governance, political economy, institutional development and economic regulation

Archive for the ‘Digital connectedness’ Category

The price of democracy

beggar

Prof. Ashutosh Varshney of Brown University calls India an improbable democracy — poor, impossibly heterogeneous and multicultural, and ironically, only its colonial heritage keeps it going. So has our hubris cost us plenty?

Why we are not China

Forget comparing ourselves with China today. Are we at least on the same path? No, we are not. Assume a lag of a decade between China’s 1979 takeoff — Deng Xiaoping’s reforms — and India post-liberalisation in 1991. Second, assume that GDP growth is a decent proxy for national effort. Judging by the results, we have tried only one-third as hard as China to grow three decades into the reform process. Have we been tied down, like Gulliver, by democracy’s Lilliputian ropes?

Money or efficiency make the world go around

There are only two ways of increasing growth. Increase investment or increase the efficiency with which capital is used. The latter is tough but critical. Efficiency and stability invite foreign capital in, build supply chains and boost “federated” exports — many economies get a say and a share in the final product. Making the world your shareholder makes politicians more responsible — barring outliers like US President Donald Trump — and who knows, his unorthodoxy might well work for the United States.

Wasting scarce capital

Amravati

India is hugely capital starved. Sadly, it has not done well either in using capital efficiently. And it is not just the public sector alone which is wasteful. A generalised trend of wastefulness springs from poor monitoring systems available to the government, shareholders and citizens, none of which can easily check the data by triangulating information sources.

Over-designed public projects

Bengaluru airport has had charging points in its parking lot since 2008 for electric cars, which will not use them till 2030 – if then. You pay for casually over designed projects. The building of Amravati, the new capital of Andhra Pradesh, represents all that is wrong with our democracy with politicians free riding on tax payers.

Frank admissions of failure are as important as bragging about success

Finance secretary Hasmukh Adhia has admitted that the GST network has failed to provide end-to-end digitisation. We knew this. But speaking honestly and responsibly endeared him to the public. Unfortunately, no one is to be held accountable for this glitch.

Adhia

Cheap finance induces waste

Wasteful use of capital is hardwired into a system which prices capital cheaply. Most business folk will moan about the high cost of funds in India. But the fortunes, domestic and overseas troves of real estate barons and industrial tycoons were built on negative interest rates, with inflation boosting prices but diluting the real interest cost of a bank loan to zero over a 10-year period.

Four matras for democratic success 

Can we take remedial measures? The times are tough. But bad times never last. More important, are we primed to take advantage of the next uptick cycle in world economic growth? Possibly not. Here is a four-point mantra for getting there.

Efficient public services

online

First, the new national government, later this year or in early 2019, must tackle the long-ignored task of public sector reform. It is shocking that economic duality has widened since 1947. The average citizen and business is streets ahead of the government in the effective use of 21st century technology to make employees accountable. Can you imagine how the government would change if the bottom five per cent of employees were sacked every year for poor performance or if the courts disposed of cases quickly? Just focusing on achieving these two and keeping everything else on hold could retrieve democracy in India.

Make data accessible on citizen aspirations & preferences, government performance and business governance 

Second, know your citizens. Make all residents and citizens identifiable, traceable and accessible. Aadhaar is the answer. Make registration for Aadhaar painless and self-declaratory — the ability to cancel out duplicates is supposed to be built into the system — enhance its accuracy in identification; mask the private information better and multiply improved digital recognition equipment. Populate data for citizenship, electoral rights and public benefits, using Aadhaar as the base platform. Transfer all public benefits through bank accounts. Roster all government officials, below 40 years of age, irrespective of grade or cadre, to serve as field-level facilitators wherever they are posted, with specific mentoring targets, to help citizens access their benefits.

The BJP and some regional parties (Trinamul Congress, AIADMK, the Left parties) who have a cadre are ramping up to do this. Down this route lies the threat of democratic abdication. A citizen must be served by the government of the day, not tied to the apron strings of a particular party for accessing benefits.

Link official accountability with efficiency in use of capital 

Third, change public incentives and processes. Switch from lazy budgeting of inputs to specific outputs, achievable over two years and outcomes over five years. Form teams of specifically identified officials to programmes and projects; ensure that there are no transfers and the team remains intact for the next five to 10 years. This will ensure more responsible budgeting; development of job commitment and expertise and improve outcomes. China does not shuffle its officials about needlessly. They stay tied to specific tasks for long periods — many forever. We encourage our officials to forum-shop from one cushy position to another.

Stop fiddling with markets

markets

Fourth, walk the talk. Withdraw the government from being a market participant and it will work better. Markets are like forests. Naturalists like Pradeep Krishen say it is enough to fence barren land off from predators like goats to allow a forest to regenerate. Going with the grain of nature doubles results. Anything else is wasteful and inefficient.

Stop fiddling with markets and they will find their level. Focus on diluting, not alleviating, the pain of those who lose out from markets. Just that can consume all of the government. Do not dilute the bite of markets if you aim for efficiency. Equity initiatives must be front-loaded to enhance competitiveness, not installed at the end of pipe to shackle markets. Caste-based reservations for education, jobs or benefits are an end-of-the-pipe option. They gel perfectly with our real strategy of steady but inefficient, slow growth.

Democracy is not the reason for our woes. It is what we do with it that’s troubling. Democracy implies at least a 50 per cent chance of not getting re-elected. The great Mughals would not have approved of the risk profile. Neither, it seems, do our rulers today.

Adapted from the author’s opinion piece in The Asian Age, July 9, 2018 http://www.asianage.com/opinion/columnists/090718/price-of-democracy-a-4-point-growth-mantra.html

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bureaucracy, Business, Democracy, Digital connectedness, Economy, India

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What the cash crunch foretells

Parliament's winter session

Conspiracy theorists are hard at work to identify the drivers behind the ongoing cash crunch, that has left the automated teller machines (ATMs) in cities and towns across large parts of the country dry. There is much finger pointing between the Reserve Bank of India and the commercial banks, both private and public sector, each accusing the other of being responsible for inefficient operations. It is unusual to see this level of discord, bordering on acrimony, between a regulator and the regulated entities.

