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Price Control on Gasoline in the U.S. (1970s)

By Ashish Devadiga

The 1970s price controls had saved consumers between $5 billion and $12 billion a year in gas costs, but at the price of stifling domestic oil production and causing an artificial shortage of as much as 1.4 million barrels a day.

In the 1970s, when the price of crude oil tripled on the world market the then President of United States, Nixon imposed a price ceiling, on both crude oil and gasoline. There was a maximum price allowed by law to be charged for gasoline. Any gas station owner charging more than this maximum price would be guilty of fraud. Price controls were turned in to address the shortage of gasoline. This was done due to e public demand to keep the prices low. But the artificially depressed pump prices imposed during the oil crisis of 1973 — which stayed in place in various iterations through 1980 — brought about lines at gas stations and an artificial shortage of gas.

Dealers sold gas on a first-come-first-served basis, and drivers had to wait in long lines to buy gasoline. The price controls resulted in a fuel-rationing system that made available about 5 percent less oil than was consumed before the controls. Consumers scrambled and sat in lines to ensure they weren’t left without. Gas stations found they only had to stay open a few hours a day to empty out their tanks. Because they could not raise prices, they closed down after selling out their gas to hold down their labor and operating costs.

In an older version of Odd-Even policy, Oregan limited fuel supply to odd and even numbered cars on alternate days.

In an older version of Odd-Even policy, Oregan limited fuel supply to odd and even numbered cars on alternate days. Image Source: Business Insider

The true price of gasoline, which included both the cash paid and the time spent waiting in line, was often higher than it would have been if the price had not been controlled. In 1979, for example, the United States fixed the price of gasoline at about $1.00 per gallon. If the market price had been $1.20, a driver who bought ten gallons would apparently have saved $.20 per gallon, or $2.00. But if the driver had to wait in line for thirty minutes to buy gasoline, and if her time was worth $8.00 per hour, the real cost to her was $10.00 for the gas and $4.00 for the time, an overall cost of $1.40 per gallon

To meet the decrease in their revenues, gasoline stations would commonly charge for washing the windows, checking the tires, and so forth. The price of oil used in oil changes would be raised. Those having oil changes at the station were favored in access to gasoline during the years of the price ceiling. Some gas station owners ran the line to the gasoline pump through the car wash.

By the Iranian oil crisis in 1979, the controls had grown unsustainable as oil prices escalated in global markets. President Carter waived most of the controls on oil and gas prices to make more fuel available.

The resulting sharp price increases ushered in a new problem: double-digit inflation, as businesses quickly passed on their higher fuel costs and workers’ unions demanded cost- of-living increases to keep pace with higher prices. The surge in inflation put the Federal Reserve in crisis mode. It ordered it’s largest-ever increase in interest rates in October 1979, plunging the economy into a deep recession.

By the 1980s, Congress and the administration had figured out that price controls were not the answer. President Reagan, abolished the oil and gas price controls upon entering office in 1981.

Harvard University economist Joseph Kalt concluded that the 1970s price controls had saved consumers between $5 billion and $12 billion a year in gas costs, but at the price of stifling domestic oil production and causing an artificial shortage of as much as 1.4 million barrels a day.

The price ceiling did not really help and a better alternative would have been to let prices rise, giving oil companies an incentive to produce more and consumers an incentive to conserve.

Ashish Devadiga is a GCPP-13 alumnus

[This and the other two essays on Price Controls was submitted as part of the Economic Reasoning coursework. The question asked students to identify instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control. The 3 best answers were picked. The other two were on Price Control on Prescription Drugs in Europe and Price Control on Milk Products in Vietnam].

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Price Control on Milk Products in Vietnam

By Hiren Doshi

A price cap on milk products in Vietnam led to shortages, illegal production and distribution, distortions in the market and a dramatic drop in profitability of manufacturers. 

In 2014, The Ministry of Finance in Vietnam set ceiling prices on 25 milk products (which was later increased to cover almost 600 products) for children below the age of six in a move to contain constant price hikes on the dairy market. This move was in response to hyperinflation in price of milk powder in few years preceding 2014 and was aimed to help make the milk for children affordable for the citizens. Vietnam has around 10 million children below the age of 6 and was considered price sensitive to milk prices.

The price of powdered milk had approximately increased 30 times since 2008 until 2014, at between 3-20 percent at a time. The retail price of powdered milk in Vietnam was about 1.4 per litre USD and almost 1.5X as compared with Thailand and Malaysia making it among the highest in the world. Powder milk market in Vietnam was very competitive, with almost 800+ milk products catering for children under 6 years old, forcing the manufacturer to routinely spend far in excess of permitted advertising and marketing cost which then translated into higher cost for the consumers.

