## Monday, October 27, 2014

### Rethinking the policy framework in coal

by Suyash Rai and Ajay Shah.

### India needs more coal

Coal is the dirtiest of all modern fuels, whether measured by habitat destruction in mining areas, or CO2, SPM and SOx emissions, or radioactivity. However, there is no alternative to coal in India's energy strategy, as coal makes up half of India's energy consumption today, and as India is blessed with strong natural resources.

Despite the strategic importance of coal in India's energy strategy, domestic production growth has been slow, with an average compound growth of 3.65% per year between 1990-91 and 2013-14 (from 247.56 million tonnes to 565 million tonnes). Over that same period, coal imports went up from 5.56 million tonnes in 1990-91 to 171 million tonnes in 2013-14, a compound growth rate of 16.06%. Coal imports have become nearly 1% of GDP. India has become the world's third largest coal importer -- despite having the world's fifth largest reserves (with about 67 billion tonnes of proven reserves). It is reasonable for a country with abundance of a fuel to import that fuel for strategic reasons, but India is forced to import due to inefficiencies of the domestic coal sector.

These inefficiencies do not have to be. Reforms can rapidly increase productivity. As an example, Australia got a gain in the raw coal output per man-shift for open-cast mines from 20 tonnes in 1966 to 54 tonnes in 1974 -- almost a tripling in 8 years. In underground mines also, technological change can give massive improvements in productivity. The puzzle is that of improving the efficiency and environmental soundness of extraction, and improving the infrastructure of transportation. This requires a fundamental rethink of the policy framework that has been adopted.

As with most problems in India, the poor outcomes are coming from deeper problems of institutions. While we periodically try quick fixes, there is no running away from solving those deeper problems.

On this much, it is fair to say that there is a broad consensus. Everybody agrees on this much. What is not widely understood is the way forward.

### The elephant in the coal mine: Coal India

Coal India is the public sector monopoly that produces, processes and sells coal. It produces 80% of the country's coal. It does so with much lower productivity (measured in terms of output/man-shift or OMS) than that in many developed countries. For example, in 2012-13, Coal India's OMS for open-cast mines was 11.48 tonnes, while the same for Australia was 75.04 tonnes back in 2005. The situation with OMS for underground mines is much worse: Coal India was at 0.77 tonnes in 2012-13, while Australia was 50 times bigger. Coal India has improved its productivity, but the rate of change is not adequate for solving India's problem. Drastic improvements in technology and management are required, but Coal India has been persistently unable to muster the requisite change capacity.

There could be many reasons for this. Some of them are generic to the public sector, some of them are generic to monopolies, and some may be specific to Coal India. Public sector enterprises face constraints of procurement, and human resource management, which private sector enterprises do not face. A monopoly does not face the competitive pressure that punishes inefficiency. This is particularly the case for public sector monopolies where the consequences are borne by tax payers. Not all public sector companies suffer from a productivity gap on the scale of Coal India -- as an example, NTPC fares pretty well on efficiency despite being a public sector company.

The relationship with labour in Coal India appears to be lopsided, even by the standards of public sector firms. Junior staff at Coal India are paid rather well when compared with other employment with the similar skill and hardship. This may be attributed to powerful trade unions. The strength of trade unions may explain the low productivity at Coal India.

We could discuss the problems of Coal India and how to solve these. However, it is important to not hold India hostage while waiting for those problems to be solved. As an example, India was held hostage by DOT/BSNL/MTNL in telecom, but the 1999 telecom reforms broke past that barrier. While DOT/BSNL/MTNL are an important part of Indian telecom, India's progress is no longer hostage to them. Similarly, there are fervent discussions about the problems of Air India, however policy thinking about civil aviation in India is focused on the interests of India and is not held hostage by the interests of Air India. In the field of coal, the objectives are clear: We need to increase output of coal by bringing in modern management so as to achieve high productivity and high standards of environment protection.

### The previous legal framework

The Coal Mines (Nationalisation) Act, 1973 curtails private participation in coal mining. It limits allocation of coal mines to firms that will use the coal only for producing power, iron, steel, coal washing or any such government-specified use. Trading by private firms is forbidden: They were not allowed to sell the coal that they extract to other firms even for specified purposes. Since 1993, governments have allocated 218 coal blocks to public and private enterprises for specified purposes, under the provisions of this Act. More than two-third of these were allocated between 2005 and 2010, under the UPA government.

Allocations were done through a screening committee process, without competitive bidding. In 2010, an amendment to the Mines and Minerals (Development and Regulation) Act (MMDR Act), 1957 provided for auctions of coal blocks. But the Comptroller and Auditor General, in a 2012 report, asserted that the government had the power to conduct auctions even before this amendment. The report also asserted that the failure to conduct auctions led to a large revenue loss for the government and corresponding windfall gains for the allocatees. The government contested these claims. The matter went to the Supreme Court through writ petitions. In September 2014, the Supreme Court cancelled 214 of the 218 coal block allocations made since 1993, and imposed fines on the operational mines among them. The grounds for cancellation are primarily the failure to follow principles of due process.

For the 42 operational mines, the Supreme Court order takes effect in six months. These blocks were expected to produce 10% of India's coal production this year. Some of these users will resort to imports. Some of them will not be able to solve the logistics problems associated with imports, and hence the downstream economic activity (e.g. an electricity generation plant) will close down.

