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Devolution of Power from Centre to State

By Ratish Srivastava (@socilia13)

States in India can play a bigger role in foreign policy formulation with active engagement in pursuing global economic opportunities, resource management, security issues and environmental issues. However, does that mean the centre will lose power to states as they push for greater autonomy?

The devolution of power from the centre to state need not translate to a lesser role for the centre. The centre could use this devolution to their advantage in a number of ways.

The current NDA government created the States Division in 2014 under the Ministry of External Affairs (MEA) for efficient management of centre-state relations. However, this division only provides economic freedom to states by allowing them to engage in global economic opportunities.

The structure proposed by NDA only allows for economic development, investment promotion but not aspects of security. The central government needs to realise the role a state can play in security and improving ties with other nation-states. The best example would be India’s relation with Israel.

India has historically supported the Palestinian stance, and any major diplomatic move with Israel could upset India’s energy ties with Iran and the Gulf states. But, a number of chief ministers of states have gone to Israel, mostly for learning new agricultural practices, as agriculture in Israel is a highly developed industry. Visits from the then CM of Rajasthan Ashok Gehlot in 2013 and Maharashtra CM Devendra Fadnavis in 2015 show that states can help improve ties with other nation-states.

These low-key measures, which go under the radar are extremely important for India to build stronger ties with a nation-state as it allows greater manoeuvrability in formulating foreign policy. India, however, needs to tread carefully as a tilt towards Israel could be counter-productive to its move for a permanent seat on the UN Security Council. India requires strong support from the Arab states that form a large group in the General Assembly. The Modi government must be careful as it looks to preserve its strategic, economic and energy interests in West Asia.

The centre will also become effective in conducting neighbourhood diplomacy if it can coordinate with peripheral states, which share borders with other countries, for example, India’s relation with Bangladesh. The relation between the two countries was weakened over disputes over the Teesta River. The Manmohan Singh-led government in 2011 failed to reach an agreement with Bangladesh, which allowed an equal share of the river. This failure can be attributed to the CM of West Bengal, Mamata Banerjee, who pressured the centre to break the agreement.

The reason for the the move’s opposition lies with the fact that the centre did not involve West Bengal, which would be impacted the most by this deal.

On the other hand, India signed the Land Boundary Agreement (LBA) with Bangladesh in 2015. This agreement will rehabilitate people in their respective enclaves in India and Bangladesh. It will improve the domestic situation in both countries but more importantly, this move showed how involving West Bengal helped smoothen the deal.

The central government assured the government of West Bengal that it will be provided with adequate financial support to help rehabilitate people coming from the former Indian enclaves in Bangladesh. The state government has also taken a set of reasonable relief measures through its Cooch Behar district administration with financial assistance from the centre. The centre and the state in this situation worked together, and it resulted in a historic deal being signed between India and Bangladesh, which has been a concern since 1974.

The current central government has suggested the Centre-State Investment Agreement (CSIA), which could potentially help the central government implement a bilateral investment treaty with any foreign country. CSIA creates a platform for states to engage in the management of foreign direct investment flowing into the country.

In addition, with states focusing on improving their economic performance, it allows the centre to focus on other issues like acting in accordance to international law and set environmental goals while the states can help bring globalisation to India through its trade deals and by attracting FDI.

Ratish is a research intern (@socilia13) at Takshashila Institution

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The South-South Divergence on Global Environmental Regulations

By Ratish Srivastava (@socilia13)

Historically, developing and emerging economies have participated in international negotiations but with time, the alliance has been strained, particularly between India and China.

What does the developing world want?

The developing world is diverse in terms of development, capacity of domestic government and power at the negotiation table in international conferences. The developing world only accepts these regulations as long as the developed world provides the technology and finance mechanism to make this change easier. They also try to make changes in the deal, which could help them cope up with the effect of regulations, for instance, a deal that requires them to reduce the intensity of emissions rather than absolute reductions.

India’s position – Less ambitious domestic climate policy (compared to China), commitment to reduction in intensity of emissions rather than absolute reduction.

China’s position – Enacted various domestic policies, including an emissions trading system.

Shift from North-South Divergence

The North-South are fluid categories that change between unity and polarity. This divide is used by the developing world as a tool for negotiation. The developed world is already industrialised without any regulations on emissions, and these regulations imposed on the developing world hinders the development process.

The North-South divide fails to understand the heterogeneity in the southern countries. The development status and the demand for resources (coal in this case) creates new groups and a complex blend of current and historic emitters at the negotiation table.

Divergence

How the divergence happened?

In the early 2000’s, a global mercury negotiation was held through the UNEP (United Nations Environment Program) Governing Council and Global Ministerial Environmental Forum. This event created a large Southern coalition (G77 plus China).

However, as negotiators considered a legally binding agreement, countries formed regional groups like GRULAC (Group of Latin American and Caribbean Countries and the African Group). The two largest emitters, India and China formed an alliance, where economic development increased emissions. Cooperation from China and India was important to address the problem of mercury emissions. According to them, the task of nation building is difficult to continue with environmental regulations for an important energy resource like coal.