The regulation which was to be in effect for 12 months brought down the recommended wholesale price ceiling 15-20% below the prevailing wholesale prices. The price ceilings were based on three grounds: the results of inspection at five dairy firms, price developments of the dairy market and prices of similar products on regional markets. Retailers were also mandated to reduce their costs, be reasonable with their profit margins and charge retail prices which did not exceed 15% over the wholesale ceiling.

Milk Price Hiren

Some of the consequences in response of price ceiling were as below:

1.    Some milk suppliers in Vietnam pulled products whose prices was to be capped under the regulation from shelves and replaced them with new ones a week before the ceiling prices become effective. They worked around the regulation by launching new products with new labels but similar ingredients at much higher prices, and reducing weights of products.

2.    Even though the ceiling on advertising spend for milk products was abolished, spends on advertising and marketing by milk producers came down due to limited margin after the price ceiling.

3.    According to the research carried out by Nielsen in 2015 in Hanoi and HCM City, it indicated that milk products for children less than six years old were reduced 10 percent and 9 percent in terms of quantity and price, respectively against the previous year, after enacting the price ceiling. This means the consumption actually went down after the price ceiling was in force. This was counter intuitive to the very reason of putting the price ceiling in place.

4.    After price ceiling was extended for one more year after being in effect from June 2014, Nielsen noted that milk prices in Vietnam have been no higher than prices found in the middle group in Asia. Its statistics in July 2015 revealed that average milk prices in the high end segment in Vietnam were similar to those in other countries in the region, such as Malaysia, Thailand and Philippines.

5.    In April 2015, the European Union removed milk production quotas which existed for more than 30 years, leading to the worldwide drop in milk prices. In 1984, quotas were applied to limit the over-abundant supply in Europe, and milk farms that produced over their quotas were fined. This made the cost of importing powder milk cheaper than sourcing milk from local cow farmers.

6.    In early 2016, prices of milk sourced from cow farmers in Vietnam were about VND12,000-14,000 (US$0.54-0.63) per kilo, nearly double that of milk shipped from the U.S., Australia, New Zealand, and European countries, which sold for about VND7,000-9,000 ($0.3-0.4) per kilo.

7.    One interesting outcome of locally sourced milk becoming non-competitive was that local cow farmers sold record number of cattle in the last 12 months. For instance, in Cu Chi District, Ho Chi Minh City, nearly 10,000 cattle of 40,000 being reared were sold in the last 1 year.

Price ceiling on milk products for children under six was introduced in response to large and frequent price increase of milk, making milk prices in Vietnam one of the highest in the world. It was meant to increase the consumption of milk and help reorganize the milk industry ecosystem which keeps the low prices sustainable. In the end this move did not make any of the stakeholder happy – consumers continued to complain about high prices, manufacturer’s sale & profit dropped while the poor cattle suffered change of ownership during the worst crisis for local cow farmers.

Hiren Doshi is a GCPP-13 alumnus. 

[This and the other two essays on Price Controls was submitted as part of the Economic Reasoning coursework. The question asked students to identify instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control. The 3 best answers were picked. The other two were on Price Control on Prescription Drugs in Europe and Price Control on Gasoline in the US in the 1970s].

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Price controls on prescription drugs in Europe

By Anjana Kaul

The unintended consequences of price controls on prescription drugs far outweighs the benefits.

Europe has had price controls on prescription drugs for decades. While this has helped the state save a lot in terms of healthcare costs, it has also had a number of unintended consequences that, in many cases, outweigh the savings on drug costs.

Healthcare services in most EU countries are provided primarily by the state. Hence the state stands to gain the most from such price controls. Each country has a regulator which negotiates the price of each prescription drug with the pharmaceutical company that is marketing the drug in that country. While an approval for efficacy and safety of a drug can be given by any EU country regulator and is applicable across the EU, the price of the drug has to be negotiated with each country’s regulator independently.

European countries have certainly benefited from these price controls. A 2004 study by Bain & Co states that in 2002 EU countries spent 60% less per capita on prescription drugs than the US. It also states that the EU countries have saved $840 Billion in the decade from 1992-2002 on drug costs.

However, these price controls have had many other consequences – some that can be easily quantified and others somewhat intangible.

Long price negotiations delay entry of new drugs into European countries. Pharma companies need to recover their R&D costs as early as possible to maximize returns hence they delay marketing drugs in countries with price controls. It was observed that in EU countries it takes anywhere between 7-19 months from drug launch to market availability while in the US it takes about 4 months. Moreover, when a regulator and the pharmaceutical company are unable reach a consensus on price on a drug, that drug remains unavailable in the country for even longer. These delays can sometimes result in higher healthcare costs for patients who otherwise would have been treated more effectively by the new drugs. It can also result in longer absence from work due to illness and in extreme cases can even lead to avoidable loss of life.