### The recent reforms by the NDA government

On October 21, the government issued an Ordinance, which amends the Coal Mines (Nationalisation) Act, 1973 and the MMDR Act, 1957 to, give effect to certain coal sector reforms. It will run auctions to allocate coal mines. For some of the mines (74 mines), only actual users of coal in the cement, steel and power sectors will be allowed to bid, while for others (204 mines), the auction pool may include those who will produce and sell coal. While auctions had to be held after the CAG's and Supreme Court's interventions, opening of the sector to private firms for production and sale is a new step. This opens the window for giving mine leases to firms that are not in the business of producing power, steel, etc, but specialise in extracting and selling coal. It is important to note that the Ordinance also allows the government to continue with direct allocation of coal mines to public sector enterprises.

This Ordinance is a step forward in institutional reform. But it is an incomplete step. Looking forward, there are five areas of concern:

• The elephant in the coal mine needs reform. Allocating coal mines to private sector for extraction and sale will reduce dependence on Coal India, but this does not solve the problem of low productivity at Coal India.
• The role of the State in the field of coal. The Ordinance is focused on addressing the gap that has been created by the Supreme Court order. However, what is required is a more encompassing treatment of the tasks of the State in contracting, regulating, and supervising private players. Such a law needs to be written and this will correspondingly require creating State capacity for enforcing it. For an analogy, setting up financial economic policy is not a mere matter of auctioning some licenses to run a bank here or an insurance company there; it requires the full blown sophistication of the Indian Financial Code.
• Why have captive mines at all? There is no case for limiting trading in coal, between private players, by forcing captive mining. India will gain when some specialise in mining, and sell to others who specialise in downstream applications of coal.
• Why a dual system? Why is it necessary to directly allocate mines to government enterprises, and create a dual system in which some mines for auctioned and others are just allocated?
• Who knows how to run a coal mine in India? Private sector participation in extraction and sale is a step forward, but after decades of public sector domination, do any domestic firms posses expertise on achieving high productivity and avoiding environmental degradation in the process?

### We cannot ignore reforms of Coal India in reforming coal

Following the Ordinance, the government will give more mines to private sector for extraction and sale. But Coal India has preferential treatment with easy allocation of mines. This is not fair. Coal India must participate in open auctions on an equal footing with other bidders.

Even after this is done, private firms will find it difficult to compete with a huge government-backed firm with deep pockets. As an example, private airlines complain that the presence of a government-owned airline, which is able to bear huge losses, has had a negative impact on them.

It would make sense to break Coal India into several independent entities that actively compete with each other and with private firms, for the business of coal extraction and sale. This could set the stage for gradual privatisation of the baby Coal Indias.

As with the opening of civil aviation or telecom, the reforms will be opposed by trade union members of Coal India. Coal India should exist to maximise the interests of the people of India (about 1.3 billion) and not the interests of the 350,000 employees.

### Building State capacity for the role of the State in coal

Government must build capacity to do efficient regulation, contracting and contract monitoring of private participation in the coal sector. Given the complex contracting problems and environmental consequences, government-private sector interface in coal sector must be backed by a sophisticated government that is capable of understanding difficult trade-offs and make the right choices. Government should draft a comprehensive coal sector law that encompasses various aspects of the government's role in the sector.

In addition to the problem of running auctions and writing contracts, the law needs to envision market failures, give the executive the minimum required powers to address them, and setup accountability mechanisms. Ultimately, the law should setup feedback loops through which the executive and the industry move forward towards world class capabilities.

In parallel, government should build human resources and other organisational capabilities to enforce the law in this sector.

### A competitive market for production and sale of coal is required

Since mines will be auctioned, the immediate question is: who will be eligible to bid? For auctions of the coal blocks affected by the Supreme Court verdict, the government is allowing only the current users of coal for specified purposes. Perhaps, that is required as an expedient measure for the 20% of cancelled blocks that were already being used. But for the remaining and subsequent allocations, it is important to hold open auctions. The expertise of coal extraction and sale is different from the expertise of producing power, cement, steel, etc. The government should decouple the two, and unbundle the two markets of extraction and trading/sale.

It is particularly important to not directly allocate mines to government enterprises. If such enterprises fail to win the auctions, they can go ahead and purchase coal from successful bidders. NTPC is good at producing power, but it need not own coal mines for that. It could very well purchase it from firms specialising in production and sale of coal. This is not to say that there should be zero direct allocations. In some contexts, especially where a downstream plant has been set up with an assumption of access to nearby mine, it might be uneconomical to auction the mines. But the principle should be that direct allocations should be done in the rarest of cases, and the government should do a formal cost-benefit analysis before direct allocation decisions.

### We need foreign players

As is evident from their superior productivity, firms in some other countries have substantially better expertise in coal extraction. If we continue to limit participation of foreign firms, we will also constrain investment and innovation. The government should open the auction to foreign firms, and enable introduction of productivity-enhancing technologies and management systems. If, for strategic reasons, the government wants to restrict the purposes of coal use, and/or place constraints on coal exports, it can do so. The key point to focus upon is to bring in the best expertise in the problem of extracting, value enhancing, transporting and selling coal.