India and China resisted the regulatory action, moving the Intergovernmental Negotiating Committee (INC) process for almost a decade. The cooperation lasted until the fifth INC, where China changed its stance completely, and were willing to accept a more stringent measure to cut down on emissions. China reached an agreement, and their decision to cooperate allowed them to play a major role in creating the final text for the negotiation. In the Minamata Convention 2013, China signed the treaty, stressing on their domestic policy measures to address mercury pollution. They adopted the same control standards as Germany, which are considerably high. On the other hand, India did not attend the convention and only signed in 2014 after a change in government. India was criticised by NGO’s for its lack of concern to address the issue with mercury emissions.

The growing divergence arises due to developmental constraints, technological capabilities and in this case, it was China’s aim to meet its domestic climate goals. China, at the time of the conference was consuming nearly half of the global coal. However, it reduced its consumption and installed more non-coal sources, which explains the shift in the fifth INC from its original stance, which also directly targets mercury emissions. India continues to invest in coal, as it plans to expand coal consumption by 2022.

The developing countries with different interests are unlikely now to form coalitions as they look to meet their own domestic climate objectives. Coalitions will form depending upon what resource it is, how much of it is used for fuelling development by the country and the domestic climate policies. This will end up creating a complex blend of current and historical emitters.

Ratish is a research intern (@socilia13) at the Takshashila Institution

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When Popcorn Costs More than the Movie

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Image credit: PVR CInemas

Typical multiplex experience in Chennai – Popcorn: ₹180; Pepsi: ₹200. The all important movie ticket: only ₹120.

By Natarajan Ramalingam (@natrajdr)

While a cinema ticket in a multiplex costs ₹250 or more in other metros, the price caps set by the the state government in Chennai provides the same ticket at significantly lower costs. Sounds good, doesn’t it? Maybe, maybe not.

Tamil film industry has been entwined with the state politics for a long time – with prominent cine actors and writers becoming politicians on one hand and the use of movies as a medium for political messaging and image building on the other. Successive governments in the state have claimed cinema as “the primary medium of entertainment for the common man” . While the validity of the claim is difficult to prove due to the changing times and tastes of the public, the government however continues to make it.

This claim provides the legitimacy for the government to intervene and regulate the industry to make the medium of entertainment “affordable to the common public – especially the poor”.

The increase in popularity of vernacular cable TV during the early 2000s, led to a fall in occupancy rates in theatres. Faced with a consequent fall of the entertainment tax rate, the government allowed for variable pricing during the first two weeks of any movie’s release.

This variable pricing mechanism did not impact tax collection as much of the increase in pricing was in “black” and was pocketed by the cine distribution/exhibition industry. The politicians saw an opportunity in this space to show themselves as pro poor by regulating the prices – with minimal impact on revenue to the state.

On 1st Jan 2007, the State of Tamil Nadu, through an amendment to the Tamil Nadu Cinemas (Regulation) Rules, fixed the minimum and maximum prices that can be changed for cinema hall tickets. The fixed prices range from ₹4 for Non-AC cinema halls in municipalities and village panchayats to ₹120 in the AC multiplexes that are contained within shopping malls.

The implementation has helped keep the prices of cinema tickets quite low in the state – ticket prices at multiplexes in comparable metropolis such as Kochi and Bangalore range from ₹300 to ₹500. It is interesting to note that another state which has a strong connect between politics and the film industry, Andhra Pradesh, also have similar laws capping the price of cinema tickets.

But this has come with long term unintended consequences.

Cinema, by its inherent nature, is a very risky industry. Notwithstanding the risks of a movie being completed from the point of inception, there are huge risks on the success of the films that are released (people’s taste, popularity of the stars, novelty of the theme, etc). In such an industry, the model will be to capture increased profits in cases of increased demand (a “Hit” movie) – what finance terms as a “higher-risk-higher-reward” mechanism. The price cap prevents the industry from capturing a higher amount of reward except by way of having cinema on the halls for a longer duration. But video piracy has led to the reduction in the “shelf life” of a new movie.

Investments in developing new and upgrading existing cinema halls have fallen due to high costs of setup and the low returns therein. Moreover, the opportunity cost of land for smaller theatres have increased – due to the increase in land value and stagnation in ticket revenue. Theatres in small towns have put the land for other use – malls, apartments and such.

Most cinemas have looked for alternate sources of revenue – snack and parking fees in multiplexes cost more than the ticket prices themselves! While the cinema tickets themselves are cheap, the cost of the “transaction” of watching a movie is high.

No allowances for inflation-based increases were made in the regulation. While the labour and utility costs have increased with time, the price ceiling have remained constant even after 10 years. The cap has led to continued use of the practice of selling tickets in “black”.

In a separate but related move the government, to boost Tamil language, decided to waive off the entertainment tax for tamil movies with tamil titles. This has led to a situation where the government doesn’t have an interest in increasing the ticket price – as there will be minimal corresponding increase in the tax collection. This tax break and the price cap has meant that the exhibitors of other language movies make lesser revenue per ticket than their Tamil counterparts.

