that these vaccines had to still conduct additional 'bridging' trials in India before use.

This decision, which ought to have been taken much earlier and is now precipitated by the acute shortage of vaccine stocks, is a precedent for several other areas. Regulators in other sectors could explore the possibility of using the regulatory approvals in other countries to allow use in India. 

8. Interesting contrast between the employee attrition rates of TCS and Infosys. The rates for the last quarter of 2020-21 was 7.2% and 15.2% respectively for the two companies, both being all-time lows and highs. Is there something about their respective business models which explains this big differential? Or does it tell us something about work cultures in the two companies?

9. Noushad Forbes points to an interesting fact,

In January 2021, India approved its first vaccines for use. The Ken Nutgraf tells us that between July 2020 (before any vaccines had passed testing) and January 2021, the US ordered (and paid for) over 600 million doses. That’s for a total population of 300 million. In the same period, India ordered 11 million doses, for a country of 1,300 million.

Indian Express has an article which points to how India did not put forward at-risk capital (or advance market commitment to purchase vaccines) to promote vaccine manufacturing. 

From all available accounts, India did not invest “at-risk” in SII and its first commercial agreement on vaccine offtake only came in mid-January 2021. And the pricing of Covishield is a factor in SII’s struggles to keep up with demand as the private, unlisted firm has committed to deliveries under AZ’s deals and through multilateral arrangements such as COVAX. SII has now sought “roughly” Rs 3,000 crore from the government to expand its “very stressed” capacity, SII CEO Adar Poonawalla told NDTV. “The globe needs this vaccine and we are prioritizing the needs of India…we’re still short of being able to supply to every Indian that needs it,” he said. “At the moment, the price (Rs 150 per dose) that is set is profitable. However, it is not profitable enough to re-invest substantially in building capacity, innovating new vaccines — including the new variants that we may need to develop and make and go into clinical trials and other things,” he added.

10. Ed Luce on tax avoidance by US companies,

Last year, 55 of America’s largest companies, including Nike and FedEx, paid nothing in corporate taxes in spite of collectively making about $40bn in profits. The headline US corporate income tax rate is 21 per cent, which Biden wants to lift to 28 per cent. However, the official rate is not the point. The effective US corporate tax rate is just 11.2 per cent, which is below that of Ireland. The US Chamber of Commerce and the Business Round Table complain that the nation’s corporate taxes are higher than the western average. In practice, they end up close to the lowest. US tax collections amount to 1 per cent of gross domestic product, compared with a 3.1 per cent OECD average. All such avoidance is entirely legal.

11. As Covid relapses and schools start to shut down, a good report on where India stands with respect to schooling.

Learning and future prospects of a cohort of children may be the biggest long-term casualty from Covid 19 lockdowns.

12. Interesting change in the IBC, for MSMEs, which now allows promoters to remain in control during the restructuring negotiations with creditors.It may be an appropriate response for the Covid 19 induced business stress, but given India's business environment, it remains to be seen how this will work out. 

13. Progress in a graphic


Thursday, April 15, 2021

The rise in share buybacks in India

Business Standard reports that Infosys has announced a share buyback of Rs 9200 Cr.

The company board approved share buyback programme worth up to Rs 9,200 crore priced at Rs 1,750 per share, a premium of 25.12 per cent over the stock's closing price on the BSE, of Rs 1,398.60 per share, as on Tuesday.

It also has another article pointing to the rise in share buybacks in corporate India

The article argues that the recent changes in taxation has prompted this rise. From April 1, 2020, dividends in the hands of shareholders were brought under the tax net and that too at the marginal tax rate, and dividend distribution tax on the company was removed. Further, capital gains on buyback are taxed at 20%. The arbitrage opportunity is clear and irresistible.  

“Dividends impact promoters and significant shareholders with an additional tax burden of 20-30 per cent over a buy back. No reason why shareholders would want to bear that burden, especially companies with large promoter or investor shareholding,” said Praveen Raju, Partner, Spice Route Legal.

I am not sure why such regulatory arbitrage should be allowed. 

Shareholders are by definition putting forth risk capital. Technically, for them, it should not make any difference as to how they realise returns - either as dividends or buybacks. Both are realised returns on their investment. I don't know a reason why one form should get a preference over the other in taxation in the hands of shareholders.