### Conclusion

The recent Ordinance is a step forward, but it is a tiny attack on the larger problem of coal sector reforms. We must reform Coal India; We must build State capacity on contracting, regulation and supervision of private players; We must setup separate and competitive markets for extraction and trading of coal; We must bring foreign players who have the requisite skills.

## Saturday, October 25, 2014

### The logjam in infrastructure investment

 Quarter-on-quarter growth of the non-seasonally adjusted value of infrastructure projects that are classified as being Under Implementation' in the CMIE Capex database.

In the standard narrative, the first wave of infrastructure investment in India (2003-2010) choked owing to the ground-level difficulties of investment, including land acquisition, corruption scandals, contract disputes, etc. By this logic, if we solve these problems, we will have set the stage for the second wave of infrastructure investment. This is the sort of idea that motivated the Cabinet Committee on Investment' in the late days of the UPA.

There is, however, another logjam which needs to be solved, that of infrastructure financing. In today's Indian Express, I worry about the short-term measures which were taken during the first wave. Each of them felt expedient at the time, but with the benefit of hindsight, they were mistakes. Instead of looking for more short-term expedient solutions, we need to solve the deeper problems of the financial system in order to break this logjam.

The second wave of infrastructure financing, that we now require, needs work on both tracks: fixing the foundations of the financial system so that well-incentivised developers try to invest, and fixing the ground level difficulties so that this investment actually turns into smoothly working operating assets.

Acknowledgements : My thinking on these questions has been greatly aided by Josh Felman (IMF), Gopal Sarma (Bain Consulting) and Suyash Rai (NIPFP). The phrase the long run has caught up with us' is by K. P. Krishnan.

## Monday, October 20, 2014

### Ebola and India

The biggest-ever Ebola epidemic is taking place is West Africa. Through travellers, this could spread elsewhere. Carriers are asymptomatic for 2-21 days, and hence border screening does not block transmission.

Ebola is very virulent. That is, the Pr(death|infection) is high. However, it is not a complicated pathogen for a public health system to deal with. It has no method of jumping to new victims other than direct contact with body fluids. This is unlike (say) a virulent airborne influenza where there is no easy strategy for blocking transmission. The simple strategy of tracing, diagnosing and isolating cases suffices to block Ebola in its tracks.

Ebola is easy if and only if there is a capable public health system through which tracing, diagnosing and isolating cases is easy. It's a disaster for the countries that don't have such a capability.

Do the public health authorities in India have this organisational capability? We in India will be sorely tested, for we do not have a focus on public goods in our health system.

Our health system is a socialist mish-mash of a government that produces and gifts out private goods. We try to run primary health centres, we try to run hospitals, and such like. We don't do the things that a public health system does -- such as the analysis and control of epidemics. We lack the intellectual clarity that the public health system is not about the health of the public; it is about public goods in the problem of health. This could prove to be a costly mistake in coming weeks and months, if Ebola spreads well beyond West Africa.

The fact that most people in India cremate the dead, and that we don't have rituals which involve touching the victim, will help. Cremation procedures will need to be modified to address the biohazard.

## Saturday, October 18, 2014

### Elections in Maharashtra: Have the fires of nativism subsided?

by Naman Pugalia, Renuka Sane, Viral Shah.

The results of the Assembly polls in Maharashtra are anxiously awaited. The four main contenders, the Congress, the NCP, the Shiv Sena, and the BJP have all been part of one of the two principal coalitions, the Democratic Front (Congress and the NCP) which ruled the state for the last 15 years, and the Mahayuti (Shiv Sena and the BJP) that has been the principal opposition alliance.

### The battle against the other'

After these two principal alliances in Maharashtra broke up, ahead of the assembly elections, political parties have been quick to rouse nativist sentiments to secure the Marathi vote. Each political party contesting in Maharashtra, and especially in Bombay, has been vying for the "marathi manoos": the BJP by bringing together Narendra Modi and Chattrapati Shivaji, and the Shiv Sena and the upcoming Maharashtra Navanirman Sena reacting strongly against such a comparison, comparing the BJP leaders as foot soldiers of Afzal Khan, the commander of the Adil Shahi, who was killed by Shivaji. At heart seems to be the idea that the son-of-the-soil will never prefer an outsider as the ruler of the state.

The roots of this angst date back to the Samyukta Maharashtra Movement launched in 1955 in Pune. As Kumar Ketar in the Asian Age says:

the business lobbies, mostly consisting of the Gujarati's and Marwaris wanted Mumbai to be an independent city state or a bi-lingual or autonomous city state. But the mass movement led by Samyukta Maharashtra Samiti foiled that plan. The Marathi angst of the time was one of the reasons for the Shiv Sena's rise, and continues to the reason for the undeclared hostility between the Gujarati-Marwari business community and the Marathi working class.

The Gujarati-Marathi antagonism was mostly restricted to Bombay. In other parts of Maharashtra, it has always been a "Maratha" vote, something that the Congress and the NCP had capitalised on over the last few decades. In the 54 years since Maharashtra was formed, the Congress has ruled the State for 49 years. Of its 17 Chief Ministers, 10 have been Marathas. The outgoing cabinet did not have a single non-Maratha!