Commercial banks bear the brunt of fuzzy policy objectives

The banks allege that the supply of high-value notes has dried up. The Bank Employees Union alleges that a shortage of imported printing ink at the currency press in Nashik could be one reason. Alternatively, this could be a covert attempt by the government to correct a problem dating back to the November 2016 demonetisation — the incomprehensible introduction of a Rs 2,000 note to replace the Rs 1,000 note as a measure to reduce black money. Phasing out the offensive new high-denomination note and stepping up the printing of new Rs 500 and Rs 200 notes instead is a more obvious and welcome blow against black money. The Ministry of Finance says Rs 70,000 crores worth of such “Hi-Value” notes can be printed in just one month. The value of such notes in circulation on March 31, 2017 (the last public data available) was Rs 7.5 Lakh Crore or ten times the value of such notes printable in just one month. So why a shortge ?

RBI waffles with poor communication

The Reserve Bank, unconvincingly, denies that there is any cash crunch and alleges the inefficiency of banks in properly allocating the available cash. Could this be a surgical strike by the banks and ATM service providers who have got unsettled by the criminal investigations into fraud or are upset with the March 2018 decision of the RBI to end the incentives for installing cash recyclers and ATMs for low-value notes? Was it their intention to embarrass the government by engineering a cash crunch to coincide with Prime Minister Narendra Modi’s visits to Sweden and the UK for the Commonwealth Summit? Possible, but far-fetched.

Cash remains king

cash is king

The most plausible reason is that the economy is reverting to its pre-demonetisation levels of cash held by the public of around 12 percent of GDP versus the hugely constrained post-demonetisation level of 9 percent of GDP in end of March 2017. Expectations were exaggerated on two counts. First, that the black economy would permanently be reduced. Second that digital and banked transactions could become uepreferred options. The second has indeed proved true. The use of cash by those who declare their incomes to tax, or even those below the tax levels, has reduced significantly.

But the big stick and carrots embedded in the Goods and Services Tax to incentivise the switch to banked transactions are not widely experienced yet. Systems and reporting compliance are clunky and curiously disadvantage the small, honest entrepreneur. Other small businesses may be unviable with a tax load.

RBI – bitten by the bug to ration currency, & create the “statistical” basis for “digital victory” 

Anecdotal evidence of how cash transactions are done show that post demonetisation, Rs 2000 has replaced the earlier Rs 1000 note as the preferred stock of currency held by high value entities and individuals. Unfortunately, RBI has squeezed the printing of this note. Prior to demonetisation, for every Rs 1000 note available, there were three Rs 500 and three Rs 100 notes. Post demonetisation, for every Rs 2000 note available, there are eight Rs 100 notes but just two Rs 500 notes available. RBI has curiously enlarged the relative supply of the highest value note (which is used mostly for individual stock of currency)  at the expense of having more transaction related currency in Rs 500 notes- possibly hoping that transactions would move to digital rather than remain in cash post demonetisation.

More importantly, not only has the overall quantum of currency, relative to GDP decreased, but even the share of Rs 500 and Rs 2000 notes, by value, in the total stock of currency has decreased, from 86 percent pre-domentisation to 73 percent in end March 2017 – possibly in expectation of individuals banking surplus stocks of money.

The ground reality is that the cash-based supply chain of goods and services is a subset of the demand for cash contributions, related to electoral politics. Highly contested elections are scheduled for mid-May in Karnataka and later this year in several other states. Cash resources will be needed to buy SUVs, print advertisements and motivate the lethargic population to vote.

Election Commission hesitates to adopt T.N. Seshan’s (ex-Chief Election Commissioner 1990-1996) muscular credo on mandate

ECI

Oddly, there is not a peep out of the Election Commission of India (ECI), which is charged with the responsibility of ensuring that election spending remains within the implausibly tight limit of Rs 20 to Rs 28 lakhs per candidate for Assembly elections. The EC has adopted an “end of the pipe” strategy. The intention is to catch the crooks once they show their hands via excess expenditure. A more proactive EC could have recognised the red flags of unusually high cash withdrawals unearthed by the media. It could have directed the Karnataka government to report on the ensuing potential for subversion of the code of conduct and the measures being taken to heighten border vigilance, to clamp down on cross-border transfers of cash. One can imagine former chief election commissioner T.N. Seshan diving through this open door for enhancing the regulatory ambit of the ECI. But today’s election commissioners appear to be content, at least overtly, with a narrower definition of their mandate, strictly as per the law.

RBI – a regulator at odds with its “caged parrot” status 

To speak the truth, the glory days of Indian regulatory institutions are over. Even the RBI, the first to be legislated into existence in 1934, is going through strained times. Demonetisation had spread the apprehension that the RBI was led by the nose from North Block in New Delhi. The extent of wilful defaults in the bad loans of public sector banks, often the consequence of ever-greening of impaired assets and plain fraud, also points a finger at the RBI for exercising inadequate oversight.

RBI governor Urjit Patel had appealed to the government through a public address on March 16 to bring public sector banks into a uniform regulatory arrangement as applicable to private banks. Domestic and international professionals support the broad thrust of a uniform regulatory arrangement for all banks. But the subsequent expose of the yawning deviations in ICICI Bank and Axis Bank from gold-standard board governance have cut the ground from under the governor’s feet.

Public credibility of commercial banks at its nadir

Mutual funds are upbeat about the prospects for equity investment in private banks. But the average person is inclined to quietly diversify away from private banks to the safe haven of public sector banks. Private insurance and healthcare are similarly perceived as being exploitative of the average consumer. It does not help that the Financial Resolution and Deposit Insurance Bill 2017 was worded so ambivalently that it fanned a deep seeded fear of savings deposits being sequestered as equity for resolving bankruptcy. Finance minister Arun Jaitley has been at pains to assure people that deposits up to Rs 1 lakh per account will remain guaranteed. But ministerial assurances provide very little comfort when elections are around the corner.