Contrast this with the neighboring state of Kerala. The state laws there do not provide the government with the ability to set prices – only decide on the taxation that can be applied. An open market – same entertainment tax rates regardless of language and content and the ability for the cinemas to be flexible on pricing – has enabled the cinema exhibition industry to grow. The number of screens in the state has increased from 408 in 2014 to 516 by late 2016.

The regulation from the state of Tamil Nadu has helped keep the prices low – much lower than what the consumers were willing to pay (if compared with similar consumers in other states). While consumers have been happy, in the long term this has squeezed the profitability of the cinema exhibition industry. The Madras High Court has recently directed the state government to take a “realistic and rational decision” on ticket pricing.

Is it time for the government to withdraw itself from regulating this industry to its peril?

Natarajan is a alumnus of the Takshashila GCPP, an engineer by education, manager by profession and an aspiring policy analyst out of curiosity (@natrajdr)

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls across the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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Why States Need to be Involved in India’s Foreign Policy

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Image credit: The Aspirant Forum

By Ratish Srivastava (@socilia13)

The involvement of states in India’s foreign policy making could be vital in launching India onto the next phase of development. The centre holds executive power in all matters related to foreign policy as stipulated in Article 246a, 7th schedule. Indian states already have many responsibilities like improving infrastructure for public health services, agriculture, transportation, etc. However, there is a heightened need to improve their economic performance and generate enough revenue so as to not depend on the centre for funding and help improve foreign relations with other nation-states.

States can and have proven themselves to be important players in improving India’s ties with other countries and at the same time improve their economic performance. States like Gujarat and Maharashtra have shown great promise with exports, contributing as much as 46% of India’s exports. Combining the exports of Tamil Nadu, Andhra Pradesh and Karnataka with the exports of Gujrat and Maharashtra increases the figure to about 70% of the total exports of India.

These states have accessed global economic opportunities, and have witnessed tremendous growth. These states have struck deals with major players in the international market, like Maharashtra’s deal with Enron in 1996, although the deal ended with the Enron scandal, which rendered the Texas-based company bankrupt. It is still worth noting the role a state can play in striking deals with international companies. Another example would be Andhra Pradesh’s ability to negotiate a state-level World Bank development loan in 2002 under the leadership of Chandrababu Naidu, proving that states can meet their development goals without help from the central government.

States in India who lag behind in these areas need to come up with a stronger structure for engaging in exports. A major concern for states with no ports, or states who depend on other states for container facilities and ports is that their export figures are being undervalued. This is because the point of origin code is filled by clearing agents rather than the exporters themselves, as the agents see no significant importance of the point of origin.

States need to understand the importance of having a state export policy, like Gujarat, which has a five-year export policy. This policy will not only address the supply side of the problems but will also address the need for adequate infrastructure and appropriate labour laws to make the state a more attractive destination for trade.

Chief Ministers of state should travel abroad to negotiate with industrial houses (Maharashtra-Enron), international organisations (Andhra Pradesh-World Bank) and commercial wings of foreign governments with the aim of achieving investment deals for their own states and to be part of intergovernmental negotiations within the World Trade Organisation (WTO). To improve the infrastructure the state needs more FDI inflows and they need to increase taxes to generate the revenue necessary for making such changes.

Apart from the economic benefits a state could reap, there is motivation for states to be involved in neighbourhood policies. Matters such as illegal trade and immigration (border security) and improving relations with the Indian diaspora in the neighbouring countries with which they have socio-cultural ties also contribute to a state’s involvement in foreign policy. Improving trans-border regional links and trans-border neighbourly contacts through the involvement of states can have positive effects on India’s foreign policy.

State interference can also have adverse impact on foreign policy, for instance, the fiasco regarding the Teesta water treaty with Bangladesh in 2011 and pressure from DMK on the central government to vote against Sri Lanka in the United Nations Human Rights Council. in 2013.

On the other hand, the role that a state can play in improving relations with India’s neighbours is huge. Border states, with historical, cultural, linguistic, religious, and ethnic links can help provide a platform for the central government to build stronger ties and improve border security. They can help improve socio-cultural ties as well, case in point, the Chief Minister of Bihar Nitish Kumar and the Deputy Chief Minister of Punjab Sukhbir Singh travelling to Pakistan in 2012 to leverage socio-cultural ties.

India can also improve border security if it allows the states who have borders with other countries to be involved in the process. It can help the centre make policies accordingly as states understand the ground realities better at the border which will help strangle illegal drug trade and immigration.

The benefits for state involvement in foreign policy has been underplayed, with much of the focus being put on the negative impact it can have. However, the positive impact could outweigh the negative as it allows states to have the power to improve its situation.

Ratish Srivastava (@socilia13) is a research intern at Takshashila Institution.

This post is the part of a series of blogposts on ‘States in Foreign Policy’.

