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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A welcome twist to demonetization

Image Source: newsexperts.in

Image Source: newsexperts.in

The government’s most recent amendment mandating that wages be paid by cheque or bank transfers is a welcome by-product of the demonetization drive.

President Pranab Mukherjee promulgated with immediate effect an ordinance amending the Payment of Wages Act, 1936 on 28 December 2016 (Ordinance). Amending an 80 year old law that required payments to be made only in cash, the Ordinance allows employers to pay wages by cheque or by electronic transfer. It provides employers with the option to pay their employees in cash, except where the worker is employed in an “industrial or other established sector”. In such cases, wages must be paid only through cheque or bank transfer.

The Payment of Wages Act, 1936 (POW Act) applies to persons earning up to Rs. 18,000 per month. Importantly, it makes specific provisions for persons employed in specified “industrial or other establishment”, that is, sectors where government regulation is required for the protection of workers, (for instance, railways, coal mines, etc.).

Shortcomings of the Ordinance

Although the Ordinance has been viewed as a welcome change, it leaves certain issues unaddressed. For example, it proceeds on the assumption that all workers have functioning bank accounts, and know how to operate them. This not necessarily being the case, workers who lack such facilities may be more inconvenienced. The Ordinance also does not contain any provision aiding the transition for workers without bank accounts to be accommodated into the new regime. Ensuring that employees have functional bank accounts and are aware of how they operate would iron out major creases in implementation.

Aside from such operational hurdles, the Ordinance is expected to increase transparency in wage payments. It could reign more salaried people in under the tax net, and ensure that workers are paid the fair wage due to them.

Manasa Venkataraman is a Research Associate at the Takshashila Institution and tweets from @nasac.

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Snapshot of 2016 military modernisation in India

By Guru Aiyar (@guruaiyar)

 A mixed year of  hits and misses, what is most pertinent for defence policy is military modernization and overdue defence reforms

The year that has gone by has been a mixed one as far as defence forces of India are concerned. It started with an attack on Pathankot airbase . Observers were quick to point out that this was a reply to Christmas 2015 visit of Prime Minister Modi to Pakistan. Little do they realise that planning for an attack of this magnitude could not have taken place in a week. Nevertheless, this exposed a chink in the security of military bases in India. The subsequent attacks in Uri in which 17 Indian soldiers were killed kept the world waiting about India’s response. What India replied on September 29, 2016 with a ‘surgical strike’ has signalled a new normal in India-Pakistan face off. India’s defence spending at about US $ 48 billion as per the 2016-17 budget stood at the sixth position in the world rankings with China at number two.  The successful testing of 5000 plus Km range Agni V missile on December 26 has China genuinely worried.

According to defence economist Laxman Behera, the finance minister made a key change in the nature of allocation of defence budget. However, the capital expenditure component (that effectively indicates the acquisition) of about 10% (army), 30% (Air Force) and 40 % (Navy) is something that must worry the policymakers. There is a renewed thrust on Make in India as far as thrust on technological improvement is concerned. But how much it has impacted on capability is something that is highly suspect. The import bill is still phenomenally high. Prime Minister Modi rightly pointed about using technology to reduce manpower costs and making military leaner.

The Navy hosted an International Fleet Review that saw participation from more than 50 countries. With power projection and the goal being a ‘net security provider’ in the Indian Ocean Region (IOR), the naval display was undoubtedly the centre of attraction. With the nuclear submarine Arihant getting its punch in the form of an operational ballistic missile, the second strike capability has been completed. Of course, the Scorpene documents leak in August has put in a brake in the conventional submarine capability proving that dependence on foreign suppliers will always be with a caveat. In November, the largest ship made in India, INS Chennai guided missile destroyer was inducted. The year ended with Navy exercising with Russia in the Bay in Bay of Bengal. With a goal of 200 ship and 600 aircraft in 2027, the maneouvres of the Indian Navy would be closely watched by the US. For this is the capability that would be most vital if the US looks for a partner in developing its ‘pivot’ in East Asia as a counter to China. Justifiably, India is inching closer to sign defence agreements—the Logistics Support Agreement (LSA), Basic Exchange and Cooperation Agreement (BECA) and Communication and Information Security Memorandum of Agreement (CISMOA).