Of course, for a company, there are important implications on which route they take to share gains with shareholders. And the corporate tax treatment should take that into account. 

The rise of buybacks also raises an intriguing point. On the one hand, corporate India has done well to emerge out of Covid in good health (though the outbreak of the second round raises questions). It's well placed to invest and grow. But, on the other hand, this rise in buybacks among the biggest companies points to less confidence on economic prospects. Buybacks are after all displacement of capital from investments. 

Much has been written on the corrosive effects of share buybacks in the US, including in The Rise of Finance

Wednesday, April 14, 2021

Domestication of fire, animals, and grains and state formation

James C Scott is arguably the most perceptive of social science scholars, belonging to the highest standards of cross-disciplinary enquiry. He's been a trenchant critique of the modern state for over half a century. 

Seeing Like a State is only one among a pile of classic works. I have recently been listening to his lectures on how the domestication of fire, grain, and animals created the conditions for emergence of the modern state (this and this). They form the basis of his last work chronicling the role of grain in creating the state. It contains fascinating historical and anthropological portraits and stories.

The sequence goes something like this. Homo sapiens can be traced back to 200,000 years, and 50,000 years outside of Africa. The first signs of sedentary communities can be traced back to 11000 years ago, roughly the same time as evidence of domestication of animals and plants. But there is no  evidence of villages with domesticated animals and plans and settled agriculture till about 7000 years back. The first form of a state appeared in the Mesopotamian lowlands (Uruk etc) about 6000 years ago, which was the last 3% of human history on the planet. The first forms of modern impersonal bureaucratic states can be traced to the Qin China of 3rd century BC. In other words, states are a very recent part of human history. 

This sequence raises questions on the conventional narrative of civilisation, which goes something like this. The domestication of plants allowed us to settle in one place, make small villages and then towns, and ultimately create civilisations. If civilisation is an achievement of the state, and if early civilisation was about sedantism, farming, irrigation, and towns, then there is something odd with this historical sequence. All these existed before anything like a state emerged on the horizon. 

A reconstructed story on civilisational development would go something like this. Human beings domesticated fire, animals, and grains. Fire ended up vastly reducing the radius of a meal. By allowing for cooking and storage, it enabled people to increase the types of foods they could consume. All this, over a long time, engendered spatial, societal, cultural, and organisational norms and practices that were appropriate for sedentary lives. This, in turn, led to the emergence of large and dense human settlements like villages and towns, which, in turn, created the conditions for state formation. 

The impact of domestication of grain and animals was transformational on the lives of human beings. It meant organising our lives around the requirements of often a single plant. Routines around preparing the field and sowing, managing the crop, harvesting and post-harvest activities, and preparing them for cooking, and finally cooking transformed human lives. It impacted even the shapes of our physical bodies, created their patterns of cooperation and coordination, and organised our work life, settlement patterns, social structures, our built environment of domus, and even our rituals. 

Moving from hunting and foraging to settled agriculture, and that too involving just one or two crops, meant a substantial narrowing of focus and simplification of tasks. In this context, Scott points out that the differences in complexity at all levels associated with the life of foraging and even slash and burn cultivation compared to sedentary agriculture based communities are of an order similar to the difference between early and Taylorised manufacturing. He argues that the transition to sedentary agriculture as similar to that of a skilled worker being reduced to the role of an assembly line worker. Alexis Tocqueville made the perceptive observation in the context of Adam Smith's pin factory example, "What can one expect from a man who has spent the last 20 years putting heads on pins?"

Fixed field agriculture is very labour intensive. Plough agriculture was avoided till population pressure and scarcity of land forced people into it. People tend to avoid it if they could. Settled agriculture was an extremely drudgery filled task, especially so for the homo sapiens who spent no more than 10-15% of their time on gathering food.

This also meant that there is nothing natural in terms of the progress from hunting and foraging to slash and burn cultivation and then to settled agriculture. He points to the physical drudgery and risks associated with domestication and settled agriculture. Unlike hunting, foraging and slash and burn cultivation, fixed field agriculture involved ploughing and other field preparatory works which entailed intense physical activity. Also, unlike foraging with its diversity of food sources, domestication of a few woodgrains concentrated risks and exposed people to risks of plant diseases and vagaries of the weather. For these reasons, people had a strong incentive to avoid domestication and sedentary agriculture. 