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Controlling Healthcare Costs in Japan

The Japanese story of achieving low-cost healthcare through price controls

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Japanese Superambulance/Ypy31

By Aneesh Mugulur (@mugulur)

Between 1980 and 1992, Japan’s price controls in the healthcare sector led to the decline of physician fees by 19%. In 1991, Japan’s infant mortality rate was just 0.45% of live births in comparison to the United States of America’s figure of 0.91%, placing it in the top rank amongst industrialised countries. The same year, the average life expectancy at birth was 76.13 years for males and 82.22 years for females, more than the world average.

What was the reason for such impressive status of Japan’s health?

The Japanese government provided universal healthcare to all its citizens and regulated the prices of all care (and continues to do so). The aim of this price control was to provide affordable healthcare and insulate them against the high cost of living due to inflation. In this period, more than 80% of hospitals and clinics were privately owned. However, for-profit hospitals were banned.

How did the price control mechanism work?

Health insurance was mandatory for every citizen. There were three important types of insurance based on sectors; for employees, the self-employed, pensioners and the elderly. The government also fixed the co-payment rate. Claims were supposed to be filed with providers and services were provided in kind. The Ministry of Health, Labour and Welfare provided medical care under a nationally uniform fee schedule.  It is ‘uniform’ because the same fees are paid by all insurers to providers regardless of the experience of the doctor, or whether it is performed in a rural clinic or a multi-speciality hospital. The government strictly controlled the fees scheduled, and neither the insurers nor the providers had any say on it.

While there were marginal differences in rates amongst insurance plans, the physician fee was uniform. Charging more than the prescribed fees schedule had serious repercussions. Hence, there was no incentive for higher quality of service. As a result, doctors and medical practitioners focused more on quantity rather than quality.

Was the objective of low-cost met?

Nationally, uniform fee schedule played a vital role in maintaining equity. It also established both the scope and standard of services. There are further three structural factors that ensured low costs.

  1. The economic incentive embedded in the fee schedule was for testing pharmaceutical products and laboratories test which meant it was mainly for physicians in primary care who could conduct those tests.
  2. Clinics-based physicians did not have patient admitting privileges. Only hospitals could accept patients and their fees were regulated.
  3. Low administrative costs and secure claiming process

According to the Organization for Economic Cooperation and Development (OECD), among the major industrialised nations, Japan’s personal health expenditures were the lowest.

However, there were several unintended consequences which remain unresolved even to this day. Due to the universal fees schedule, a doctor who sees more patients makes more money than a physician who performs long hours of surgery. As the price for each consultation is fixed, doctors make sure they consult more patients to increase their income. In Japan, doctors worked an average of 70.6 hours per week, compared with 51 hours per week in the U.S. Patients have to wait for three hours but their consultation time is just three minutes.

Even though Japan’s healthcare was cheaper compared to most industrialised countries, its quality was dismal. The rigid control did meet the objective of providing affordable healthcare to citizens irrespective of their income. But its unintended consequences were more.

Since Japan’s system provides more incentives to primary care physicians and pays equally to specialists, it has led to an acute shortage of specialists in tertiary care such as surgery, paediatrics, and obstetrics. According to Japan times, the number of maternity wards declined from 4200 in the year 1993 to 3000 in 2005, resulting in longer commutes for pregnant women. Another significant consequence of this government control is the increasing corruption in the system.  In 2004, the chairman of Japan Dental Association was arrested for bribing the members of the government in charge of setting medical care fees.

Will the new ‘Abenomics,’ which is making news globally, revamp the healthcare system of Japan? The question remains unanswered.

Aneesh Mugulur is an alumnus of the Takshashila GCPP15 and tweets at (@mugulur)

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls across the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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Shopping at Supermarkets in Argentina? No, Thanks!

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Image credit: Vauvau, flickr/The Argentina Independent

How the price freeze at supermarkets in Argentina left consumers in an unrelenting dilemma with regard to grocery shopping

By Sreetama Sen (@SenSreetama)

The Argentinian government, under the presidency of Cristina Fernandez de Kirchner in 2013, imposed a strict price control mechanism on necessary goods being sold at larger supermarkets across the country. This action of capping the price is a price freeze scenario, which is similar to a price ceiling, wherein the prices of goods are fixed in such a way that they can’t increase beyond the set limit.

This measure was introduced in the aftermath of the International Monetary Fund (“IMF”) censuring Argentina for providing inaccurate data. Also, we must keep in mind that Argentina’s inflation and hyperinflation woes date back to several years.

In 2013, the official records stated an inflation of around 10.9-11% in Argentina whereas, according to independent analysts, the actual figures were 25-28%. The price control mechanism was implemented by the government to bring down this double-digit inflation rate as well as to protect the interests of consumers by maintaining their standard of living in the short term. Additionally, the supermarkets utilised the already high inflation rates to sell the goods at an even higher rate to the final consumers while they themselves continued to pay six times lesser than the final price to the producers. Hence, this measure was aimed at ensuring that such producers were not at a disadvantage in addition to controlling the soaring inflation rates in the country. Even in recent days, there have been instances of protests by these producers for not being paid the adequate price.

In the initial stages, the government followed a two-pronged action plan – (i) identifying several goods which were daily necessities, including groceries (cooking oil, cereals, beer, etc.); and (ii) capping the prices at which such goods could be sold by large retailers for a period of two months. This period was subsequently extended in phases till Mauricio Macri took over as President in 2015.