By this logic, you would have expected that a national party, with a low support base in Maharashtra in the past, with a Gujarati leader and a Gujarati campaign manager, would not fare that well in the coming elections.

Several commentators, have, however argued that the new Marathi middle class has moved on in its economic and cultural ambitions. It no longer shares the sense of injustice that was the cornerstone of the Samyukta movement, and is in fact, brimming with enthusiasm to participate in the new India. In addition, over the years, migration on a large scale has taken place into Bombay and it's environs, and into Poona, which has created a new set of immigrant voters.

### How relevant is the issue of the "marathi-manoos"?

FourthLion Technologies has been conducting message testing polls in the run up to the elections in Maharashtra to tease out voter preferences using its Instavaani. The methodology involves using a control and multiple treatments, and comparing the treatments to the control to get a relative understanding of the persuasion power of different messages.

In a message testing poll, the control is a simple horse-race poll, that asks voters to pick the party or candidate of their choice. The poll on October 1, 2014, showed that 41% of voters preferred the BJP, 11% Congress, 14% Shiv Sena and 11% the NCP. BJP was comfortably in the lead. This is the control.

In each treatment, a particular message is read out to the listener, and then the horse-race question is asked again. Differences from the control give us a sense of the immediate short-term impact of this message on the minds of the populace. These polls are conducted by randomly sampling phone numbers across the entire state. The poll typically strives for 200-400 observations. With assumptions of perfect random sampling of a small sample from a representative population, the margin of error is 0.98/sqrt(n). At 200 samples, the margin of error is 7%, and at 400 samples, it is 5%. These polls are typically carried out as soon as news breaks out, and situations develop in real-time, allowing the observation of the mood of the people within hours after an event.

Here are some results which illuminate attitudes to nativism:

1. Prithviraj Chavan is a true son of Maharashtra. He went to school in Karad, which is in south Maharashtra. His mother and father, Premalakaki and Dajisaheb Chavan, went to jail because they fought for an independent state of Maharashtra. No other candidate for Chief Minister has the same legacy of fighting for Maharashtra as Prithviraj Chavan'.
Would you vote for% of respondents
BJP31%
Congress26%
Shiv Sena15%
NCP11%
Others17%
This shows that the CM's background matters quite a bit, and led 10 percentage points of voters to switch from the BJP to the Congress. This also explains why Prithviraj Chavan led the Congress' campaign in the state - his popularity is higher than the party's.
2. In 1960, Gujarati minister Morarji Desai ordered police to fire on activists of the Samyukta Maharashtra Samiti, killing 105 Marathis. The Samyukta Maharashtra Samiti activists won their fight to create an independent state of Maharashtra. Today, the BJP is bringing Gujaratis such as Amit Shah to again place Maharashtra under Gujarati dominance'.
Would you vote for% of respondents
BJP33%
Congress14%
Shiv Sena25%
NCP11%
Others17%
If there was indeed strong antagonism about Gujaratis, this question should have caused a lot of people to switch votes out of the BJP. However, only 8% of the voters seems to have moved away from the BJP, mostly to the Shiv Sena.
3. The BJP has no leaders in Maharashtra who are clean, honest and capable of running the state government. That is why the BJP has to parachute in outsiders like the Prime Minister and Amit Shah to campaign for them. The BJP is afraid to announce who their CM candidate will be because their local leaders, including Devendra Fadnavis and Eknath Khadse, are inexperienced and unqualified to run the second-largest state in India, and also have dozens of criminal charges against them'.
Would you vote for% of respondents
BJP39%
Congress15%
Shiv Sena19%
NCP10%
Others17%
This yielded the least movement away from the BJP: only two percentage points, which is not statistically significant. 39% of voters continue to root for the BJP. It shows there is far greater confidence in the BJP leadership than in that of any other parties.

This post is about nativism, so we don't talk about other measurement of how voters feel. But one point must be made. None of these treatments work as well as other treatment messages that talk about construction of roads, public works, anti-corruption, etc. These results suggest that the passions of caste and creed are now less important; that the history of the Gujarati-Marathi antagonism has faded from memory. By this logic, the BJP was perhaps on the right track in breaking away from the Shiv Sena, and focusing on its core messages of development and good governance. This is what voters in Maharashtra seem to care about.

### Implications

We may conjecture that three things are going on:

1. Part of the reason for this move away from nativist sentiment is the personal appeal of the Prime Minister. His approval ratings, measured in a survey FourthLion did for Mint on August 16, 2014, were highest in Maharashtra and West Bengal. In the bye-polls, there was very little involvement of the Prime Minister, and the BJP did not do well. It is no surprise then that the BJP is seeking votes under the Modi banner, with messages like "Chalo chale Modi ke saath" ("let's walk with Modi") and "Ab ki bar Modi sarkar" ("this time let's make it the Modi administration").
2. Anti-incumbency against the state government, and the 2 parties (INC + NCP) that jointly governed the state for 15 years, has voters looking for an alternative. Given the BJP's own brand, their assessment of being able to achieve a majority on their own, and the country beginning to taste the benefits of a clear mandate, the BJP has an edge in asking voters in Maharashtra and Haryana to give it a clear mandate in the states too, so that they can work well with the Centre.
3. But most important is the fact that the Indian electorate has moved on. The desire of the voter to look beyond tribal considerations is the reason why Maharashtra might be the first state to throw up a verdict that challenges preconceived notions about the eternal power of old hatreds.