Drug approvals for efficacy and safety are not global so pharma companies first seek approvals for new drugs in countries or regions where they can maximize the price and quickly recover their R&D costs. It is easier to seek approval from a regulator if drugs have been developed and tested with a local country population in mind. This has led to a significant migration of pharma R&D activity from the EU countries to the US where drug approvals are faster and drugs can be released at higher prices.

This migration of R&D activity has reduced investment in pharma R&D in the EU, which is not just a direct economic loss to the EU countries but also compounded by the loss of network effects of R&D such as training, clinical trials, equipment manufacture, etc.

The number of drug patents from EU countries is declining causing loss of patent revenue. The controlled drug prices and the reducing patent revenues have resulted in declining profits for the European pharma companies.

When R&D divisions are shifted to the US, there is a flight of high value talent along with them. These R&D experts and their families would in turn have created their own network effects from high end services & retail activity that is an additional economic loss when they migrate.

Added to this economic loss is the reduced tax revenue for the state due to the declining profits of the pharma companies and the flight of high value talent.

Price arbitration across different EU countries creates opportunities for middlemen to profit by purchasing drugs in countries with lower prices and selling them in countries with higher prices. The lack of trade barriers amongst EU countries makes this very hard to control. This price arbitration gets extended to a global scale when drugs are sourced in Europe and illegally sold at much higher prices in the US.

The study done by Bain & Co illustrates with a case study of Germany that the benefit of imposing price controls on prescription drugs in fact leads to a net loss. In 2002, Germany saved $19 Billion on prescription drug expenses. However, if some of the costs of the above consequences were quantified (as shown in the study) they would add up to a loss of $22 Billion, a net loss of $3 Billion.

Anjana Kaul is a GCPP-13 alumnus 

[This and the other two essays on Price Controls was submitted as part of the Economic Reasoning coursework. The question asked students to identify instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control. The 3 best answers were picked. The other two were on Price control on milk products in Vietnam and Price Control on Gasoline in the US in the 1970s].

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Why Moderate Inflation is a good thing

By Prakhar Misra

Inflation is not always bad for the economy. Some amount of inflation can aid the growth of an economy.

inflation_1811026b

In economics and in public discourse, inflation is a highly debated term spurring very extreme emotional responses. The media reports tend to suggest, albeit subtly, that inflation is a bad thing and that rising inflation is a cause of concern that needs to be dealt with immediately.

However, that is not true. Inflation, like all other Economic concepts is one that is beneficial if maintained in balance. Too high or too low inflation can be problematic. The costs of a deflationary economy are all too clearly seen in Europe now and in Japan since the 1990s.

Inflation is basically a resultant of supply and demand of money in relation to the amount of goods and services produced in an economy. If there is more money, the value of each unit of the currency is reduced. So, it makes the currency less valuable in effect causing a rise in price. But, there is a general consensus that some amount of moderate inflation in healthy for the Economy.

The first caveat of this wisdom lies in John Maynard Keynes’ description of “Paradox of thrift”. Keynes talked about this paradox with respect to savings rate and one way to go around it was to have some positive inflation. If there is no inflation and prices keep reducing, then individuals will keep delaying their spending which will lead to a fall in aggregate demand resulting in less production, layoffs and hence a decline in Economic growth. Hence, having a positive inflation rate helps in preventing such a situation.

In theory, inflation also helps in increasing production. More money means more spending which further translates to an increase in aggregate demand. This increase feeds into increasing production of goods in the country.  Infact, the Phillips Curves showed that by increasing inflation, we can successfully bring down unemployment levels. Although the 1970s era of ‘stagflation’ successfully rebutted this claim- but it was in the minds of many until then.

Higher inflation would lead to a price rise which would push companies to raise wages too. This might not be by full effect of inflation, but some sort of a rise can be expected. Thus, the rise in prices is more than the rise in wages as revision of wages takes time due to rewriting of contracts. This leads to an increase in the income of the firm which in turn helps in reducing the debt on loans and mortgages, effectively benefitting companies.

Inflation also helps governments reduce its debt burdens in 2 ways.Firstly, a healthy dose of inflation in the economy helps governments to collect more taxes. Even if the economy is stagnant, as long as there is inflation- the revenues of the government would continue to increase. Thus, even though inflation may devalue the currency – it may be offset by the excess money coming into the system that can be used to invest, build, hire more staff and spend in other areas of boosting economic activity. Secondly, the debt owed by governments to its lenders is not indexed to inflation. Thus, a higher rate of inflation reduces the value of the government’s debt, assisting the government in effectively paying back a lesser value than what it would otherwise.