Accordingly, Scott points to the long time of nearly four millennia it took for people to adopt agriculture and assume settled lives. He also points to how episodes of large population destructions were generally followed by reversion away from settled agriculture towards either slash and burn cultivation or increased focus on animal husbandry. Even the Great Plague of Europe in the fourteenth century was accompanied by such reversals from settled agriculture. 

Further, unlike foraging and hunting, settled cultivation was also amenable for greater participation by women. Most of the tasks associated with settled cultivation, including cooking, were tasks that are historically associated with women. Therefore societies that took to settled cultivation were associated with greater involvement of women in production and also greater drudgery of their lives. 

Given the extent of their influence on human civilisation, Scott also draws attention to the epistemological point about who is getting domesticated. He quotes Michael Pollan and Evans Pritchard to say that while it is argued that human beings domesticated plants and animals respectively, it can just as well be argued that human beings ended up being domesticated or enslaved by the forces unleashed by domestication of animals and grains. Their personal behaviours and practices, livelihoods, daily routines, familial relationships, social organisations, and so on were all deeply impacted and transformed. Indeed the entire human life, including even their biological processes, was transformed by the process of domestication of fire, grains, and animals. 

At another level, there is also the role of slavery in motivating the earliest wars so as to get state residents who can be captive cultivators and thereby tax payers. 

Scott characterises domesticated animals, like domesticated fire, as expanding our scope of food. They go far and wide, eat up different kinds of food, metabolise them, and provide us with valuable proteins and fats. They therefore become the dedicated foragers of human beings. 

Scott describes a "domus complex", whereby stable groups of humans gathered themselves and an assortment of nonhuman animals, to highlight the emergence of densely populated communities.

Density, in turn, brings with it a proliferation of diseases, as populations provide the necessary concentration of hosts for viruses and bacteria to survive. Combined with domestication of animals, it also provided the perfect opportunity for transmission of zoonotic diseases contracted from animals. The examples of how whole populations got exterminated in the New World from diseases brought by invaders from the Old World highlights the point. 

On state formation, sedentary agriculture was central to the project. Consider a few snippets. One, all early states were slave states. Most early wars were fought to conquer populations who could then be brought home and made to undertake agriculture which could then be taxed to support the state. Besides, these slaves also could fight more wars. In fact, most early trade was trade in slaves. Two, the big walls, like Great Wall of China, were built just as much to keep farmers inside the state as it was to prevent barbarians from invading.  

Scott points to the domestication of three grains - rice, wheat, and maize - as critical  in the process. Incidentally, these three grains make up nearly half the calories consumed by human beings even today. These three grains had pre-defined production cycles, were standardised, had to be harvested and the production could be easily assessed through routinised processes (unlike tubers which could be left inside the ground or millets whose production cycles were less certain). It became possible to assess production and levy taxes, which was a critical requirement to support the state. In fact, only these cereal grains can form the basis for taxation. 

Root crops are a form of state resisting crops, since they are easy to grow, and have no specific harvest requirement and can be left underneath for a long time. Scott describes growing them as agriculture of evasion.

In fact, even among grains, there is nothing like wet rice cultivation in concentrating state making. Rice grows above the soil, is grown the same times of the year, ripens at the same time, can be easily confiscated after threshing, stores quite well, high value per unit weight, and can be transported easily over long distance.  

Scott points out that sedentary agriculture by itself did not lead to the formation of states. But he's not clear (using his narrative on domestication of grain) about what forced state formation in the Mesopotamian lowlands. It is likely, as others have pointed out, that when faced with climate related pressures, those residing in those areas doing settled agriculture consolidated to form states. 

States in turn fought with each other, which necessitated more taxes, and organised armies to fight those wars. This, in turn, called for bureaucracies to collect taxes and manage the logistics of recruiting and managing armies. The modern state gradually evolved. 

In sum, as Scott says, states need alluvium or loose soils (to grow grains), navigable waters, and places where you can cram large numbers of people into small areas (grain-manpower module). Sedentary agriculture is an essential requirement for state formation. 