Does this have implications for regional parties elsewhere in India? Many regional parties may have to go in for radical reconstruction if nativist fires are subsiding. Some, like the BSP, have begun doing this. The entire eastern and southern belt, which sees strong regional parties - West Bengal, Orissa, Telangana, Andhra Pradesh, and Tamil Nadu - could see change. While Jammu and Kashmir and Jharkhand will give us some more intuition in the coming few months, Bihar is going to be the next big test in 2015.

One possible argument is that Maharashtra is a better state, with greater exposure to new ideas, low levels of violence, and a successful economy. In contrast, the backward parts of East India may still be trapped in the old nativist ways. But what about the South? The developments in Maharashtra could be particularly portentious for the better states of the South.

The politics of Bombay has long been benighted by the problem of nativism. What was once a great metropolis has been bogged down by decades of nativist politics. These results show a possibility for becoming a normal city, where the political questions that matter are about efficiently producing local public goods.

## Friday, October 10, 2014

### Scientific management for election campaigns in India

by Viral Shah.

From 2010, I worked in the Aadhaar project for three years. This helped me learn how Government works and how it does not. The one big takeaway from my experience of working with the Executive arm of the Government was that to bring about true and lasting change, to restructure our defunct institutions and build new ones, one needs to engage with the Legislative arm, with politicians.

Politics in India is a cottage industry. Everybody loves to talk about it; most are cynical; very little is known about how things actually work. The professional ways of working -- which are found in business, science and slowly in government -- are least visible in politics. In particular, the crucible of politics -- the election campaign -- is just black art. In the last 20 years, we have seen family businesses get shaken up, professionalise, and embrace technology and process engineering. We have seen some parts of government do the same. We have seen a transformation of some parts of academiaa. The one place which has seen the least change is politics in general and election campaigns in particular.

This suggests opportunities for achieving important change. Shankar Maruwada, Naman Pugalia and I started a company -- FourthLion Technologies -- to provide professional services to political campaigns. Over a couple of campaigns, we have slowly learned how elections in India work. We have looked at an array of data from various public and private sources, and developed tools and technologies to aid election campaigns in multiple phases.

Elsewhere in the world, election campaigns are run through scientific management. In the US, both the Democratic and Republican parties have voter databases, where one can search for any voter by name. Through a variety of analytical methods, campaigns know fairly well which voters are likely to vote for them, and which ones are marginal, and on which groups of voters, no resources should be expended. Starting with such databases, every voter contact is recorded (a volunteer knock, a telephone call, a letter sent, an email, or a tweet) in the same way companies manage customer services through a CRM system. It took a decade of work for the machinery of election campaigns in the US to get to this stage, to transplant ideas which were well developed in the world of business.

When thinking about election campaigns in India in a professional way, there are many challenges. There are multiple parties, many races are multi-cornered, and with first-past-the-post elections, a candidate can win with as few as 20-30% of the votes. The voter lists are very poor in quality, with every possible error of inclusion and exclusion. They do not capture the large scale of urban migration and are often tampered with. Although the Election Commission of India has made great strides in conducting free and fair elections over the last several decades, much more remains to be done, and the quality of the voter list is perhaps the weakest link in Indian democracy today.

Every election has three natural phases: Registration, Persuasion, and Turnout. A campaign should start 6-12 months before voting date, by registering voters. Three months before the election, voters need to know the candidate and be persuaded, and finally the last week is focussed on "Get The Vote Out", or Turnout. At each stage of the campaign, one has to focus on the message and mobilisation. The message is all about what the candidate says and does, and mobilisation is about execution on the ground, in the digital sphere and in the media. Each stage as a distinct methodology for scientific management, and the problems faced can be quite surprising. As an example, it is not uncommon for 2 to 3% of the population of a constituency to be working for all the candidates, put together, in the last 2-3 weeks. This calls for the processes of large-scale management.

We provide tools and technologies for different parts of the campaign, starting with coalition dynamics, seat selection, analysis of past elections, formulation and testing of messages, calculating the reach of every channel (hoardings, TV, radio, print, etc.), managing call centres, and a control room for the turnout operation and voting day. We use data, analytics, and technology at every stage of a campaign to aid decision making and efficient deployment of resources. Traditional politics often deploys resources in a "Spray and Pray" manner, while we try to combine all available information and intuition so as to use resources more effectively.

In our experience, an incumbent who has a good chance of getting the ticket has a head start as he is able to do preparatory work for the campaign well ahead of time. As emphasised above, the campaign should really start 6-12 months before the voting. All too often, in India, candidate selection is left to the last minute. This makes it impossible to mount a serious campaign, and generally plays in favour of the incumbent. Once we start thinking of an election campaign as a systematic project, this induces the discipline of a minimum time period that is required to execute all the steps, just as is the case with all well planned projects.

On one hand, our thinking about process improvement for election campaigns consciously draws from successful techniques of scientific business management which have been perfected in the worlds of business, science and government in India. Along the way, we have seen that the speed, agility, and scale required in political campaigns in India is something unique when compared with the worlds of business, science and government in India. To some extent, we are seeing innovations in the field of election campaigns that can usefully inform, and sometimes get directly transplanted, into the other three worlds.