A common thread across this turbulence is uneven support from the government for beleaguered institutions and the absence of informed participation, quite unlike in the GST Council. RBI governor Patel bravely sat out the storm around the hasty implementation of the questionable policy option of demonetisation. But the Pandora’s box of crony capitalism has taken its toll. These are challenging times. Deeper bench strength, within the government, of trusted fiscal and financial expertise would help.

Adapted from the authors opinion piece in The Asian Age, April 21, 2018 http://www.asianage.com/opinion/columnists/210418/what-the-cash-crunch-foretells.html

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banking, BJP, Business, corruption, crime, Democracy, Digital connectedness, Economy, elections, India, Tax

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Lock your data & sell it

The concept of information asymmetry” was taught using the well-worn example of a secondhand car salesman who uses his insider’s knowledge to sell a “lemon” (a defective car) to the innocent buyer. The new-age example of information asymmetry relates to data.

rural data

Visionary business leaders know that “data is the new oil”. But the average person allows free access to his or her digital data merely in exchange for downloading and using an app, such as Facebook, Google, Twitter, YouTube or Amazon, for free. The asymmetry is that individual data is worth a lot less than data collected at scale. The latter generates enormous value by targeting advertisements and influencing minds. Resolving problems of information asymmetry is a typical regulatory function. But it has been managed lackadaisically in the digital world, at least so far.

Have judicial short cuts muddied the water for selling your data legally?

A Constitution Bench of India’s Supreme Court had decided on August 24 last year that the right to privacy was a fundamental right for every Indian citizen, akin to the right to life and liberty or the right to freedom of expression. The court had stressed, however, that it was not creating a new right and was not, therefore, judicially amending the Constitution. It was merely enumerating the core components of the pre-existing rights in Article 21 to life and liberty.

Life and liberty are recognised as natural or inalienable right. The State can only restrain them lawfully, going through due process, and then too only in a reasonable manner. The judgment serves well the purpose of guarding individual privacy against intrusion by the State. But it may have inadvertently created a problem for individuals who want  to sell their data, opinions or experiences. There is a long history of the right to sell your privacy, such as in publishing a memoir.

Natural rights being inalienable cannot of course be sold. You cannot end your life for money or any other inducement. You cannot also voluntarily revoke your right to liberty and become a slave, no matter how much the reward. Techies, some of whom work 24×7, would be surprised to hear this. Treating privacy as a natural right and yet allowing for its sale with consent will have to be judicially reconciled.

……..and governments looks to the Justice Srikrishna Committee for answers

ravi shanker prasad

Meanwhile, Big Data is too valuable not to be used by social media and digital search, share, see and sell companies. Explicitly contracting with users to compensate them for using their data is one way forward. The Justice Srikrishna Committee report will likely show the way to legislate the do’s and don’ts on data protection.

Public education on the uses & abuses of data would help

In the meantime, the government can help by educating the public about the consequences of clicking the consent button on websites and apps — something that we all do without a thought. Tech companies could also do better. At present, they do inform users about the type of data that they intend to access, but what is less clear is how they intend to use this data. A clear distinction must be made between three types of use.

First, using your private data to target advertisements of products and services that you may want. Second, using private data for generating useful secondary data for sale like analysis of market trends and forecasts. Third, selling raw private data to a third party.

The Aadhaar leaks and the leak by Facebook to Cambridge Analytica of the raw data of 50 million American users are the third type of use, which can only be termed mala fide. Since there was no consent, such leaks should have both criminal and civil consequences — punishing the offenders, including those who leaked, and the collaborators who used the data, and in addition compensating the victims. Mere possession of stolen lists of raw data should be punishable as dealing in stolen goods under the Indian Penal Code. The source of the leak should be booked for theft, or at the very least, for criminal negligence.

Using your data to drive advertisements to you is the least pernicious of the three types of use. You can always choose to not view advertisements. Using your data to analyse behaviour trends is also acceptable, if only aggregated, secondary data is made public.

Socially conscious “tech” should lead by paying for data use with consent 

James Madison, one of the framers of the American Constitution, had put it very well. For him, if there is a right to property, the right itself become property, which can be transacted. Applying this logic, one can make the right to privacy something that can either be enforced or alternatively, sold or gifted, at the will of the owner. This seems to be a practical approach.

Tech companies desirous of being legally in the clear could start compensating customers who explicitly agree to having their data analysed and outed as secondary data, or even given out raw. Paying users through discount coupons on purchases or even by picking up their Internet access charges could generate the underpinnings of consent and contract. If the user remains free to choose any transmission provider, despite the social media site picking up the monthly bill, the Net Neutrality principle, which had killed Free Basics earlier, could also be complied with.

Meanwhile, cryptographed network and analytics tech companies, launching soon, aim to provide a “question and answer” service. Customers could query it about specific markets. “Fetch”, one such tech company, proposes to provide the answers, using primary data from contracted-in data sets of other companies, while ensuring that the primary data is kept secure.

Keep regulation focused on efficiency and free of ideology

Till now, the government has sensibly regulated technology companies very lightly, in order to avoid killing the spirit of innovation. Those days are now over. The government must ensure the impending privacy legislation is fit for the purpose, but also provides for the potential to monetise private data. Not doing so would be a massive social loss.

Adapted from the author’s opinion piece in The Asian Age, April 3, 2018 http://www.asianage.com/opinion/columnists/030418/in-an-age-of-leaks-just-lock-your-data-sell-it.html

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Digital connectedness, Economy, India

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Aadhaar – catching crooks & criminals

UIDAI members

The Aadhaar fever started in 2009, when the UPA government was in office. It encountered turbulent times in 2014 when the government changed. But Prime Minister Narendra Modi, a technology enthusiast, was persuaded to look beyond the past at the opportunity it gave to reduce official discretion and corruption, whilst targeting and delivering public services.