But, all of these benefits are to inflation only if it is administered in moderation. Unless interest rates are higher than inflation rate, too much inflation leads to an inflationary spiral. Because of high prices- the profits of a company rise and so they hire more workers and increase wages. So, now goods are priced higher and people have more money to spend- and this leads to a successive increase in price rise. So, prices keep rising, but we don’t receive any benefit for our excess money. A deflationary spiral is equally dangerous, if not more. Prices reduce and people spend less because they delay their spending in expectation of prices to reduce further. This leads to companies laying off workers and cutting costs which further leads to a price-cut and so on.

For the first time in 2015, a Monetary Policy Framework was signed between the RBI and the Government of India which categorically states the following with respect to inflation: “The target for financial year 2016-17 and all subsequent years shall be 4% +/- a band of 2%.”

The target for January 2016, from the MPF, was to bring Inflation below 6% and the RBI has succeeded in doing that. Although, some Economists argue that even 5% is too high for India given that many countries in the world are hovering between 1-3% inflation rate.

A 3% inflation rate is generally accepted to be ideal, i.e, pushing a country to economic growth and preventing it from sliding into recession. While the inflation target of USA is set at 2%, countries like Zimbabwe had an inflation rate of 231 million % until very recently. So, Inflation can go either way depending on how well it is managed.

As the Austrian philosopher and economist Ludwig Von Mises said, “The most important thing to remember is that inflation is not an act of God, that inflation is not a catastrophe of the elements or a disease that comes like the plague, inflation is a policy.”

Prakhar Misra is a Chanakya Scholar at the Meghnad Desai Academy of Economics. He is an Alumnus from the GCPP. He tweets @prakharmisra .

 

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Have the rate cuts been effective?

By Prakhar Misra

The effect of the monetary easing by the RBI over the past year has not transmitted through to the end consumer bringing into question the efficacy of monetary policy in India.

The Reserve Bank of India, over the past year, under the aegis of its Governor Raghuram Rajan has given quite a huge boost to the economy. It cut the policy rate to 6.75%, the lowest in four and a half years. However, in the largely intricate financial world, the result is not immediately perceivable as the banks haven’t passed on the benefits of the RBI measures to the end consumer.

Over the past year, the RBI has cut interest rates 4 times. The last cut was by 50 basis points, which is unprecedented, as until now, the RBI has been changing the interest rate by ‘baby steps’ (25 basis points). The below graph shows that at the beginning of the year interest rates were at 7.75% and have been dropped by a percentage point over the past year.

 

Repo rate in India since 2012

Repo rate in India since 2012

A cut in the interest rates should ideally translate to growth in the economy as the firms and corporations now have to borrow money at a lesser price and thus can use that money to invest in more physical capital and human capital – adding to the employment and organically, to the GDP. This reduces unemployment and increases wage rates as well. The low interest rate is an advantage to consumers also because they can borrow and spend money at a lower cost. This adds to the Indian GDP as it boosts sectors like the real-estate, consumer goods, etc.

The only disadvantage of a policy aimed at monetary easing is the fear of inflation. The RBI had set a target of maintaining inflation below 6% and they have done pretty well in this regard. Inflation was about 11% in 2012 and has fallen gradually to just above 4% this year, indicating that this is an opportune time to decrease interest rates and allow the economy to pace-up without the fear of rising inflation. After the GDP fell to 7% from 7.5% the previous quarter, there seems to be a need for such a rate cut to be in effect.

However, the problem lies in the fact that the RBI controls only the Policy rate(or the repo rate). This is also called the overnight borrowing rate which is the rate at which the banks either borrow from one another, or borrow from the RBI in order to maintain their balance sheets. So, the general perception is that if the borrowing of banks is made cheaper, then that should translate to the consumer as well and borrowing should be made cheaper for the end-user too. With this intention, the rate cut was implemented in the first place. But, it hasn’t gone down this way.

The base rates set by major banks, as of end November, is still above 9%. HDFC is at 9.35%, SBI and ICICI at 9.70% while Bank of Baroda and Canara Bank are at 9.90%.

Clipboard02

One reason could be that banks, themselves, have not been borrowing enough from the RBI for this rate to actually affect them. The following graph shows that for most of July, August and September- banks have not borrowed a lot from the RBI.

Thus, it can be concluded that the policy rate cut may not affect the banks as much as one expects it would and that this outcome is not entirely surprising in that light.

Competitiveness among banks also doesn’t seem to push them towards reducing the base rates so as to gain a larger share of the pie. After the interest rate cut of half a percentage point in January this year, only 4 out of 47 banks had lowered their interest rates. So, no one seems to be in a hurry to act in this domain.

Rising Non Performing Assets (NPAs) may be yet another problem that the banks might want to mitigate, thus keeping rates high. The number of bad loans are close to 6% from 4.4% in March earlier this year. Infact, Minister of State for Finance, Jayant Sinha announced that NPAs were worth 2.67 lakh crore during March 2015 up from 2.16 lakh crore in March last year. The banks, obviously, would not want to aggravate this situation any further.