We are learning how our democracy works. The accountability is jarring, as any politician will tell you: voters make every possible demand, and speak their mind to the candidate, in as direct a way as can be. Millions of micro-deals are struck with candidates by individuals and groups of people. These are genuine deals about actions of the State and not bribery or corruption. These micro-deals bubble up into the processes of government and ultimately shape policy. It is a rough and tumble world which clashes against our dreams of representative democracy, but it is also astonishing how much this is about representative democracy.

### Should a government subsidise the purchase of energy-efficient equipment?

Today the Financial Express has a story, where LED bulbs costing Rs.400 will be sold at Rs.10 with the government paying for the difference. Does this make sense? I think it does not, and that this situation calls for a lot more sophistication in thinking about public policy.

#### What's the market failure?

The first and obvious place where this spending program fails to make the grade is on the question of public goods. I get a gift of Rs.390 to have a LED bulb, I benefit. The bulb is a private good. A gift to people who buy LED bulbs is as wrong as government spending on other private goods. Just as we criticise a government which runs health clinics for perambulatory care, we should criticise the government when it gifts money to people for the folks who buy LED bulbs. This is just the faddish thinking of one bunch of hausfraus running policy versus another.

The guiding question, in all design of government, should be: What's the market failure? I am not able to see a market failure in the working of the market for LED bulbs.

#### Get the prices right

Some people in the field of energy have an almost moralistic perspective on energy efficiency. Higher energy efficiency is seen as a good thing, regardless of cost. This is the wrong way to think about it. Energy efficiency is just one part of economic efficiency. An LED lamp is a big up front payment and then a stream of gains in the future. Whether the LED lamp is worth putting in depends on (a) The magnitude of each gain (i.e. how much you use that lamp) and (b) The discount rate. If the interest rate is high, it will make sense to buy a Tungsten bulb instead.

To obtain efficiency in the field of energy we should think about three things:

1. The first is the question of pricing of energy. When energy is cheap, it will be squandered by consumers, and vice versa. Externalities should be priced in. The biggest externality that is not being priced in is carbon emissions. When we fix these mistakes, the price of energy will go up, which will encourage people to buy energy efficient equipment.
2. When a household chooses to get capital goods of more or less energy efficient equipment, the flip side of these decisions are the capital goods that will be invested upstream, in the large factories of the energy industry such as generation utilities or natural gas infrastructure. Optimality requires that society should solve that overall problem correctly, and the overall problem is the combination of energy production, energy transportation and the end-devices which use energy. It is not obvious that the greatest bang for the buck is always obtained at the device end.
3. For that overall problem to be solved correctly, consumers and energy companies should be hanging off a sensible financial system which shows interest rates to both which are internally consistent. The failures of the Bond-Currency-Derivatives Nexus in India hamper that. The interest rates seen by households (which determine their purchase of LED bulbs) are strange, and the interest rates seen by the energy industry are quite different and also strange.

The engineer in me marvels at LED lamps. I was thrilled when the 2014 Nobel Prize went to the geniuses who made blue LEDs; this is simply one of the great sagas of the 20th century. I have watched Shuji Nakamura ever since he moved to UCSB in 1999. But this gee whiz' should not blind us on questions of public policy; we should be hard headed in how we thinking about what government does. Most of what government in India does is not the job of government; most of what government ought to do in India is not being done. The rocket science that we require in India is the great organising principle of the market economy -- the Bond-Currency-Derivatives Nexus.

## Thursday, October 09, 2014

### How to strengthen the National Pension System

by Renuka Sane and Susan Thomas.

When the Old Age Social and Income Security (OASIS) committee was created in 1998, it was asked to design a pension system that: (a) increased pension coverage on the large area, population and diversity of India; (b) was low cost; (c) was accessible to unsophisticated participants; (d) provided choice of investment; (e) was backed by sound regulation; and (f) had long-run sustainability. The report of the OASIS committee recommended the creation of the National Pension System (NPS), a pension system that was innovative even by the standards of pension systems in developed economies. The design included the following features:
• Individual accounts with defined contributions.
• Central record keeping agency which will provide a single account balance statement for each individual, and will move net funds to the fund managers.
• Investments managed by multiple pension fund managers, each offering standardised asset products. Auction based selection of fund managers where the selection is based on the sum of fees and expenses.
• Collection of contributions done through a network of banks, post offices and other "points of presence" across the country.
• Withdrawals permitted only after age 60, with a minimum mandatory annuitisation of 40 percent of the terminal pension funds.
• EET tax treatment, where benefits and withdrawals are taxed as ordinary income.

The NPS became operational in 2004 for new recruits to the central government. A central recordkeeping agency (CRA) and selection of fund managers through auctions have led to some of the lowest cost structures in the world. The NPS has grown to having 7.1 million accounts, and Rs. 0.6 trillion in assets under management. While it is mandatory for new recruits to the central government, it can be accessed by all. A co-contribution scheme called NPS-Swavalamban encourages participation by poor households in the informal sector.

After a decade of existence, there is need to examine the existing NPS and compare the performance of this system to the goals with which it was created. In a recent paper, we analyse the NPS from this perspective.