Inspirational achievements: Speed, scale, low cost & sustainable institutions

The results have been impressive on three counts — speed, cost and sustainability. First, the system was scaled up at breathtaking speed. Around 15 citizens were digitally registered every second, over seven years, assuming a 60-hour week.  Registering 1.2 billion residents out of around 1.3 billion, in a country spanning 3.3 million sq km is by itself a “never- before” achievement.

Second, unbelievably, this feat was achieved at a nominal cost of Rs 73, a little more than $1, per person. The norm for biometric identification anywhere else has been at least $10 per person. Clearly, frugal Indian innovation was at its best here.

Third, Nandan Nilekani, the single parent of Aadhaar, moved on in early 2014, serially to politics, social impact ventures and today heads Infosys as its non-executive chairman. Small, effective public institutions — UIDAI had a sanctioned staff of just 115 in 2009 — tend to be helmed by charismatic banyan trees — leaders who allow nothing to grow under their horizontally spread branches. But the Unique Identification Authority of India (UIDAI), which he first headed, continues to flourish, which speaks volumes of its sustainable management systems and the quality of successor chairpersons.

Why, then, the angst?

So why then the public angst against Aadhaar? Three reasons come to mind — all of them related not to the technical effectiveness of the system itself but the manner in which it is proposed to be used.

Illegal immigrants are rich political fodder

First comes politics. Illegal immigrants from Bangladesh — between three million to 20 million — along with legal immigrants from Nepal, have acquired voter IDs and ration cards. They are difficult to distinguish from their neighbours. But it has also suited the government politically, till now, to not identify such immigrants. Aadhaar can upset political calculations. Targeting Aadhaar at residents — a more inclusive genre — than citizens was a compromise solution. But the threat remains that this powerful data set will feed into culling voter lists of duplicates or ghosts and weeding out passports wrongly issued to people who were never Indian citizens.

We are all “crooks”

Second is the scale of disruption associated with ending corruption. Consider that 14 per cent of Indians, or 180 million, have a driving licence. But one-third are fake and many more are improperly given to ineligible drivers — a key factor in road fatalities.  290 million Indians have a unique number called PAN, required for filing income-tax. But 80 per cent are not authenticated with the Aadhaar database. This illustrates the poor integrity of the tax database.

Big bang reform catches headlines but induces a push back

Third, managerial ambitions have outrun executive caution in graduating the pushback from those adversely affected. From being a back-office tool, Aadhaar has become a digital shortcut to cull ghosts from the burgeoning food security scheme; weed out manipulations in income-tax submissions; introduce a security check over phone connections or use big data to link bank accounts, phone numbers, vehicles, houses, financial investments with each biometrically identified individual. Aadhaar is the shortcut to dig out our dirty secrets. And no one likes that.

Protection needed against low data integrity at time of issue & poor connectivity for authentication of Aadhar

aadhar center

Section 7 of the Aadhaar Act 2016 specifies that Aadhaar shall not be the sole arbiter of identity for accessing public benefits.  Section 5 makes it obligatory for UIDAI to get those, who lack identity documents — children, women, the specially-abled, senior citizens, workers in the unorganised sector, nomads are mentioned — covered under Aadhaar by other means. The intention is clear. The State must devise methods to include all residents in the database and ensure, till then, that the flow of public benefits to eligible recipients continues uninterrupted. Similarly, the onus for protecting the privacy of the individual is on the State. The government has no option except to align with the law. Indeed, it seems to have already diluted its hard stance on the timeline for the implementation of Aadhaar.

Rolling back or stalling the program a poor option

Two options present themselves for the way forward. First, the government could downsize its ambitions for Aadhaar and allow other modes of identity verification to continue till the availability of Aadhaar becomes universal and, more important, the hardware for authenticating Aadhaar is widely available. This is unlikely, in the short term, till the Bharatnet fibre cables have been laid and are operational in all gram panchayats. Just one-fourth are connected today. But the more real downside here is of a slide into never-ending inertia. This seems alien to the present government’s style.

Prescribe fall-back identity authentications with better oversight over the quality of initial data capture 

AAdhaar alt

The second and better option is to deal with the fears of activists who have petitioned the Supreme Court against linking bank accounts and phones with Aadhaar. With respect to privacy, the fact that the State will be able to trace individuals behind phone conversations or bank accounts seems innocuous. On the contrary, both security and tax revenue considerations point to this being desirable, if not essential.

Better branding: disseminate tax and security advantages of Aadhar widely

The government has advertised the Aadhaar principally as a means to transfer benefits to citizens in a more targeted manner and thereby optimise the public subsidy on such benefits. But this is only part of the story. Aadhaar is a significant tool in increasing tax revenue and bringing criminals to justice. What is in it for those who do not enjoy social security benefits? They must be made aware of how Aadhaar creates a trade off between privacy on the one hand and public finance and security on the other. It must be re-branded as a broad governance tool. It should take a cue from what President Obama said about privacy concerns. No individual right, against the State, is perfect. It must needs bow to the larger public interest.

Theoretically, any information, available with the State, can be misused to violate the privacy of an individual. But surely an income-tax officer using the Aadhaar authentication to check if you have included all your bank accounts in your tax return does not fall in that category. What about a duly authorised police officer who traces the owners of phone numbers talking about crime or a threat to public security? Protocols for tapping phones and accessing details of private bank accounts already exist. The Aadhaar link simply makes it easier and faster to catch crooks and criminals.

recovery ITGovernments rely on their credibility to gain the trust of citizens. Safeguards for individual rights do help. But only for governments that are public-spirited and well-intentioned. Once this is no longer the case, the only recourse is to voice your opinion through your vote, and good luck to you on that.