The geography of state depended on flat land and navigability over water to concentrate populations and undertake trade and conquests respectively. It also highlights Scott reinforces the point about how historically water was far easier for social contact and integration through trade and conquest than land. For example, as late as 1800, it took less time to travel from Southampton to Cape of Good Hope by sea than from London to Edinburgh by stagecoach. 

To highlight this, he puts forth the fascinating idea of "friction of distance maps" or maps of the world that measures sea-based and land-based distances separately in terms of their respective speeds of travel (with ships and carriage). In these maps, the the unit could be a distance travelled in a day. It would vastly reduce the distances where there was easy waters and vast increase distances where the topography was rugged mountains and rivers. This would give a much better grasp of social contact and integration. 

On the resistance to state building projects, Scott points to the more or less contiguous hilly periphery of South East Asia, encompassing the hill regions of eight countries, which are largely populated by non-state communities. In contrast the valley and alluvial low lands are populated by the mainstream populations of these countries. He describes these hill populations as having emerged in response to flight from state-building projects with its taxation, conscription, diseases, and dissent including religious persecution (eg. dissident Buddhist sects in hills of Myanmar). 

In fact, using the example of S E Asia, Scott argues that far from being primitive tribes totally unexposed to modern civilisation, the hill people are those who have fled the Han, Burmese, India, and Thai civilisations over a long period of nearly 2000 years. He argues that this is deeply reflected in several signatures across their social and personal lives and livelihood activities. 

While such non-state communities occupy the hills in South East Asia, they are also known to occupy the valleys in South America or swamps in Middle East and other places in Africa. But in general, state formation projects have struggled except in plain and alluvial lands because of the problems with conquering and concentrating populations. Scott's point is not that civilisations can't climb hills, but that for the last 2000 years, peoples have been climbing hills to escape the control of the state. These areas are regions of refuge. As Ernest Gellner has written, marginal tribalism is the type of tribal societies exists on the margins of non-tribal society as refuge from state building projects. 

He gives the example of Cossacks, who are considered the most soldieristic ethinic group in Russia and were used by Tzars in their armies. They were originally runaway serfs from Russian serfdom to the peripheral non-state areas. And their identities were formed at the margins as they fled the oppression. 

In summary, Scott characterises state making as being associated with several undesirable features for its populations - forced agriculture, slavery, diseases, wars, weakening of kinship ties etc. In fact, he calls state a "late Neolithic multi species resettlement camp"! Therefore, populations most often preferred to remain outside state limits. Given the central role of settled agriculture in state formation, populations made strategic choices to remain as nomads and foragers. In fact, the term barbarians is used to refer those residing outside state limits. They were nomadic, pursued foraging, and were governed by kinship norms, and did not live under states.

Reading Scott, one gets the impression of a historical narrative which is so tightly fitted into a prior hypothesis. It appears like a mega history. What makes him by orders of magnitude more formidable than the likes of other faux mega historians (Yuval Harari, Jared Diamond, Peter Turchin etc) is the rigour of his research and the orthodoxy of his conceptual frameworks. In many respects, I feel only another equally formidable and granular scholarship can refute Scott. 

At a higher level, Samuel Moyn  has a very good critique of Scott's works, 

Scott rarely mentions the forms of social justice that only modernity and its states have permitted and put into practice, however faulty and outweighed by state crime and excess they are. Instead, he has sought to project an immemorial dialectic between the state and its enemies onto the whole of human history. This has made him one of the greatest teachers of how costly modernity has been; yet it has also caused him to obscure the fact that modern states could strive not simply for civilizational splendor, but also for the freedom and equality of all.
This is a broader alternative point, which however cannot refute the descriptive interpretative parts of Scott's work.

Monday, April 12, 2021

Covid 19 and income, spending, and savings in US

Neil Irwin and Weiyi Cai have three excellent graphics that summarises the economic impacts of Covid 19 stimulus programs in the US. 

On household incomes

Americans’ income from unemployment insurance benefits was 25 times higher from March through November 2020 than in the same period of 2019.

On household spending

On household savings

Including the latest $1.9 billion stimulus, the effects are most likely larger still.

Then the stimulus has had its inequality dimension:

So how can the number of jobs be down 6 percent but employee compensation be down only 0.5 percent? It has to do with which jobs have been lost. The millions of people no longer working because of the pandemic were disproportionately in lower-paying service jobs. Higher-paying professional jobs were more likely to be unaffected, and a handful of other sectors have been booming, such as warehousing and grocery stores, leading to higher incomes for those workers.