The Indian government signed the landmark Rafale deal to bolster the strike capability of the Indian Air Force. Although the outgoing Air Chief Marshal Raha stated the numbers are inadequate, he vouched for its exceptional technological superiority.  With Tejas being in the Final Operational Clearance (FOC) stage, the IAF is optimistic about the aircraft to replace its ageing MiG 21 and MiG 27.

While the recent appointment of army chief had its share of controversies, the government has indicated that it will move towards the much needed joint chief of defence staff in 2017. This long standing reform will hopefully propel the military toward greater potency and ‘bang for buck.”

Guru Aiyar is a Research Fellow at Takshashila Institution and tweets @guruaiyar

Featured Image: India Gate by Arian Zwegers from creativecommons.org

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Locating the paradiplomacy of Indian states

Currently, the space for Indian states to play a role in foreign policy is largely in the economic realm.

One of the growingly popular frameworks to analyse how sub state actors can play a role in foreign policy is paradiplomacy. According to Adam Grydehoj, paradiplomacy is a political entity’s extra-jurisdictional activity targeting foreign political entities.

Andre Lecours looks at how states participate in foreign policy in Europe and North America. He believes that they participate in three layers based on their geopolitical aims or behavior.

Political Issues of Paradiplomacy- Andrew Lecours

Political Issues of Paradiplomacy- Andrew Lecours

Lecours believes that paradiplomacy has been successful only because states have constitutionally granted powers to work in the foreign policy space. They have then proceeded to set up mechanisms by which states can play bigger roles in international relations. Belgium which is one of the best example of sub-state diplomacy provides all its regional actors with a veto on matters pertaining to international relations. Canada has set up communication and sectoral channels (so that the sub state authorities can approach relevant departments or ministries, share information and coordinate) apart from specific bodies devoted to bringing all domestic stakeholders on the table to discuss relevant international policies.

However, it will not be possible for all countries to follow this sort of paradiplomacy. Lecours acknowledges that in developing countries, sub nationalism may threaten sovereign identity or even result in the lack of national coherence. Therefore, paradiplomacy is viewed with suspicion by developing countries which generally have unitary governments.

Debates about participation of states in foreign policy eventually lead to debates on federalism. The Indian Constitution has placed foreign affairs (all matters which bring the Union into relation with any foreign country) in the Union List. The Central Government also has sole authority over diplomatic, consular and trade representation, war and peace, foreign jurisdiction, citizenship, extradition and so on. This has structurally left the states little space to intervene in policy issues.

Any discussion about states in foreign policy in India goes back to how regional parties have pressured the Centre- with Tamil Nadu and West Bengal as the primary examples. States with land or sea borders have interacted beyond the Indian subcontinent much before Independence. Therefore, they have a natural interest in foreign policy. Since liberalization, states have started looking beyond the Union Government for sources for revenue. An overwhelming number of states now organize a Global Investor’s Summit to woo foreign investors. As I have argued earlier, states are also stepping up their game on NRI affairs because the importance of remittances has grown.

If we try to look at Indian states in Lecours’ layers, then it becomes immediately evident that states fall under the first layer in some capacities. Some states have actively pursued foreign investment to boost the state economy. The most striking example, of course, is the erstwhile Andhra Pradesh state under Chandrababu Naidu who actively courted investments in a bid to convert Hyderabad to the IT capital of the country. Telangana has recently come into the news for wooing large international companies like Amazon, Uber, Ikea and Apple to set up offices in the state.