Adapted form the author’s opinion piece in The Asian Age, December 13, 2017 http://www.asianage.com/opinion/columnists/131217/aadhaar-fever-unveiling-secrets-to-secure-india.html

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bureaucracy, corruption, Digital connectedness, Economy, India, Infrastructure, Law and regulation, Tax

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TRAI should junk net neutrality

Chairman TRAI

Telecom Regulatory Authority of India (TRAI), was once the gold standard for “light touch” regulation, in stark contrast to electricity regulators, who continue today, to be stuck in byzantine rate of return regulation and administering cross subsidy between classes of users.

TRAI loses industry focus

TRAI has changed since. Consider that on November 29 it recommended to the Department of Telecommunications (DOT) that rural users should get a limited amount of data for free, funded from the Universal Service Obligation Fund (USOF) managed by DOT. To the everlasting credit of DOT, this was shot down, as unnecessary and inconsistent with the basic objective of the USOF, which principally finances telecom infrastructure.

One third of the 250,000 gram-panchayats, targeted under Bharatnet, have been connected to broadband. Tenders have been finalized to connect an additional one half. But Bharatnet is still a work in progress. Diverting funds into revenue expenditure is unwise.

TRAI’s proposal would have taken telecom down the route of electricity regulation, where subsidies for agriculture and domestic users have proved intractable and sap the viability of the distribution utilities.

Intrusive regulation has become the norm for TRAI, suitably packaged as serving the interest of the “small” user. Regulatory experience shows that governments should steer clear of distorting business incentives by subsidizing one technology over another or by benefiting a set of users either at the expense of other users (cross subsidy) or at the expense of budgetary allocations (state subsidy).

Net neutrality has its adherents but is it backward looking

Net Neutrality

It is ironic that, way back in March 2015, Facebook had proposed a privately funded initiative to provide free access to limited or curated content, in collaboration with a Telecom Service Provider (TSP) to the same “small” users, whom TRAI now wants subsidized from public funds.

Curiously, this proposal was shot down by TRAI in February 2016 as violating “net neutrality”, cheered on by vocal, Indian “netizens”. Over 1 million netizens had jammed the servers of TRAI with outraged petitions against Facebook’s proposal. NASSCOM, which represents software and content providers, added its weight to the storm, thereby protecting the business interests of incumbent content providers.

Even IT gurus like Nandan Nilekani opposed the innovative intrusion into the cozy confines of Indian IT. Paying homage to “net neutrality” was, at the time, also justified by pointing to the elaborate systems, for protection of this concept, put in place by the Federal Communications Commission (FCC) in the United States.

United States FCC to roll back “over regulation” and restore net freedom

Ajit PaiToday, a marginally Republican FCC, incidentally helmed by Indian origin, Ajit Pai, is rolling back, what it calls stifling “over regulation” of the net in the name of restoring freedom for innovation. To be sure 22 million US “netizens” have howled in orchestrated protest, against a rule change, seemingly, in favour of business. In this charged debate, anything which is pro-business is anti-consumer. A zero-sum view of commerce which is a familiar story in India.

Closer home, the November 28 recommendations of TRAI on “net-neutrality”, expectedly, carry forward the bloated carcass of Obama style intrusive regulation. TRAI is right in asserting that neutral traffic management is a technical ideal – selective blocking, slowing down or degrading specific content even when line capacity is available is banned. No one contests that generic principle.

Competition is aso an effective tool for optimisation

The real regulatory choice today is between competition in transmission, as a compelling instrument to simulate what “net neutrality” was supposed to do versus continuing with intrusive oversight over quasi-monopolistic transmission providers. Relying on and enforcing competition, seems a more effective, hands-off option in our pervasive, low-oversight ecosystem.

Another reason why “net neutrality” as a principle stands compromised is that increasingly, the transmission needs of content vary. With new services coming online, we will need multiple transmission protocols. Consider that online text need not be continuously streamed without detracting from reader pleasure. But online heart surgery support can be fatal unless continuous streaming is ensured. The same applies to internet access for driverless vehicles. TRAI has recognized these difficulties and the possibility that the Internet of Things will transform the rules for optimum scheduling of transmission.

Regulation by exception is non-transparent

TRAI’s solution falls short of transparent regulation. It has provided for exceptions, on a case-by-case basis, from “net neutrality” norms – for emergencies and unspecified “specialized services”. The latter are distinguished from general services by their targeted appeal to a narrow set of users.

Is net neutrality obsolete?

A better option would have been to review whether “net neutrality” itself is not obsolete because it will become riddled with exceptions. It was an important principle in the 1990s, to ensure market access for fledgling innovators in content provision by prescribing a merit order for getting past monopolistic telecom transmission utilities. But today competition is rife, both in transmission and in content provision. Possibly, the need of the hour for TRAI was to seek pathways downsizing regulations to simply protecting access, to basic internet services, for small users. High value-added services anyway, provide sufficient revenue incentives, for TSPs to push availability.

Providing net access remains a challenge

A massive challenge for India, per TRAI data, is that only one half of Indian citizens are connected to the internet as compared to 81 percent in the US and 76 per cent in China. Competition has reduced the access charge to affordable levels. But the quality of services is low because of under- investment in infrastructure.

Internet Service providers need new pools of revenue

Heavy penalties for non-compliance with quality standards can improve the quality of service. But TSPs finances are already under stress. Spectrum cost is high. If government earnings from spectrum are not to be reduced and user charges are to remain low, TSPs need to find new pools of revenue to fund infrastructure development. Their business models need to go beyond being just “passive pipes” – the role which “net neutrality” forces on them.

Software and content providers are not necessarily winners either in a net neutral environment. Consider that, in 2015 Facebook got stymied in India. But which Indian “edge provider” (jargon for content providers) gained from that blocking action? Rapid growth of infrastructure is the best option to fuel demand for content. This is a better incentive for innovation than protectionist regulation.

“Minimum government, maximum governance” is a Modi mantra. TRAI appears not to have been copied.