By December 2013, the Argentinian government entered into an accord with the popular supermarkets operating in the country like Carrefour SA, Wal-Mart Stores Inc. Cencosud SA, etc. whereby the prices of these goods were frozen for one whole year. During the time when this mechanism operated in Argentina, the number of regulated goods, rose to as many as five hundred. Interestingly, the accord also included an understanding between the parties that such price fixation on goods should not result in shortage of supplies by the supermarkets.

The question that arises now, is whether the inflation rates were actually controlled? Well no, as of 2015, the inflation rate was at 23.5% as per data released by the World Bank. Secondly, the effect on consumers was also undesirable. This mainly happened because the supermarkets found a way to counter the fixed price by displaying lesser supply of those goods and in turn, the smaller sellers, due to a rise in demand also raised the prices of those goods – hence demand for the particular good kept increasing for the consumer and yet he/she was unable to purchase it because the supply was considerably reduced, artificially or by market forces. As a result, the producers were not getting paid for sales, and thus, were unable to produce any good due to lack of capital.

So, why is any of this still baffling, considering that the IMF has lifted the censure on the country in November, 2016? Here is why:

The first and foremost unintended consequence was a deficit in the supply of the goods – whole point of fixing the prices was because they were ‘necessary’ goods and yet consumers found it difficult to purchase the same items. The smaller vendors, taking advantage of the fact that supermarkets were unwilling to sell these items, further increased the prices of those items, leaving consumers in a limbo. It also resulted in black marketing of such goods, catering only to those consumers who could afford to pay higher costs to meet their demands.

The intended recipients did not receive the intended benefits of this price control mechanism. It most definitely did not achieve what it set out to achieve. But, what is even more surprising is that, three years and a government change later, the condition in Argentina is not very different. This is important because – it is one thing to know that a control mechanism did not work and it is another to see the same control being removed and yet the same issues still persisting. The recent proposal by the legislators in Argentina in relation to regulation of prices in supermarkets in Argentina to curb rising prices and inflation rates is that there needs to be a law that governs this sector and a law that is passed after due consultation with all stakeholders.

Thus, it remains to be seen whether the extremely high double digit inflation rates in the country is a consequence of continuous economic mismanagement by the authorities or misplaced causation by the stakeholders.

Sreetama Sen is an alumna of the Takshashila GCPP15 and tweets at @SenSreetama

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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When Economic Policy Saved India from the Mongols

By Anirudh Kanisetti

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Featured Image: coinindia.com

13th century, an era when the Mongols were considered the Scourge of God, had rulers from Hungary to China quaking in their boots at the mere thought of a Mongol attack. One potentate however was a notable exception: he was, in fact, in the habit of defeating Mongol raids and keeping his dominion, among the world’s most prosperous, conspicuously safe from pony-riding barbarians.

Sultan Alauddin Khilji of the Delhi Sultanate was one of the finest generals in the history of the Indian subcontinent. He came to the throne after a coup against his uncle, and his successful military expeditions against the Mongols required a large and efficient standing army. It would take one of history’s most innovative economic policies to maintain it.

The Sultan’s solution to the problem was as brutally efficient as his military campaigns. The larger the army, the higher its upkeep. However, if prices of essential commodities were lowered, he could assure the same quality of life for his soldiers at a lower cost to the treasury without compromising their fighting calibre.

If the prices of essential commodities were fixed to buy the support of the military, the prices of every other commodity would also have to be controlled to ensure a similar quality of life for cultivators and merchants. The controls, therefore, were extended to every commodity available in Delhi’s markets – ranging from fine cloth to ponies – in an ever-expanding bureaucratic maze.

Fundamental market rules haven’t really changed much from the 13th to the 21st century. Price controls inevitably led to black market trading as a new equilibrium is reached between buyers and sellers. In addition, famines inevitably led to hoarding and shortages.

A policy like this would be impossible to maintain in a state which had to adhere to human rights. Luckily for the Sultan, the Delhi Sultanate was famous for many things, but humanitarianism was not one of them.

Draconian punishments were applied to any merchant who dared to hoard and sell items on the black market. Peasants were forced to come to Delhi and sell only to government-approved merchants at government-approved prices. This is in addition to the land revenue they already paid – which the Sultan paid back to the merchants, allowing for a small profit margin.

An intricate spy network ensured that any violations to the system were reported and dealt with. In times of scarcity, the entire city of Delhi was put on rations and fed only from government granaries, which acquired grain at fixed prices.

Within a few years of Alauddin’s accession, Delhi became unrecognizable. A totalitarian state where the Big Sultan knew all, its markets boasted possibly the most elaborate system of price controls ever conceived, at relatively cheap prices compared to global standards. In times of famine, amazingly, every household in the city had something to eat. Contemporary travellers’ accounts describe the fixed prices, come hell or high water, as a wonder of the world. But the downsides of the policy are not difficult to comprehend.