The number of investment instruments are also plenty. Thus, to combat the more preferred instruments like mutual funds for instance, which provide tax benefits- banks would want to keep their rates high so that people don’t move to other financial measures.

IMF, in a paper titled Effectiveness of Monetary Policy Transmission in India said that on an average it takes about 9 months to change deposit rate for customers and as much as 19 months to bring about a change in lending rates. In the report, it questions the efficacy of monetary policy for all developing countries but also states that “this hinders policy making by making it difficult to predict the effects of policy actions on the economy”.

As Crisil Research points out in a research “Lending rates show upward flexibility during monetary tightening but downward rigidity during easing. Between 2002 and 2004, while the policy rate declined by 200 basis points, lending rates dropped by just 90-100 basis points. Conversely, in 2011-12, when the policy rate rose by 170 basis points, lending rates surged 150 basis points.”

The effects of such move would show negatively for the rate of growth and its real impact on the Indian economy. But, the thing to watch out for is if the RBI has already taken this into account. As for what would happen next is anybody’s guess, as is always in the world of financial markets.

Prakhar Misra is a Chanakya Scholar at the Meghna Desai Academy of Economics and an alumnus of the Graduate Certificate in Public Policy Programme, 2015.

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India & the One Belt One Road paradigm

On how OBOR is likely to interact with India’s foreign policy

by Hemant Chandak (@HemantChandak)

One Belt One Road (OBOR) is an initiative the Chinese envisioned in 2013 and are taking progressive steps to bring it to fruition. Execution of the plan will depend on how China is able to engage the countries involved in this perimeter, mainly in what it calls the Silk Road Initiatives. The OBOR has following two key components:

  1. New Silk Road Economic Belt that links China and Europe, through Central and Western Asia
  2. Maritime Silk Road (MSR) that will connect China and Southeast Asian countries, Africa and Europe.

OBOR’s grand vision seems to cover every continent except the Americas. It is aimed at further strengthening the Chinese role in economic integration with these nations and playing a larger role in global political affairs. As and when the infrastructure is ready, the Chinese are not only looking to push its indigenous technologies but also find means to export its surplus manufacturing.

As per the Chinese, OBOR initiative is in line with purposes and principles of UN Charter and is not restricted to the ancient Silk Route but open to other countries for wider benefits for all involved. President Xi Jinping and Premier Li Keqiang have visited more than few dozen countries promoting OBOR, and throwing their weight behind by bringing domestic ministries together to facilitate the project, providing policy support and funding billions of dollars to partner countries, such as $1.4 Billion funding to Sri Lanka to build Colombo Port City.

The strategy is long term and seems to have been in motion for not years, but decades. The Chinese have invested in several African countries over decades, and these countries are now expected to be part of its Maritime Silk Road. On other hand, many of the Asian countries that are going to be connected through New Silk Road Economic Belt are already part of Asian Infrastructure Investment Bank (AIIB) — another Chinese initiative, to invest in infrastructure in these countries. AIIB already has 56 member countries as signatories.

China’s economic power allows it to play it king size on the geopolitical game board. Recently, the Chinese have committed $40 Billion to Silk Road Fund that will go towards creating infrastructure in Asia for above projects, and building ties with the countries involved. Chinese have proven their capability with mega infrastructure projects before, the freight train connectivity to Spain or looking to build a tunnel system under the Mount Everest are a few examples. China also signed its first ever MoU with Hungary last month around OBOR. Hungary could become an integral logistics hub in Europe and Hungary-Siberia rail network is an opportunity for both countries in near future.

What’s in it for India?

China extended an invitation to India to join Maritime Silk Route during the 17th round of border talks between the Special Representatives of the two countries in New Delhi.

OBOR project will have a connected mix of not only developed European countries but also the bustling East Asian nations. India needs to be careful how China progresses on this. China-Pakistan Economic Corridor as well as the Bangladesh-China-India-Myanmar Economic Corridor are also closely related to this Initiative. Besides economic integration, these initiatives are also meant to showcase Chinese military might to the larger world and how it plans to use these sensitive corridors for its military mobilisation. The buildup of roads, highways, ports, tunnels and bridges over such a large unchartered terrain across all these countries will have a tacit approval from each one, who owns that particular stretch of land, air space or sea. One has to be thoughtful about an unseen future before falling into what could possibly be a trap.

Once all key players have undergone their own validation to become participants, these initiative led by the Chinese could augur well for the rising Asian century. The economic prosperity that the ancient Silk Route brought to the regions sitting on its path, could well be repeated in a much more impactful manner. The Indian government is progressive and looking to connect internally with initiatives such as Digital India, and it can marry gracefully with “Information Silk Route” where telecom connectivity between the countries through fiber, trunk line and under-sea cables is also a key component. This will expand the bandwidth capabilities for India significantly, without which offering eGovernance and delivering public services in an efficient manner will remain a pipe dream and a good marketing campaign.