This is an important reason for the persistence of the equity market boom despite the profound economic shock and economic output compression. It's a classic asset inflation driven by too much money chasing too few scrips. Worsening matters, thanks to the likes of WFH and social media, too many people have gotten into the game. 

These raise important questions. How much of these boosts to household balance sheets are a transfer of wealth from future generations? What will be its impact on public spending in the years ahead? Will inflation and economic growth be able to wipe out the increased debt burden over the medium-term? Will this inflationary episode be a manageable one? 

Saturday, April 10, 2021

Weekend reading links

1. A summary of the petrol/diesel taxation 

The Union and state levies put together account for roughly 55 per cent and 52 per cent of the retail price of petrol and diesel respectively; these work out to around 135 per cent and 116 per cent of the base prices of the two products respectively. It is also interesting to note that the central levy on petrol and diesel works out to around 36 per cent of the retail price while the state component is around 20 per cent (diesel) to 28 per cent (petrol)... of the total central levies on petrol and diesel, Rs 1.40 per litre and Rs 1.80 per litre is the basic excise duty for the two fuels, and Rs 11 per litre and Rs 18 per litre is the special additional excise duty. Both these components form part of the divisible pool of taxes, 42 per cent of which (approximately Rs 52,000 crore) goes to the states. The remaining portion of Rs 18 per litre in both cases is the Road and Infrastructure Cess and Rs 2.50 per litre and Rs 4 per litre is the Agriculture Infrastructure and Development Cess which are retained by the Centre, to be used only towards road and agricultural infrastructure development.

In the article Sushil Modi also presents the pros and cons of bringing gasoline under GST,

Given the price build-up of petrol and diesel in today’s scenario, a 28 per cent levy of GST on the base price would fetch around Rs 5.40 per litre on petrol and around Rs 5.45 on diesel to the central and each of the state governments as against the current yield of Rs 32.90 per litre on petrol and Rs 31.80 per litre on diesel to the Centre alone and an average of around Rs 20 per litre and Rs 15 per litre on petrol and diesel, respectively, to each of the states. This, however, would bring down the prices of petrol and diesel to around Rs 55 per litre even though lowering the prices to this level would entail a staggering loss of revenue to both the Centre and the states. Unless, a commensurate levy of non-creditable excise duty/VAT (equivalent to the difference between the current yield of central/state levies and the expected GST yield) is imposed by the Union and the states, this would translate into a revenue loss of around Rs 3 lakh crore on account of petrol and around Rs 1.1 lakh crore on account of diesel to the Centre and the states, at current volumes.

As to the global practice on gasoline taxation, 

Being demerit goods, fuel oils and liquor are almost universally subject to a dual levy by countries that implement any kind of VAT or GST. The levy is a mix of GST at a fixed percentage of the price which qualifies for credit in the value chain and a fixed amount or percentage of the price which is not creditable and is thus outside GST... These products are subjected to a plethora of levies like VAT, excise duty, storage levies, security levies and environmental taxes in the EU and the total incidence of such taxes ranges from around 45 per cent to 60 per cent. In Canada, the tax on these products ranges from 15 per cent GST (5 per cent in case of non-participating provinces) plus around 25 to 30 cent per litre. The US is an exception in these matters since it imposes taxes at rates as low as around 15 per cent.

2. Historically dry bulk shipping rates have fallen by 79% from 1850-2020.

3. Neelkanth Mishra points to India's term premium, the difference between repo rate and 10 year G-Sec, 
From an average rate of 73 basis points since 2011 (one basis point is one-hundredth of a per cent), and 120 basis points in 2018 and 2019, the 10-year term premium is currently 215 basis points, having risen 35 basis points since the budget presentation, and among the highest in the world.

He also points to the breadth of India's bond markets,

Over 15 years, the share of banks in the ownership of outstanding central government bonds has fallen from 53 per cent to 40 per cent now, as policy has correctly tried to reduce financial repression (that is, forcing banks to deploy the deposits they collect into government bonds). But no alternative buyer of size has emerged to fill the space vacated: Despite improving penetration of insurance and formalisation driving growth in pension inflows, their share of bonds outstanding has in fact shrunk over the last 15 years. The RBI sometimes buys bonds to inject money into the economy, but of late this space has been used to buy dollars to save the rupee from appreciation.
The expected suggestion is to get new types of buyers, or further liberalisation of India's G-Sec market to foreign investors. 