First, the peasantry had absolutely no incentive to increase production, as they would earn the same regardless. The Sultan refused to lower the taxes they paid. The countryside was essentially bled dry so that Delhi could live as he ordained. Merchants, too, could not pursue profits beyond what the Sultan allowed. This led to the economy stagnating for the duration of Alauddin’s rule: nearly twenty years.

Second, in a stagnating economy, it became more and more difficult for non-military professions to lead a good life. The prices of goods did not change for years, but incomes inevitably rose and fell with the Sultan’s military campaigns. “The price of a camel is two coins,” laments a contemporary, “But where do I get the two coins?”

The policy was clearly meant to benefit the army first, and the average Delhiite second. On the first criterion, it was a success, on the second it was a disaster (except in times of famine). Its implementation required a massive, expanding bureaucracy and spy network to fix everything from trading licences to profit margins and to discover and punish violators. Finally, it led to a miserable existence for the non-military classes, who could only live as well as the Sultan permitted them, and thus had no incentive to increase production, leading to economic stagnation and a long-term weakening of the Sultanate.

Was the policy a success? In terms of Alauddin’s objectives, yes. Was it a success on other counts? The answer is a qualified no – in purely economic terms, it was a disaster. But the positive externalities of keeping the entire Subcontinent safe from the Mongols justified the massive transaction cost to the economy of Delhi: the ends justified the means.

Besides, the citizens of Delhi were still eating Alauddin’s cheap grain in 1334 (he died in 1316), so perhaps they didn’t mind all that much?

Anirudh Kanisetti is an alumnus of the Takshashila GCPP15.

[This blogpost is part of an assignment of the Economic Reasoning coursework. For the assignments, students were asked to submit essays on identifying instances of price controls in the world; who the intended beneficiaries were; and what were the unintended consequences of the price control.]

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Improving Greece’s Global Competitiveness

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EU’s directives on Energy and Environment put additional pressure on one of the most productive sectors of a weakened Greek economy.

By Ratish Srivastava (@socialia13)

Eight years since the Sub-Prime Mortgage crisis hit the world economy, Greece still seems to be on a downhill path. EU’s Directives on Energy and Environment are an encumbrance to one of its most productive sectors – refinery. Greece is losing its comparative advantage in the global economy, in turn hampering its ability to find a way out of trouble.

There are two major implications from this – one, the argument for the case of a Greece exit from the EU becomes stronger. Second, if Greece does have a choice to leave the EU then it will be choosing between long-term impact of its refinery sector on the environment or having more flexibility to improve the conditions of its citizens, at least through the refinery sector’s productivity.

The Greek economy has shrunk by a quarter in the past five years and unemployment is as high as 25%. Greece has received three bailouts from the IMF, the proceeds of which have been used to pay off their international debts. This crisis in the Greek economy and Europe’s debt crisis have combined to have a major impact on the refining sector in Greece.

A report by Foundation of Economic and Industrial Research in Greece, estimates that the refining sector has a strong impact on Greek economy. The research took into consideration the direct, indirect and induced effect of the sector on the overall economy. The report further estimated that the refining activity contributes € 3.8 billion and 40,000 jobs to the domestic economy, whereas its contribution to the tax and social security revenues is also significant. Another major contribution the refinery sector has is on reducing trade deficit, as the export of petroleum products amounted to 37.5% of all exports, most of which are going to non-EU countries who have the option to switch suppliers (86%).

In light of EU’s Directives on Energy and Environment, the refinery sector faces significant challenges as high financing and energy costs, lower margins, high cost of crude oil has reduced the competitiveness of Greek refineries in international markets. There is a dramatic shift in fundamental demand and supply trends of the world in refinery, as the refining capacity grew in Asia-Pacific (15%), West Asia (8%) and Russia (6%). The refineries in these economies have a high complexity index, implying that they can produce high value products in addition due to their size; they can achieve economies of scale.

The most complex refineries are able to produce petroleum products with high market value and process most types of crude oil, exploiting its price variations and availability. To achieve this complexity, significant investment needs to be made constantly. The refinery sector in Greece already invests in itself majorly, as the sector’s investment accounts for 26% of total investment in the manufacturing sector (€1.3 billion). This investment intensity comes as a surprise as Greece faces high rates on borrowing, making it expensive for them to borrow. However, this investment is seen as necessary to keep up with the international market for oil products in terms of increasing the complexity of the refinery.

The developing economies of Asia-Pacific, West Asia and Russia are export-oriented economies that are increasing the complexity of their refinery. With the domestic demand for oil products lesser than their capacity to produce them, with fewer compliance costs, lack of environmental regulations and low labour costs, these economies are able to price their goods competitively.

Greece will not be able to compete with these developing economies, due to additional costs imposed on them by the EU’s climate change policies. With the following directives in place – EU Emissions Trading System adopted in 2005 (EU ETS currently in its third phase 2013-2020), the Fuel Quality Directive in 2009 (FQD) and Industrial Emissions Directive (IED) in 2010, the refinery sector will not be able to compete in the international market and their products will face a competitive disadvantage compared to its rivals. These policies come at a time when the Greek economy needs more flexibility for the refinery sector to become competitive globally. However, the EU is hoping to achieve its ‘EU Energy Roadmap 2050’ which was launched in 2011 (which is, during the crisis period of Greece), as compliance with Best Available Technique (BAT) under IED is compulsory for an EU member state. BAT brings about high cost of emissions reduction for the refineries with little to no flexibility on meeting the emission targets. In a report by European Commission in 2014, the refining sector in EU has the highest energy cost worldwide with the cost for Greece the highest among EU member states.