Few states fall under the second layer. Tamil Nadu has held ‘World Tamil Conferences’ to reach out to Tamil Speakers and enthusiasts all over the world at regular intervals. While cultural associations emphasizing regional identity like the Kerala Sangam have been set up, these are non-profit initiatives set up by diaspora in various parts of the world.

The third layer is interesting because it is representative of why the Union Government would like to have authority over foreign policy. As India is an amalgamation of regional identities, the emphasis on political distinctness does not bode well for a coherent foreign policy. However, even this form of paradiplomacy has few takers simply because States see it as an infringement of their sovereignty.

India, states will increasingly pursue paradiplomacy for economic issues. While Lecours’ model may work well for developed countries, Indian states will find a way to maneuver foreign policy with the help of the centre. After all, the aim of foreign policy is to further India’s national interests which states also share.

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

Hamsini Hariharan is a Research Scholar with the Takshashila Institution and tweets at @HamsiniH

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Nadaan Parindey, ghar aaja

Kerala, Gujarat and Punjab show that states can play an important role in diaspora relations.

States are increasingly reaching out to their diaspora

States are increasingly reaching out to their diaspora

States are maneuvering around foreign policy considerations by reaching out to Non Resident Indians (NRIs). Foreign Policy is considered the domain of the Union Government however, some state government have proved adept at working around this by focusing on selected areas of outreach. One of the primary ways that states play a role in foreign policy is by reaching out to diaspora. As NRIs are an important source of remittances to the states, the states benefit from solving the issues faced by NRIs. States are also better poised to engage with diaspora as they have direct links with them and can devote more resources than the Union to deal with issues. One of the ways in some which states have done this is by forming a public sector undertaking which can work with relatively more freedom than the state administration itself.

More and more states have begun to institutionalise NRI relations through specific departments, divisions or boards. The states with the most developed institutional structures are Kerala, Punjab and Gujarat. These three states that stand out are not surprising given that they have huge diaspora spread out in different parts of the world. The states have tailormade their policies according to the interests of the diaspora which allows them flexibility and innovation.

Institutions dealing with diaspora relations in Kerala

The State Government of Kerala has expressly looked at institutionalizing administrative processes with respect to the interest of non-resident Keralites (NRKS) through a department called Non-Resident Keralites’ Affairs Department (NORKA). However the real work is done by a PSU established under the Department called NORKA ROOTS. Kerala which receives the highest remittances in the country has been working on making its diaspora employable from arranging pre-departure orientations, easy authentication of certificates, skills upgradation programme, financial assistance, rehabilitation projects for returnees, job portal, travel assistance etc.

Institutions dealing with diaspora relations in Gujarat

On the other hand Gujarat has set up an NRI division under the General Affairs Division which merely allocates funds and decides the composition of the Non-Resident Gujarati Foundation (A Government of Gujarat Undertaking). The NRGF looks at how NRIs can play a vital role within the state and has set up district committees for NRIs in every district to deal with any problems, to provide financial aid to the Gujarat Samaj, create a database of NRGs etc.

Institutions dealing with diaspora relations in Punjab

The NRI Affairs Department in Punjab has an intensive mandate from coordinating with the Home Ministry, liaising with NGOs, providing grants and waivers for NRI investment, focusing on twinning of cities such as Derby with Kapurthala and Jalandhar with the Borough of Hounslow, cultural exchanges etc. Punjab has gone a step further and allowed NRIs to vote in state elections (though they have to return to India to cast their votes).

There are some common strands across the policies of these three states such as the outreach to diaspora, creation of databases, grievance addressal and encouraging investment. The state governments of Kerala and Punjab have set up NRI cells under the respective police (though for Punjab, this has been upgraded into an NRI wing with cells in every district). While Gujarat has not set up similar institutions, it has set up an NRI cell under the State Women’s Commission to deal with complaints related to harassment of women abroad. While the grievances of the NRIs generally fall under the Home Ministry, the states have ensured their own jurisdiction by making BRI grievances a law and order issue pertinent to the state.