Being a key participant to such a global infrastructural initiative would mean we will have excellent connectivity of various transport modes, and a great facilitator to Make In India initiative. Success for us depends on how we efficiently use these channels to find and grow new export markets for our products and enable efficient trade routes. The benefits to India while participating in a globally challenging project such as OBOR are immense. For one, the technical know-how they will bring back could be used to develop or iron out issues facing domestic infrastructure sector or for envisioning projects that we never had audacity to pursue before. An increased trust between the countries involved will not only increase opportunities for extended trade across their respective industries, but sharing the know-how, co-operating in research & development and improving mutual security through co-operation in areas such as customs, are just a beginning of immense possibilities.

Hemant Chandak is a GCPP10 graduate. He tweets @HemantChandak.

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An Imbalancing Act

The power of tax officers should be reined by statutory amendments, not memos

Direct and indirect tax revenue boards in India need to balance the wide powers granted to their officers with a sense of responsibility on how to use them. This should preferably be achieved by amending the necessary statutes rather than merely issuing memos and instructions. Unfortunately, the latter method has been utilised more often. Most recently, it was the turn of the Central Board of Excise and Customs (CBEC) to issue an instruction asking its officers to be more circumspect in resorting to extreme steps when collating evidence. In November last year, the Central Board of Direct Taxes (CBDT) had also issued a memo asking its officers to be ‘non-adversarial’ when dealing with tax payers. It is not the first time that the CBDT & CBEC have issued such communications to their field staff.

It is common knowledge that tax officers in India (like in many other countries) enjoy wide, statutorily granted powers to deal with the tax payers. That such powers are often exercised in excess is also common knowledge. These powers are considered as the manifestation of the sovereign’s right to impose tax. Statutes, in fact, often deem tax proceedings to be akin to those of a civil court; its presiding officers are vested with many of the powers of a judge. As such, tax proceedings are described as being ‘quasi-judicial’ – proceedings that are often administrative in nature but require the presiding officer to adjudicate on a set of facts. Though quasi-judicial bodies exercise some of the powers of courts they do not function as such. Their principal limitation is that they must follow the basic principles of natural justice otherwise their actions are liable to be struck down in a regular court of law.

While the rights of these officers are explicitly stated in taxing statutes the corresponding obligations on how to use them are only implied or developed through court judgments. The resultant lack of clarity and cohesion ensures that the outer bounds of these duties are stretched much further than any outer limits on the rights of officers. The CBDT and the CBEC have indeed laid down norms to be followed by officers during tax proceedings by officers – but they are by way of memos and instructions. In the hierarchy of codified law, they are as low down as one can get.

The Revenue Boards are facing the classic principal-agent problem – how does the principal (CBDT & CBEC) incentive its agents (tax officers) to not do anything that is against the principal’s interests? Despite the necessity for some of these powers, empowering officers with broad rights and powers while casting weak, unenforced obligations on them is definitely not the solution.

One of the ways this problem could be solved is to put the rights and obligations on the same footing – by amending the provisions that give these powers to also contain the obligations and safeguards. In the absence of such statutory safeguards, we can expect to see more such memos and instructions being repeatedly issued to little effect.

Surya Prakash B.S is an alumnus of the Graduate Certificate of Public Policy and can be found on Twitter on his handle @SuryaPrakashBS. The views expressed here are personal.

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The Fourth Caveat of Evaluations: The Interdependence of Factors

By Karthik Dinne

Why the relationship between factors must be considered when evaluating the relationship between one factor and the outcome

In an earlier post, we discussed the dangers of conflating an evaluation of a product with an evaluation of its theme. In this post, we will discuss the causal framework used to interpret evaluations. Most caveats about evaluations don’t deal with their design but more with the communication and interpretation of their results.

In a typical evaluation, the outcome of interest is often dependent on multiple factors. Evaluations can be broadly classified into two categories based on the manner in which these factors are dealt with.

  1. Evaluations of programs which span across multiple factors: Do cash transfers increase the learning outcomes of children?
  2. Evaluations of the individual factors: Does providing textbooks to children improve learning outcomes?

In the first category, the cash transfers aren’t a part of education per say; they indirectly influence education by affecting the components of education delivery. One such component is the provision of textbooks as evaluated in the second category. In order to conduct the first category of evaluations it is often necessary to isolate each factor by conducting the second category of evaluations for each of them. This post discusses one of the caveats in interpreting evaluations of an individual factor where the outcome is determined by multiple factors.