Also available at TOI Blogs December 6, 2017 https://blogs.timesofindia.indiatimes.com/opinion-india/trai-should-junk-net-neutrality/

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Digital connectedness, Economy, India, technology

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“Demonetisation” as a morality play

The politics around “demonetisation” — a misused term for what happened on November 8, 2016 — has taken centerstage in the run-up to the Assembly elections in Himachal Pradesh (that voted yesterday) and Gujarat (which goes to the polls in December). Finance minister Arun Jaitley has added “morality” to the cluster of objectives, that seemingly justified compulsorily replacing 86 per cent of our currency with new notes over a short period of just two months last year.

Whose morality?

Morality is a slippery slope to tread in public affairs. It’s certainly an individual virtue, but at a societal level it’s difficult to define. Consider the moral conundrums that arise while enforcing a law which doesn’t have widespread local acceptance. Rebels with a cause see themselves as morally-elevated outliers. Not so long ago, our freedom fighters were feted for disrupting the peace, assassination or damaging public property. Even today in areas like Kashmir or the Maoist belt in central India, it’s tough to apportion the balance of morality between those who violate the law and others who seek to enforce it.

Our Constitution, quite properly, is silent about “morality”. A quasi-moral concept of “socialism” was introduced in 1976 into the preamble, by former PM Indira Gandhi, as a populist measure. But it sits incongruously with the otherwise liberal slant of the document.

Corruption is patently immoral as it saps national wealth. Measures to fight corruption are part of public dharma. The real issue is: was demonetisation essential to end corruption?

Demonetisation to identify counterfeit money like using a hammer to kill a bug

If the objective was to weed out counterfeit money, which can fund terrorism or even legal transactions, there was no need to impose a tight timeframe of two months. This is what caused widespread panic and disruption. It would have been enough to alert the public to the menace; provide markets (banks already have them) with testing devices to weed out “compromised” notes over time. This is an ongoing activity, that all central banks do routinely, because any note (besides crypto currencies) can be counterfeited.

Better policing can identify & capture the stocks of black cash

If the objective was to capture the stocks of “black” money, held as cash, in one fell swoop, this was better done by making known “havens” of “black” cash — apparently entire warehouses — unsafe for storage through effective enforcement, coupled with strong incentives to come clean. Note that “black” money hasn’t gone away.

Black money was generated even as the notes were being replaced

Demonetisation can do very little to stop generation of black money. The government knows this. It intends to use “big data” for surveillance of potential evaders; embed governance systems with enhanced oversight and enhance transparency. Only improved technology and perpetual, intensive oversight can starve this hydra.

Was it political?

Not least the timing of the move, just before the elections in Uttar Pradesh, India’s most populous state, which sends the largest number of members to the Rajya Sabha, where the BJP didn’t have a majority, could indicate the compulsion to play to the gallery. If this was the motive it worked very well politically — not least, because UP is a poor state with low governance indicators and high levels of inequality. Hitting the rich is a tested populist strategy, perfected by former PM Indira Gandhi, and still held dear by our antiquated Communist parties.

Would Gandhiji have approved?

But demonetisation doesn’t align with Mahatma Gandhi’s precept that “means matter as much as ends”. Hitting tangentially at corruption, at the cost of scorching even the law-abiding, is unacceptable. Anti-corruption measures which ignore the social and economic collateral cost of implementation are suspect. The State has an asymmetric, fiduciary relationship of trust with citizens. Did it live up to its dharma of insulating the honest from State-induced actions intended to harm the corrupt?

Some positives – nudged people towards digital and banked transactions

Undoubtedly, demonetisation did accelerate a shift towards banked transactions and boosted digital payments. Both outcomes are winners. But it’s also true that it put a temporary brake on economic growth by disrupting business and inducing job losses, mostly in the informal sector, where workers and the self-employed are less well paid, and less well-endowed to absorb the cost of a disruption.

Means matter as much as ends

Seemingly desirable steps to make the system honest can have grossly inequitable outcomes, which Gandhiji would have termed “immoral”. It’s possible to reduce corruption by replacing income-tax with a “head tax”. Citizens are more easily identifiable than their income, so very few would be able to escape this tax. If a “head tax” were to replace income-tax, each citizen would pay Rs 3,600 per year. But consider, for 40 per cent of the population, which is vulnerable to poverty, the head tax would be a minimum 12 per cent of even the poverty level income of $1.90 per day. Currently, even an income of Rs 10 lakhs (Rs 1 million), or 22 times the poverty level income, attracts a low effective tax rate. Protecting the weak is cumbersome. It creates tax escape routes, which need to be plugged with minimum collateral damage to the weak and the honest.

GST the first efficient, corruption buster

The good news is that the Narendra Modi government has got it bang-on with its second major corruption-busting initiative: the Goods and Services Tax (GST). Implemented from July 1, 2017, it has also disrupted business and compounded job losses, arising from the shutting down of businesses, which relied on the illegal competitive advantage of avoiding tax. GST is a potent standalone, medium-term winner. This expectation mitigates the interim economic “amorality” arising from the collateral harm to innocent workers and suppliers to such businesses. The proactivity of the GST Council in correcting mistakes and acknowledging errors has only deepened its credibility and conveyed a sense of responsible stewardship. This is welcome.

Compensate for the distress & dislocation

cashless

Demonetisation was misguided even if it had “moral” end-objectives. One-fifth of our population, which suffered the most, is in the income segment of Rs 50,000 to Rs 5 lakhs (0.5 million) per year, being workers and those self-employed in the informal sector. They have still not been compensated. Hopefully, the finance minister will apply some balm in his 2018-19 Budget and bring this tragic “morality play” to a happy end.

Adapted from the author’s opinion piece in The Asian Age, November 10, 2017 http://www.asianage.com/opinion/columnists/101117/end-morality-play-its-a-misfit-in-eco-policy.html#vuukle-emotevuukle_div

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banking, BJP, bureaucracy, corruption, Democracy, Digital connectedness, Economy, elections, India, Uttar Pradesh

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Rooting out perverse incentives in GST

Hasmukh Adhia Masterclass

Muscular tactics are paying-off in the Income Tax system. The number of assesses went up by an astounding 25 percent from 37 million in March 2016 to 46 million, by March 2017 and to 63 million by mid-July 2017. The linking of Aadhar-PAN card to bank accounts; the campaign against cash and now the GST, together create desirable institutional incentives for individuals and business to bank their transactions. This provides the “push” factor for enlarging the income tax base of potential assesses.