All the three states have also focused on issue identity cards to NRIs. The issue of cards such as Non-resident Keralite, Non-Resident Gujarati and Non-Resident Punjabi pushes for the sub-national identity which has generally subsumed under the larger Indian visa. This also reinforces the regional identity of the NRI and gives them a stake in the domestic affairs of the state.

States working in diaspora relations is a crucial and overlooked part of foreign policy. Increasingly, states have started looking to their diaspora for several reasons. Even states with relatively smaller diaspora such as Madhya Pradesh and Uttar Pradesh have started engaging with diaspora so that they can be important stakeholders of the state. The role played by states in diaspora relations is an important one because it eases some of the burden that the Union bears in dealing with all these problems. It also acts as a bridging mechanism between NRIs and the Central Government. Other states in India should also consider similar mechanisms (or those more contextualized to its needs) so that they can tap into the advantages of their residents in a globalised world.

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

Hamsini Hariharan is a Research Scholar with the Takshashila Institution and tweets at @HamsiniH

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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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A breach notification strategy for cyber attacks is needed

By Sandesh Anand

While a strong focus on preventing India’s cyber assets is required, it is a reasonable assumption to make that there will be more cyber attacks in 2017. These attacks will lead to sensitive information leakage, lack of availability of your favorite internet services and other disruptions common during a cyber attack. It is hence important to deliberate on a breach notification policy framework.

Currently, many regulators (such as RBI) and CERT-in lays down many rules to ensure companies report certain kinds of cyber incidents. However, there is no policy which requires entities to report breaches to you and I, the consumers. This means, if (say) a bank get’s hacked and that leads to leakage of consumer’s sensitive information (such as phone number, account balance), the bank is under no obligation to inform the consumers about the extent of the breach and explain what steps are being taken to prevent such incidents in the future. This means, consumers are in the dark about the status of their data and cannot take corrective steps. For instance, if a consumer knows that her credit card number is compromised, she can contact her bank, cancel the card and get a new one issued.

Here are some questions to ponder while we design such a policy:

What type of breaches should be notified?

Agencies like CERT-in require companies to report any “significant” breach, however, attacks which are “significant” may be irrelevant for a consumer. For example, does the consumer really need to be notified if an attack caused internal network outage internal to an organization? How about if only employee details were leaked? On the other hand, attacks which lead to leakage of consumer PII (personal identifiable information) certainly warrants a consumer notification. It is important to make it easy for organizations to distinguish between breaches which need to be notified and otherwise.

Who should be notified?

The policy should address the question of who needs to be notified. Should it be limited to “affected parties” (for example: users whose accounts were compromised) or should the entire public be notified? The answer to this question may differ based on industry, company size, ownership model (i.e. publicly held v/s privately held companies).

Should notifications be enforced? If yes, who should enforce it?

It is important for the policy to define if it merely “recommends” notification or enforces it. If the latter, the policy needs to define who the enforcer should be. Options include central government, state governments (such as in the USA) or industry regulators.

What should be the nature of the notification?

It will be useful to define the nature of the notification as well. While some flexibility can be provided to the breached organization, broad  guidelines should be provided. The absence of such a guideline might lead to a organization notifying a breach through a small column on page 16 of a local daily.

When should the notification take place??

While it makes sense to provide breached organizations with some time to investigate the breach, it is important to have a deadline by which the organization has to notify the consumer. For example, the US state of Florida mandates that such a  breach be notified within 30 days of determination of the breach.

A robust breach notification policy is a requirement as we move rapidly towards a digital economy. While some companies may resist such a policy as it makes things harder for them, it certainly serves the interest of their customers and brings in much needed transparency to the myriad world of cyber attacks.

Sandesh Anand is a GCPP9 alumni and an Information Security professional. He tweets as @JubbaOnJeans

 

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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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