To continue with the example of education, let us assume that the individual factors affecting learning outcomes are limited to:

  • Providing free textbooks
  • Increasing teacher attendance
  • Increasing access
  • Teacher training
  • De worming
  • Decreasing Pupil Teacher Ratio

After looking at them, most people would probably view these factors using the following model:

Framework 1In this framework, each factor is only examined in relationship to the eventual outcome. A change in the factor is considered sufficient to impact the net outcome, even if this is not necessarily so. Such an interpretation means that the net outcome is viewed as the sum total of the impacts of each factor. It would thus be possible to achieve increased learning outcomes by only affecting one factor, e.g. providing more textbooks, or improving access to schools, and so on.

The reality, however, is more like this:

 

Framework 2

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 Factors rarely exist in isolation and are often interdependent on one another; they are all necessary conditions to achieve the outcome. It is similar to an electric circuit: breaking the circuit at any point will affect the flow of electricity, even if the circuit is otherwise complete. In this framework, improving learning outcomes would require all the factors to be pursued simultaneously. Providing more textbooks would have to be accompanied by improvements in teacher attendance and training, de-worming measures, etc.. It is only until the threshold value for each factor is reached that we start seeing a change in the outcomes.

The danger is in interpreting evaluations of individual factors using the first model when the relationship between the factors more closely resembles the second framework. It is possible to arrive at conclusions that are unreliable before even the question of external validity can be asked. The intervention administered on the factor may have failed to affect the final outcome only because the other factors remained unchanged. If the intervention was about increasing access to schools, we might conclude that increasing access won’t result in an improvement of learning outcomes. This might cause us to ignore the fact that improving access will only affect learning outcomes if accompanied by increased teacher attendance. This interpretation would have serious consequences on educational policy; it would probably lead to budget cuts for measures improving access to schools even though such measures might actually be vital.

It is therefore necessary to not view each factor in isolation when evaluating its relationship to the outcome. It is possible to misattribute its failure to affect the outcome. While it may be necessary to isolate each factor for greater understanding, their position in the whole picture must always be kept in mind. The interdependence between factors calls for a lot of care when interpreting evaluations of them, especially when the interpretations can decide policy priorities.

Karthik Dinne is an alumnus of the Graduate Certificate of Public Policy and can be found on Twitter on his handle @dkarthik. The views expressed here are personal.

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More than education

Why the government’s push towards skills development is a timely and necessary move

By Prakhar Misra

The latest Union Budget infamously reduced the total allocation to education by around 2%. This was somewhat surprising given that the BJP had promised to allocate 6% towards education as recommended by the Kothari Commission (1964-66). This would have been an increase from the 4.6% of the last UPA budget. However, there were some positives; the expenditure on secondary and tertiary education was increased by a whopping 22%. The department of Higher Education was allotted Rs. 26,855.26 crores in comparison to last year’s revised estimates of Rs. 23,700 crores. But, what was even more heartening was to see an increased focus on skilled labour. Depending on which survey you look at, as little as 2-7% of the Indian workforce is in the organized sector. Increasing the level of vocational training will help workers from the informal sector transition into formalised labour where they can better contribute to sectors such as manufacturing.

The word ‘informal sector’ was first introduced in 1972 by the International Labour Organisation and the precise boundaries of its definition have been debated upon since then. The 15th ICLS in Geneva arrived at the following operational definition; “For statistical purposes, the informal sector is regarded as a group of production units which, according to the definitions and classifications provided in the United Nations System of National Accounts (Rev. 4), form part of the household sector as household enterprises or, equivalently, unincorporated enterprises owned by household.”

The Indian government has established many commissions and committees to clearly define the informal sector in the Indian context. The most recent of these is the Committee on Unorganised Sector Statistics established by the Ministry of Statistics and Programme Implementation. According to the committee’s report, the fundamental features of the informal sector in India are: a) the overwhelming number of informal enterprises working out of homes and offices; and b) a workforce that is constantly in flux and is thus, very difficult to measure. The Committee goes on to argue that it is in the interest of the government to transform the unorganized sector into an organized one as organized labour has a lot of advantages. It allows for the provision for a specific number of work hours, provident funds, sick leaves and pension packages. Employees and employers will both benefit from the increased job security as it enables the creation of stable market conditions that make the economy self-sustainable and stronger.

Education plays a big role in this process. The creation of new colleges and the re-organization of existing ones have demonstrated that the government is aiming to increase its outreach capacity. At the same time, launching the National Skills Mission through the Skills Development and Entrepreneurship Ministry will go a long way in making the 30 million youth population that is near-productive more employable.. Furthermore, skills development will have the largest impact towards employment as it creates jobs from a bottoms-up approach. Given that skills programmes are typically of a shorter duration (2-3 years) than a conventional education, they will better equip the youth to meet their immediate monetary needs. The 66th round of National Sample Survey Organisation showed that between 2005-2009, 27.7 million new jobs were created but the number of self-employed people decreased by 25.5 million, leading to a net increase of only 2.2 million jobs. Enabling more people to develop expertise in particular sectors will boost entrepreneurship and self-employability. It will also increase the number of people being absorbed in various manufacturing and service industries without the companies having to train them at an additional cost.