Transformative GST  

The GST is even better designed to provide desirable incentives for enlarging the indirect tax base. Unlike, Income Tax where “push” factors compel assesses to pay tax on the income revealed via bank transactions, the GST uniquely also has “pull” factors for better tax compliance. The biggest being the facility to set-off GST paid on purchases against GST payable on sale, which reduces the net tax payable. This induces both buyers and sellers to bank their transactions – which is also good for income tax collections.

Transformative, as the GST is, glitches have inadvertently crept in, which go against the grain of positive incentives to prefer banked to cash transactions; increase value addition and boost tax revenues.

But design glitches remain

One such, relates to small service providers with annual revenues of up to Rs 2 million. Those providing services within the state are exempt from both registration and payment of GST up to this limit. But the moment they provide a service across the state borders or to a client abroad, they are compelled to get a GST registration; submit the mandatory three returns per month and much worse, pay GST on their entire revenue stream.

Killing the small cross-border service provider

Individual IT professionals writing code or designing websites routinely get contracted over the internet to provide services to overseas clients or to clients across state borders. Each contract may be as low as Rs 20,000. But all these professionals will need to get registered and incur the transaction cost on submitting monthly GST returns. For these small service providers, the price points are highly competitive. It is unlikely that clients will be willing to part with the 18 percent GST for out of state providers. They will be pushed to get registered and pay the GST themselves or absorb the tax in the price they charge with the GST paid on the purchase by the client.

The net result will be that out- of-state small service providers will become uncompetitive and may stop seeking work outside their states, reducing competition. GST which was meant to create a Pan Indian national market will instead, end up creating intra-state silos for small service providers.

The negative impact is fiscally marginal but it rankles

This design flaw will also impact income tax revenue. Service providers whose annual billing reaches Rs 1.6 million within a state, will refuse out-of-state work of less than Rs 0.5 million because, by increasing their out-of-state billing by up to Rs 0.4 million they end up paying the entire incremental amount as GST.

If 2 million small service providers, ranging from civil contractors, designers to business consultants, refuse additional work due to this reason, the government loses Rs 18 billion as income tax. This calculation assumes a tax rate of 20 percent and the underlying taxable income lost at one half of the amount of work refused.

Protection for local service providers breeds inefficiency

The “infant industry” proposition can be used to justify discouraging cross border services and thereby encouraging small local service providers to ramp up their capacity and fill the gap. This may well be true. But it rankles against the pan-Indian tax framework objective of promoting efficiency and competition. It is also, against the logic of digital India which is meant to enable seamless work across state and international borders.

Whence the pan-Indian market and digital India?

Admittedly lost income tax revenue of Rs 18 billion is small change, in an income tax kitty of around Rs 4 trillion. But it is personally frustrating for small service providers who can see the cross-border opportunity to expand their business but are blocked by the “deadweight” amount of Rs 0.4 million of billing, which equals the GST they would pay by increasing their billing to Rs 2 million, if some part of it coming from cross border contracts.

Have a common GST exemption limit irrespective of location of the client

Is there a way of getting away from this flawed design? Yes, there is. The first option is to extend a common GST exemption limit to all service provision, irrespective of whether it is within state, across state borders or overseas. This immediately removes the “deadweight” of GST becoming payable, the moment a cross border transaction, no matter how small, is made.

Tax only the incremental revenue above the GST exemption limit

However, this still leaves the problem of expanding billing above Rs 2 million and thereby losing the exemption from GST on the initial Rs 2 million. Adopting the principle of taxing only the incremental amount, as used in the Income Tax, can effectively avoid the perverse incentive for opting for cash based transactions to avoid losing the tax exemption above a billing of Rs 2 million, till billing expands substantially beyond Rs 2.4 million, at which point it would neutralize the additional GST paid and yield a net income increase for the supplier.

Harmonise tax exemptions under IT and GST to reduce reduce the compliance cost 

The best option is to harmonize the exemption limits under GST and income tax. The current income tax regime presumes taxable income at 50 percent of billing, unless shown otherwise. A billing of Rs 0.5 million corresponds to a net taxable income of Rs 0.25 million which is also the maximum limit for income exempt from income tax. Hence the exemption limit for GST could be reduced to Rs 0.5 million from the existing limit of Rs 2 million. But rolling back exemptions is tough. Alternatively, the exemption limit in Income Tax could be increased to Rs 1 million. Enhancing the income tax exemption limit is the preferred option.

The number of income tax assesses increased by 25 percent in 2016-17 over the previous year. In comparison the revenue from Income Tax increased by 18.4 percent. Tax yields are lagging increase in assesses. Efficient tax collection practices would point towards focusing on high value targets rather than cluttering up the system with marginal yield assesses until tax filing systems are vastly more simplified and easy to follow for the average citizen.

This article is also available at http://blogs.timesofindia.indiatimes.com/opinion-india/end-perverse-incentives-for-small-service-providers-in-gst/

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Digital connectedness, Economy, India, Tax

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Book Review

 

parag-khanna

Connectography: Mapping the Global Network Revolution, Parag Khanna, Weidenfeld and Nicolson, 2016

In the 1980s, Disney World, Florida offered a gripping, virtual journey as viewed by a blood corpuscle as it rushes through the arteries, veins, into and out of organs in the human body. Parag Khanna’s fourth and latest book –Connectography: Mapping the Global Network Revolution – does much the same for the world of physical and digital infrastructure -roads, railway tracks, power lines, communication cables, oceans, rivers, canals and electrons joining suppliers to customers, uniting families physically and virtually, whilst creating ever widening value enhancing networks around mega cities.