The competitiveness of Greek refineries, which contributes significantly to the domestic economy, is not secured. Current legislations and policies of the EU create more problems and uncertainty for the refining sector in Greece as it is affected by a number of other exogenous factors (price fluctuation in crude oil prices, global economic crisis). The bailouts do not help Greek economy, as the money from them is not used to make necessary structural changes that the domestic economy requires. Yanis Varoufakis, the ex-Finance Minister of Greece resigned after his government accepted the third bailout package, maybe realising that the right steps towards a sound economic policy were not taken with the bailout.

One of the most productive sectors of the Greek economy faces uncertainty, reduced domestic demand, high costs, low margins and a comparative disadvantage in the international market. If Greece hopes to take the right steps to move towards a more stable economy, it needs its refinery sector to become more globally competitive. However, with strong pressure from the EU regarding its ‘Energy Roadmap 2050’, the chances for the Greece economy to improve its situation seem bleak as the potential of the refinery sector is being limited.

Ratish Srivastava (@socialia13) is a research intern at the Takshashila Institution

Featured image: Heiko Prigge/Monocle

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Regulating Fintech: A Proactive Approach

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Image courtesy of Forbes

By Nitin Malik (@nitinmalik86)

Financial Technology or Fintech sector needs a proactive and stable financial regulation policy environment to grow. Fintech can have a potentially transformative impact on economy in the future, and as such, Indian regulators need to carefully nurture a policy regime which promotes innovation and growth of fintech companies.

Fintech encompasses a broad range of technological innovations in the areas of block chain, financial advisory, digital currency, payments, financial inclusion, peer to peer lending, among others, which are disrupting traditional financial services. Not only do fintech innovations increase efficiency and lower costs, they also help increase access to financial services. For example, innovations like P2p and social data based lending is enabling people without formal credit histories to get faster and easy access to loans. In Kenya, M-Shwari uses call data and recharge history of customers to determine their credit worthiness. This has made it possible for millions of mobile subscribers to get loans in just a few minutes.

The Indian Fintech sector is estimated to be $1.2 billion in 2015 and is projected to touch $2.4 billion by year 2020, as per a NASSCOM study. Globally the sector is estimated to touch $45 billion by 2020. A recent McKinsey study estimated that digital financial services can help governments in developing countries to save around $110 billion annually.

Why regulating fintech is different?

Rapid innovations in fintech sector makes it a difficult sector to regulate. The objective of Fintech firms is to disrupt banking and financial services which are traditionally heavily regulated. Sometimes these regulatory costs create high capital requirements on startup firms and pose barriers to innovation in the initial growth phases.

This is why regulations of fintech is so critical, one that enables and not stifles innovation. Globally, regulators have had to walk a thin line between over and under regulation. Since understanding of risks posed by fintech firms is limited, regulators have come up with different approaches to understand and regulate this sector. Countries like UK, Singapore, the US and Australia have been at the forefront of these regulatory innovations.

How others are doing it?

UK’s Financial Conduct Authority and Monetary Authority of Singapore have created regulatory sandboxes for fintech firms. These sandboxes are like contained experiments, where fintech firms are allowed to innovate without the burden of regulatory permissions. FCA in UK through its project innovate scheme has invited fintech firms to innovate. These firms are provided with regulatory feedback and a safe house to build on their innovations and experiments.

Another approach, advocated by Omidyar Network, is the minimal approach to regulations called lean regulation – a term borrowed from the lean startup philosophy by Eric Ries. The spectacular growth of Kenya’s M-PESA and Philippines’ GCash mobile money services owe a lot to minimal regulations in the initial stages by central banks. Under the lean approach, regulators collaborate with players in their incubation phase and keep the regulatory requirements to a minimum. Rules are developed gradually as the market matures and there is better understanding of risks involved. This approach has proved highly successful for both countries, as they have become global leaders in providing mobile financial services to their citizens.

Recently, PayPal has also come with a paper on performance based standards for regulating payments industry. It advocates setting smart governance models by governments using data analytics and feedback loops to advance payment business models. This is still at ideation stage.

In summary, the overall arc of regulations should move from a rule based approach to principles based approach. Regulators should be active participants in market development rather than bystanders. They should encourage pilots, trials of innovations and engage with both incumbent players like banks, NBCFs and new startups.

India can spearhead the change

In last few years, India has taken a lead in emerging markets in embracing financially innovative regulations and policies, especially in finding innovative ways to promote financial inclusion. Despite this, we still don’t have pervasive mobile money services for the poor like Kenya and other east African countries. But the government along with RBI has been proactive with initiatives like award of differentiated banking licenses, development of India Stack, unified Payments Interface and laying out of JAM architecture. RBI has even issued a paper on P2P lending providing much needed clarity to the regulatory grey area.