4. Arvind Subramanian and Josh Felman examine India's debt sustainability.

They propose a fiscal consolidation framework which deviates from the current one which targets public debt to GDP ratio, gross fiscal deficit, and revenue deficit, and proposes targeting just the primary balance,
It is inherently simple and has the eminent virtue that it — much more than the existing or proposed targets — is closely linked to meeting the overall objective of ensuring debt sustainability. Put differently, a primary surplus is a shield that guards fiscal sustainability against the risk of the growth-interest differential turning unfavourable in the future. Finally, the Centre should not set out yearly targets for the primary balance. Instead, it should announce a plan to improve the primary balance gradually, by say half a percentage point of GDP per year on average, making clear that it will accelerate consolidation when times are good, moderate it when times are less buoyant, and end it when a small surplus has been achieved.
5. Is Mahindra & Mahindra emblematic of what ails corporate India? Sample this about lack of any focus,
By its own admission, the group is present in 22 industries, which encompass 150-plus companies. This makes M&M as diverse as the Tatas but with group revenues less than a sixth of the latter. In the last two decades, M&M has spent a fortune to diversify into almost everything from two-wheelers and passenger cars to hospitality and e-commerce. Most of these ventures have failed to be earnings-accretive and continue to be cross-subsidised by the parent company. In fact, the tractor and the IT services businesses are the only two that have consistently generated free cash flows for the parent while others have been either loss-making or cash guzzlers... RoCE... has averaged around 12 per cent in the last five years... the revenues of the automotive division, which has historically accounted for nearly half of M&M’s revenues on a consolidated basis, have not grown in the last eight years and the profit of M&M Financial Services is likely to hit a decade-low in FY21. M&M’s market share in sports utility vehicles is now down to 13 per cent from 50 per cent a few years ago. While the group remains a market leader in tractors and farm equipment, its lead over the rivals is shrinking and the division requires a consistent dose of investment to stay ahead of large domestic competitors and deep-pocketed foreign competitors. Most of the group’s profits came from the farm equipment division, which accounted for just a tenth of M&M’s capital employed.
Is also Mahindra, like several others, a good example of the typical value destroying Indian family business?

6. Staying on with the issue of corporate governance in India, Kanika Datta draws attention to the difficulty of the so-called independence of Board and independent Directors,
Why is a board needed? The broad theory is that it is another layer of shareholder safeguards apart from proffering managements the benefit of their expertise... The fact that boards, many of them staffed by industry stalwarts, have failed to exercise these fiduciary duties — from Satyam in 2008 to ICICI Bank in 2012 to IL&FS in 2018 — now explains the extra attention that is being paid to strengthening the independent director’s role. But this, too, is a chimera. Though board appointments are approved by shareholders — with new provisions being considered for explicit minority shareholder approval — the fact is that board members are associates or friends of the chairman or MD. Can they seriously be expected to act independently in the interest of an amorphous shareholder body over the tangible presence of the promoter or MD who appoints them in the first place? The same arguments apply to powerful professional CEOs. The decidedly opaque manner in which the ICICI Bank board addressed the question of Chanda Kochhar’s conflict of interest in approving a loan linked to her husband’s business interests is one example. IL&FS’ board, similarly, appeared notably incurious about Ravi Parthasarathy’s worst practices in infrastructure financing, as was YES Bank’s board to Rana Kapoor’s questionable deals.

7. The OECD anchored long-drawn negotiations on harmonisation of corporate taxation rules appears to have achieved a breakthrough with the US presenting a proposal for taxing multinational corporations. The negotiations have been centred around a new regime for taxing MNCs and also agree on a global minimum tax rate. The US has now sent a proposal to all participating countries that multinationals pay taxes to national governments based on their sales in each country. 

This is a big break from the Trump administration's insistence on a "safe harbour" provision that would make compliance by US technology companies voluntary. However, the Biden administration wants to limit this to the largest and more profitable companies in the world. It's likely to include about 100 companies, comprising US tech companies etc. The Biden administration has called for raising US corporate tax rates from 21 to 28% to raise about $2.5 trillion over the next 15 years to pay for more than $2 trillion in investments. 