In this world, national borders are little more than irritants; national sovereignty a barrier to be overcome; national passports a poor substitute for global identity options and the ownership of land valueless, unless it is part of global supply chains.

Global citizen

parag-khanna-2

Parag is a self-confessed global citizen. He was born in India, grew up in the United Arab Emirates, studied in the US, works in Singapore but feels at home anywhere – chatting with Chinese workers in Tibet, Turkish Gastarbeiters in Germany or breakfasting with the President of Mongolia in Ulan Bator. There are around 300 million others like him. This book describes the way the world could be from the view point of global citizens. A world without borders or intrusive governments; self-regulating businesses kept customer friendly by competition; open markets allowing capital and goods to move freely, perpetually in search of optimizing costs and maximizing value.

Open economy

The virtues of the “open economy, networked” universe are generally accepted today, even if most peoples’ view on markets is similar to their opinion of democracy – not the best option but better than anything else available.

Parag hammers away at re-establishing these generic concepts with relentlessly energy via a high octane delivery, interspersed with a wealth of granular information to buttress his argument. It helps that the book is extensively researched. Its bibliography lists nearly 500 references and almost each page has a quotable quote. An added attraction is the 38 color plates which illustrate what connectography could look like. Maps or traditional cartography which represent geographical or political features, actually tell us very little about the world. These are of little use beyond being partial navigational aids. Consider that Singapore is a mere dot on the world map with just 0.1 percent of the world’s population. But if countries were mapped to scale on the size of their GDP, it would be twice the size of Bangladesh. Does Singapore’s land size or population determine its function in the world today or its economic heft?

Connectivity is key

The book is divided into five parts. Part one dwells on the truism that connectivity and not territory or resource endowments, are the arbiter of how nations grow. In a riposte to the reasons listed by Paul Collier of why nations fail, Parag argues, that countries can overcome the disadvantage of poor geophysical endowments. There is hope even for land locked nations, like Rwanda. Despite being resource poor, it is one of the fastest growing economies, in Africa, because it actively searches out opportunities for becoming part of global supply chains.

The withering Nation State

Part two posits controversially, that the nation state is an artificial construct whose longevity is explained by inertia rather than any irreplaceable value addition ascribable to it. This is especially true in nation states which spend much time and effort to reconcile mutually antagonistic and parochial domestic stakeholder identities. Far better then, to devolve power away to homogenous, smaller sub entities – tribes, communities, companies and cities which, in any case, are the basic framework for solidarity and common interest.

The recent splintered vote in Britain, with London, Scotland and Northern Ireland voting to remain in the European Union whilst the rest of the country voted to exit, seems to illustrate the inherent fragility of nation states in the face of sharp internal divisions based on self-interest. The nation state is similarly powerless against the loss of sovereignty to larger regional aggregations- earlier the United Nations, cold war alignments and now regional trading blocks. Better connectedness and communications fosters this trend towards aggregation, driven by Metcalfe’s law that the value of a network increases proportionately to the square of the number of interconnected users. Scale is everything.

Sub- national entities are stable

Part three asserts that a future world of connected sub-national entities aggregated into large regional entities, is a more stable and competitive arrangement than the present geopolitical architecture. Sovereign nations seem besieged by split mandates and dissidence at home whilst simultaneously assaulted by external threats. Competitive connectivity trumps national sovereignty. There is no incentive for destabilizing any actor because all are connected for mutual gain. In comparison, Orwellian instability is built into the DNA of competing nation states.

Snap shot of a connected future

Part four fleshes out the future as a landscape of connected megacities. Multinational businesses will be replicas of the Dutch 19th century colonial empire – a web of small enclaves – business hubs for a global supply chain. The nodes of growth would be the four thousand Special Export or Economic Zones, which dot the world today and are also the foundation of China’s extraordinary economic growth.

….and everything else

Part five is mixed fare – an overview of current issues in the digital economy; the genetic transformation resulting from human cross breeding inherent in the physical movement of more people across the globe than ever before- provocatively titled “a mongrel civilization”- and how to best deal with the competing needs of conserving nature and welfare enhancing growth.

For resilient readers only

This is not a book for the faint hearted. The style varies from the explanatory; the exhortatory to being chattily conversational. Some parts are too dense for a lazy afternoon’s read. Others, particularly where the author links his own experiences to more generic issues are lucid and revealing. Editing is unfortunately, lackluster. Rwanda is not a country which is natural resource rich as claimed on page 94; the lead paragraph on page 337 under the attractive title “The digital identity buffet” is an incomprehensible, single sentence of seventy-one words! Deng Xiaoping’s reforms kicked in during the 1980’s in China, not the 1970s as page 380 claims.

Read this book if you are interested in knowing more about the intersections between globalization, geopolitics, business, technology, urbanization and culture. If you are looking for deep knowledge in any one of these areas, you are likely to be disappointed. If you are looking for a new theory of development or growth, it isn’t here. What you do have is masses of information brought together anecdotally in a narrative format.

This is a tour de force of contemporary world trends with attractive, self-explanatory titles to each of the seventy-eight sub chapters. Each of these is self-contained so you don’t have to read the book sequentially. And don’t miss the quotable quotes. My favorite is “a smart rabbit keeps three holes to hide in” to explain why large numbers of Chinese citizens invest in the US or Canada as a safe haven option.

If you are looking for advice on very long term business investments, check out the heat map on plate 31. Be warned, India, China, Africa, Southern Europe, the US and South America may all be deserts by 2100 dried out by the ravages of climate change – unlivable but good for generating solar power. Think instead of investing in Canada, Greenland, Northern Europe, Russia and Western Antarctica, where the climate is expected to be salubrious and the resources plentiful for the depleted population which manages to emigrate there.

This book review by the author first appeared in Swarajyamag, August 2016 http://swarajyamag.com/

 

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Book Review, Digital connectedness, Economy, India, Infrastructure, Space

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