### Problems with the implementation of the NPS

While several of the key features of the existing system are consistent with the original design features, there are certain critical areas in which the NPS has deviated. There continues to be an attempt to reduce transactions costs in the system, with a central record keeping agency and a limited number of pension fund managers. However, the NPS has several flaws at the ease of accessibility as well as the choice of investments to the pension contributor:

Low transparency: One of the progressive features of the original NPS design was high transparency about cumulations for the NPS member contributors. However, this has not been implemented. Members do not always get communications regarding their pension wealth. There is as yet, no clarity on how long the process of contribution deduction to actual investment takes, and the costs incurred in the form of lost interest owing to delays in the process (if any) on the customer. The PFRDA does not make available aggregate details about assets under management, number of accounts, or cumulated returns. This lack of transparency leads to a lack of awareness and trust in the system, and reduces the quality of policy analysis.

Lack of investment choice: Government employees are not allowed a choice of investment strategy, or pension fund manager. The default investment option of government employees is badly structured - it does not cater to the best interests of participants. International diversification is not permitted.

Inconsistency in tax treatment: Schemes such as the GPF and the CPF continue to be taxed on a EEE basis, while the NPS is taxed on a EET basis. Employee contributions to the NPS above Rs.100,000 are taxed. These tax inconsistencies need to be rationalised.

Confusion: A key element of the original NPS was that it was one single pension system serving the entire country. For a variety of tactical reasons, before the PFRDA Act was passed by Parliament, a series of variants of NPS were created. These create complexity, hamper portability, and increase cost. It is time to go back to one single NPS.

### Broader policy problems

Beyond the scope of the original NPS design, there are other policy issues that need to be addressed in order to achieve the end objective with which the NPS was commissioned: the goal of providing old age income security with coverage across the breadth and length of India.

One such issue deals with the question of the annuity the NPS contributor member can expect to access as a pensioner. The price of an annuity will influence the monthly pension available to a pensioner. If annuity prices are very high, it will have a detrimental impact on the pension payout. As of yet, there has been no active effort on the part of the PFRDA to enable the pensioner to obtain the lowest cost annuity product. Similarly, there has been no effort to design a common draw-down policy that works in the interest of both government employees and lower-income, informal sector workers, both of whom contribute to the NPS.

Another area of broad policy concern has centered around the sales of NPS so far. This has been perceived as very low, and has led to suggestions to incentivise sales intermediaries to push the sales of NPS, by improving their commissions. However, experience from the mutual fund and insurance industries in India shows that a combination of high-powered sales incentives without any liability for mis-selling does not lead to an increase in retail participation. Instead, it can lead to defrauding of customers. This suggests that it would be imprudent for the PFRDA to incentivise the sale of the NPS in an environment that is characterised by a lack of strong consumer protection. The PFRDA needs to first re-orient its strategy towards an explicit goal of consumer protection, with a clear enumeration of the rights of consumers and obligations of sellers. A relevant benchmark that provides explicitly for protections against misleading conduct by sales agents is the Indian Financial Code.

### The light at the end of the tunnel

One of the key bottlenecks for the NPS since it was implemented in 2003, was the lack of a sound regulatory framework that was implemented by an empowered and independent regulator. While the PFRDA has been in place at the same time that the NPS was implemented, it has awaited the passage of the PFRDA Bill for a regulatory mandate and empowerment. This Bill has since been passed in 2013, enabling the formal institutionalisation of the PFRDA as the regulator of the NPS.

The PFRDA can now take on the task of both the relatively short term agenda of closing the gap between the current implementation and what was visualised in the original design. This includes building trust in the system by improving the transparency and visibility of fund accumulations for contributor members and the overall system; enabling a richer choice of investments available to individual members; and resolving inconsistencies in tax treatment.

Another area which the PFRDA can take forward is to initiate the policy thinking and research analysis for the medium and long-term objectives of sound policy and regulation for annuities, and to design the regulatory framework to improve the NPS customer rights.

With these actions, India can get back on the track to achieve a pension system with universal coverage that was visualised in the OASIS reforms of 1998.

On this blog:

## Saturday, October 04, 2014

### Repeal 100 laws

An earlier version of this appeared on qz.com two days ago.

### Fixing the laws is fixing the Republic

Badly drafted laws are at the heart of the failures of government in India. All too often, in India, laws feature sloppy drafting (inducing legal risk), have vague objectives (hampering accountability), and give sweeping powers (inviting abuse). Of particular importance is the role of sloppy drafting coupled with absence of accountability in generating arbitrary power in the hands of the executive. You have to respect' the executive because it has arbitrary power.

Today there is a thicket of nearly 2,000 central laws, alongside hundreds of state laws, processes, rules and regulations, The Gazette of India fares badly on publishing central legislations, making it impossible for citizens to know all the laws through which government has powers over them. Everyday life has become a minefield: a person never quite knows what laws he is violating.

Remedying this situation requires large scale rewriting and cleaning of the statute books. The first step is outright repeal of obsolete and anachronistic laws. The second is creating a new wave of well-drafted laws which clean up one sector at a time. A well-drafted law is precise, principles-based and will make sense for a long horizon. One example of this is the Indian Financial Code, which aims to replace all existing financial law. Drafting high quality law is a complex and time-consuming process.