India’s traditional software strengths and large internet consumer market places it an optimum position to be a leader in fintech sector globally. It is important that RBI, SEBI and other regulators continue to embrace the growth of fintech and make India a global hub of fintech innovation.

Nitin Malik is a financial inclusion consultant working in Myanmar and a participant of the 14th cohort of the Takshashila GCPP. His twitter handle is @nitinmalik86

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GST Bill: A Successful Exercise of Consensus-Building in Democracy

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Image courtesy of The Indian Express

Bhavani Castro is a Fellow of Indian Studies, Getulio Vargas Foundation in São Paulo

The first half of 2016 was marked by several setbacks for democratic institutions and liberal values all over the world. From the Turkish government’s repressive response after the failed military coup to the rise of radical parties in Europe, a controversial impeachment process in Brazil and the rise of Donald Trump in the United States, it seems that democracy has recently been under significant pressure. Intense animosity and partisan divisions are challenging the way democracy works and its core values, undermining decision-making processes in parliaments, blocking key reforms, and leading to authoritarian administrative measures. However, in the midst of many worrying examples of flaws in democratic regimes in different parts of the world, it is possible to identify one case of significant success when it comes to democracy’s capacity to overcome division and build consensus: the passage of a groundbreaking tax reform by the Indian Parliament.

Goods and Services Tax Bill (GST) was passed in August in the Upper House of the Indian Parliament, the Rajya Sabha, and approved by President Pranab Mukherjee on 8 September. The GST, now turned into law, creates a single tax system in India, and represents a significant breakthrough that in practice will transform the Indian states into a common market. This notable success generated little reaction in the international media, especially in emerging and developing countries; however, it holds important lessons on how game-changing reforms can be implemented in a democracy.

The world should look at the ratification of the GST law as a substantial example for effective democracy for a variety of reasons. First, it shows the capacity of a messy, multiparty parliamentary system. Since the 1990s, the Indian government needs to recur to coalitions to rule at the national level, as the increasing number of national and state parties make it impossible for a single party to rule alone. This means often making deals and negotiating not only with the opposition, but also with strong regional parties that seek policies that benefit only – or mostly – their local constituencies. Similar phenomena are visible in other large democracies like Brazil, where large coalitions make governing extremely difficult.

An increase in polarization usually means fewer laws pass in Parliament. For emerging countries like India, where there is a necessity of progressive reforms to manage the economic transformation and push for social improvements, political fragmentation and a lack of consensus building can have devastating effects. To avoid setbacks, the strategy adopted by the Indian government was to engage and include strong regional parties in the discussion, rather than coercing and embracing a combative tone. At the same time, the biggest opponent, the Congress Party, was slowly isolated and eventually, faced by the risk of having its image damaged, had to accept the bill and enter the negotiation. Consequently, opposition parties contributed to changes in the bill, while the ruling coalition yielded to demands and offered concessions in the final written version. The process was not simply an exchange of favours as it is usually observed in multiparty democracies, but instead a conciliatory process of political commitment by all parties involved.

Moreover, the GST, when implemented, will go against an ongoing international trend of isolating peoples and markets – the new tax system has even been called a “reverse Brexit”. While the European Union is going through one of its biggest crises – with rise in partisanship and the exit of an important economic member – India is showing the world that democracies can do better. The new tax system will replace dozens of different tariffs that made selling a product to another Indian state as hard as selling products abroad. That means connecting 1.2 billion people in a European-style market and an expected increase of 1-2 per cent to the country’s GDP growth rate.

Finally, it is important to consider the dimension of this tax reform. The GST was designed along the lines of the value-added tax (VAT) model from OECD countries, and it is considered a key reform for restructuring economies. For India, it is one of the biggest institutional reforms since its independence in 1947. Most countries still struggle to enact legislation that will lead to this type of revolutionary work, as it can negatively affect some industry sectors and interest groups. Brazil, another populous democracy, has been trying for years to design a tax reform to substitute its inefficient system; however, it never even managed to produce an initial project for a new tax scheme. India’s lessons on the GST law-making process could be extremely valuable for countries like Brazil, which could follow India’s steps: first creating a highly skilled committee to design a uniform tax system, and then submitting the initial proposal to the legislative for a comprehensive discussion and adjustments between all political parties.

India still faces many problems threatening its democracy, including an ongoing civil upsurge in Kashmir, suppressed by the government, and a severe water-sharing dispute that increases tensions between southern states. However, in the case of the GST process, the government proved that it is possible to use democracy as a tool to reach potentially painful but necessary reforms in a pluralistic country. It took more than a decade to pass the GST Bill, but democracy is a slow process and does not provide fast solutions to urgent problems. India’s political system can be inefficient, polarized, disorganized and sometimes exhausting, but hopefully this experience will be a positive example for other democratic countries still struggling with much-needed institutional reforms.

Bhavani Castro is a Fellow of Indian Studies, Getulio Vargas Foundation in São Paulo

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