8. Fascinating article (HT: Ananth) about the discovery that muon, a subatomic particle, violates the laws of physics when shot through an intense magnetic field. 

9. Since the GFC, and especially since 2014, Indian governments have enjoyed the benefits of lower oil prices, especially on two fronts. Foremost, it has boosted the government's tax revenues by over a percent of GDP. This is huge. Besides, by keeping inflation down, it has allowed for interest rates to be kept low, in turn containing borrowing and debt service costs. 

Now the rising petroleum prices pose the exact opposite problems. The tax cushion is now depleted and government faces the decision of whether to keep passing on the ever increasing oil prices. Besides, the attendant inflationary pressures also adds to the pressures on borrowing costs.

10. TT Rammohan raises questions about the recent Supreme Court dispute between Tata Sons and Cyrus Mistry and SP Group, which highlight the dissonance between law and corporate governance. 

11. Econ 101 argues against administered interest rates. Accordingly, India's various small savings schemes have been the target of critics who have advocated its phase out.

Rajesh Mahapatra has an oped which brings out the savers side of the story and it's not easily brushed aside given the Indian context. Multiple committees of the government striating from 2001 have recommended linking small savings rates to G-Sec rate, reseting them once a year (and against doing it quarterly, as is being done now), and changing rates by no more than 100 basis points at a time. The argument in favour of linkage being that small savings are overwhelmingly invested in various government securities.

While he does not provide numbers to back these claims, in a country with very low financial savings and even lower (relative to others) bank credit to GDP ratio, the importance of small savings should not be underestimated,

Notwithstanding the merits of such arguments, it is important to recognise the larger role that small savings have played in contributing to overall economic growth. For decades, small savings have constituted an important source of household savings, funded development programmes of state governments and offered a safe and secure source of income to senior citizens.

12. Rathin Roy offers a useful analytical framework to assess India's post-Covid economic recovery. It's based on the relationship between the rates of return on capital, r (which is predominantly owned by the rich) and economic growth, g (which is more broad-based reflection of income growth). In developed economies, r>g at steady state, whereas the opposite holds in developing countries which are undergoing catch-up growth. In the former, widening inequality is countered by robust redistributionary social safety net. 

Roy argues that it is a matter of concern that pre-Covid India had rising inequality despite r<g, and since Covid, r appears to be growing faster than g, thereby widening inequality even more. 

13. Scott Galloway points to the importance of trust and scarcity in financial intermediation, with the example of Bowie Bonds,

In 1997, seeking more control over his songwriting catalog, David Bowie raised $55 million with Bowie Bonds. The bonds paid 7.9 percent interest over a 10 year-long term — a scant premium to a U.S. 10 Year Treasury Note at 6.4 percent. What made Bowie Bonds unique was the collateral, or source of trust: future royalties on Bowie’s music, which the bondholder felt people would continue to value. Moody’s rated the bonds A3 and Bowie used the proceeds to buy out his former manager, shoring up the bonds and securing long-term control of his music.

Though innovative in its collateralization, the Bowie Bond was on its face a vanilla financial instrument, no different in form than a bond issued by GM or P&G. In order to connect his art and potential investors, Bowie had to rely on the (expensive) apparatus of traditional gatekeepers in finance and entertainment to imbue his bonds with the essential attributes of trust and scarcity. The royalty stream (trust) was mediated by lawyers and accountants in big publishing houses, and the legitimacy of each individual bond (scarcity) was dependent on the financial powers of Wall Street.

The blog post itself is about the use of non-fungible tokens to securitise art. Owner of the art attaches an NFT to the work which gives him/her the sole discretion to designate any copy of that artwork as the sole authentic copy at any point in time. Unfortunately, this applies only to those NFTs created when the owners are alive.

14. Via Dani Rodrik's twitter feed, this excellent thread on the life of Albert Hirschman. In terms of scholarship which engages with the real world, one could easily say that there is Albert Hirschman, and then there are the rest. It draws from this blog post by Oliver W Kim. 

15. Finally, again from Rodrik's feed, this is an excellent database of political affiliations in elections across countries over several years. See this on India.