Narendra Modi’s election campaign prioritized economic growth and better employment to great success. Tapping into the unorganized sector by increasing the number of skilled workers is a positive step towards securing the promised ‘achhe din’. Registration of labourers to the ‘Pandit Deendayal Upadhyay Shramev Jayate Karyakram’ will enable the government to reach out to the 42 crore workers in the Construction sector, 86% of which are unskilled and therefore unproductive. Given that Parliament successfully approved the transition of the coal and insurance ordinances into legislations, such measures (combined with the Make in India programme) could lead to massive job creation. As 54% of India’s population is below the age of 25, such moves and policy changes have come at the right time. Ultimately, the success of these measures will lie in their implementation, and only time will be the true judge of that.

Prakhar Misra is an alumnus of the Takshashila Graduate Certificate of Public Policy and is currently a Teach For India fellow in a low-income private school in the slums of Mumbai. He is the co-founder of a Media Organisation called Janhitt Mein Jaari (Hindi for ‘Issued In Public Interest’). He also writes a blog on public affairs and can be followed on Twitter  @PrakharMisra

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Private Schools vs. Government Schools – Which are better?

Why the debate about private vs. public schools is often simplistic and filled with misconceptions

By Karthik Dinne

It may seem obvious to some that private schools are indeed better as the phrase ‘private schools’ is considered synonymous with quality education by many, but there is more to the issue than meets the eye. Before choosing one type of school over the other it might therefore be prudent to first answer a few additional questions.

What do we mean by private schools? 

There is a spectrum of private schools that ranges from schools charging Rs.50/- per month to schools charging Rs. 6 lakh per annum. In the debate about private schools vs government schools, ‘private schools’ are generally understood to mean low cost private schools. These are the schools most often chosen by people moving their children out of government schools.

Why is it better?

Determining the superiority of an individual school usually depends upon both the efforts made by the school administration and the nature of students that attend it. One school may have highly talented teachers but students with low motivation while another may have poor teachers but highly motivated students and parents. The latter school may be achieving good results solely due to the efforts of students and not the school. This inability to accurately attribute the success of a school makes it difficult to conduct a full and thorough examination of what type of schools are preferable.

How do we then go about such an examination? The ideal solution for this problem is to have a set of people who are similar in all aspects (income, motivation etc). This set would then be split, preferably in half, where some would be sent to private schools and the others to government schools. If their scores are compared after some time, any differences are, in all probability, likely to have arisen only due to the efforts of the schools.

How is it better?

Another way of phrasing this question is: what do we mean by ‘results’? In other words, what are the metrics used for comparing schools? Is it scores in Math, or the local language? Should scores from the other subjects taught in schools also be included? Are the behavioral aspects of children also measured? The list of questions is endless and this can be a separate debate in itself. That being said, maths and language scores are conventionally used to evaluate learning outcomes in primary education.

So, which is better?

To summarize the previous answers, we are comparing government schools with low cost private schools (which are attended by similar students) on the performance of the students in Maths and the local language. This comparison, thankfully, has already taken place on a small scale; in 2013, Karthik Muralidharan and Venkatesh Sundararaman published their paper entitled “The Aggregate Effect of School Choice: Evidence from a two-stage experiment in India”. Two major findings to emerge from the study are encapsulated in the following quotes:

 “After two and four years of the program, we find no difference between the test scores of lottery winners and losers on Math and Telugu (native language).”

[NOTE: lottery winners here means the group of students who won the lottery to get a voucher to attend low cost private schools.]

The point that has led to more contention was this

“the mean cost per student in the private schools in our sample is less than a third of the cost in public schools.

It is for this reason that some argue that private schools are better as they are more cost efficient. But there are arguments on the side of public schools as well. Government schools often deliver education of a comparable quality with low cost private schools despite functioning in unfavourable and remote conditions with shoestring budgets. It is necessary to separate the outcomes from justifications for an objective comparison.

The conclusions reached in the study might have changed if the words ‘private’, ‘government’ and ‘results’ were defined differently. It would also have changed depending on the value of the voucher given to parents or if private schools had spent more time reaching Maths and Telugu instead of Hindi or English. Both these aspects are subject to further research as the paper mentions. However, with the agreed upon definitions of ‘private’, ‘government’ and ‘results’, we have to face the reality that there isn’t any difference between the government and private schools.

Does this mean that low cost private schools should be closed? No. We need to realize and accept the fact that the education system is broken in both government and private schools to the same extent. Acceptance of the problem is the first step towards addressing it.

Karthik Dinne is an alumnus of the Graduate Certificate of Public Policy and can be found on Twitter on his handle @dkarthik. The views expressed here are personal.

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