Both strategies -- outright repeal and new drafting -- are required to clear the thicket, reduce complexity, uncertainty, mis-governance and opportunities for rent seeking, and ultimately to put the Republic on a sound foundation.

### Three groups of laws that require fixing

Three groups of laws are of prime importance in cleaning up the undergrowth:

1. There are laws from the colonial era which are irrelevant or misplaced today, as the world has changed. Some of these were specifically enacted to curb the independence movement.
2. In particular, during the Second World War, many laws were passed which reflected the exigencies of the war. In numerous areas, freedoms of Indians were taken away to make it convenient for the British war effort.
3. The laws from the socialist period, roughly 1950 to 1980, where the government sought to achieve a dominant role in the economy. Many times, the dirigisme which was initiated as a wartime measure ossified into a system of control under socialism. The years around the Emergency in particular had laws which gave a tremendous increase of State power, the after effects of which are still plaguing the country.

### The zone of careful rewrite

While all the laws under these three categories merit review, in many cases, outright repeal is neither feasible nor desirable. Three examples are instructive:
1. The Forward Contracts Regulation Act of 1952 has as its objective the prohibition of options trading. This is not an objective that we wish to pursue today. However, the solution does not lie in a simple repeal of this Act; what is required is a complex drafting of a new law (i.e. the Indian Financial Code).
2. The RBI Act, 1934, was proposed by the British as a temporary measure'. It is a badly drafted legislation, and has given us an under-performing central bank, but the solution is not a simple repeal but the complex drafting of a new law (the Indian Financial Code).
3. There are huge problems with the Indian Penal Code in areas such as freedom of speech. In a sense, the IPC of 1860 (written three years after the mutiny) is incompatible with the Constitution of India when it proposes to imprison a man for committing the crime of speaking. But this is not a simple repeal. What is required is a deeper rewrite of criminal law - e.g. by setting up a Criminal Justice Legislative Reforms Commission a la FSLRC.

### The zone of outright repeal

In 2014, a collaborative project was initiated between three organisations -- Centre for Civil SocietyVidhi Centre for Legal Policy and the Macro/Finance Group at the National Institute of Public Finance and Policy -- that aimed to identify 100 laws that can be simply repealed. This initiative came at the back of the new government's undertaking to clean the statute books. The initiative identified laws that are completely out of touch with today's India, where almost everyone would agree that they do not belong, and where there are no complexities other than a simple repeal.

The report of this project has a compact presentation of each of these laws, based on thorough research. This document is a hall of shame of the 100 laws that have no reason to exist. Once there is consensus about this work, a simple `Repeal of 100 Laws Act' can be drafted which eliminates these 100 laws.

In the past few weeks, the government has built momentum towards fulfilling its promise of repealing dated enactments -- however, these have focussed largely on low-impact house keeping repeals. This is no doubt crucial. The 100 Laws Project however, goes a step beyond -- it has assembled a package of both low impact repeal recommendations (40 of which have been included by the 20th Law Commission as part of its Legal Enactments Simplification and Streamlining project/248th Report), as well as gathered evidence to recommend repeal of high-impact laws that materially affect business climate and government effectiveness.

Achieving a modern and capable State in India undoubtedly requires more work. There are surely more than 100 laws which merit simple repeal. There are thousands of laws, which can be removed through more complex drafting projects. Most important of all is the constructive agenda, of drafting high-quality laws which create an accountable government with clarity of objectives. However, in that larger journey, this project is a useful and immediate building block.

A team of experts sifted through the landscape and chose 100 laws that are ripe for repeal. Let's look at the distribution of the date of these laws:

 Distribution of the date of the 100 laws

We see a bimodal distribution with one hump at old British laws and another reflecting the period of India's socialism. The vertical lines focus us on the socialist period, 1955-1980, and the red line is the year of the Emergency, 1976. This gives us insights into the time periods which produced laws that obviously merit repeal, and may help increase the productivity of future projects which sift through laws.

World War 2 does not show up as a bump in this graph. Perhaps what is going on here is that the restrictions which were introduced here, such as capital controls, ossified into complex systems of socialist control, and resist simple repeals.

### Reinvigorating the legislative process

In the past, the drafting of laws was dominated by the executive. As an example, the Ministry of Rural Development drafted the National Rural Employment Guarantee Act, 2005. The founding team of SEBI drafted the SEBI Act, and RBI staff have repeatedly had a role in drafting amendments to the RBI Act. This method of drafting generates a bias in favour of sweeping powers and low accountability.

For the health of the Republic, it is important to have independent voices involved in drafting and critiquing laws, and to create public debate on the substance and impact of new and old laws. In recent years, we are starting to see the evolution of think tanks away from traditional economic policy analysis towards a greater understanding of, and an involvement in, the legislative process. Examples of these organisations include Centre for Policy Research, Parliamentary Research Service, Centre for Civil Society, Vidhi Centre for Legal Research, Indira Gandhi Institute for Development Research and NIPFP. An array of independent writing now dissects laws and regulations, and creates resistance against badly drafted laws. This is an important and welcome new phase in the policy process in India -- in the maturation of the Republic -- one we think should be received with enthusiasm by the new government.