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Monday, February 29, 2016

How the Indian land market can learn from the Indian securities market

by Prateek Misra and Bhargavi Zaveri.

In the world of finance, the implicit value of a security or asset lies in its marketability, or the ease with which it can be converted into cash. Laws enacted by the State and rules of exchanges which impede transferability are viewed as regressive. Financial reform has conventionally focused on increasing the marketability of securities and reducing the transaction costs attached to the transfer of securities. On the other hand, land reforms which have been undertaken in India largely since the 1950s, have failed to create a liquid land market by imposing several restrictions on transferability. This is because Indian land reforms were not motivated by the need to create a land market. On the contrary, the outcome of land reforms has increased transaction costs and reduced the transferability of land. Any conversation on the creation of a land market in India must, therefore, begin with the reforms which have hitherto been undertaken.

State intervention in the land market in India: Intentions and Outcomes

In a lucidly written column, Prof. Anand Swamy points out that upto about 1855, State intervention in the land market was limited to the measures taken for collection of revenue and there were practically no restrictions on land transferability in India. This enabled farmers and peasants to freely mortgage and sell their land.The large scale transfer of land to merchants and moneylenders having no connection to agriculture, however, often led to social tensions, especially in the poorer regions of the country. That is when the State (the British, as it were) chose to intervene in the land market to deal with the social tensions that arose from indiscriminate land transferability. This approach towards land reform continued post-independence too.

Post independence, land reform in India was motivated by the following concerns:

  1. Increasing agricultural production;
  2. Eliminating exploitation and promotion of social justice in the Indian society by providing security for the tiller of soil;
  3. Preventing concentration of land holdings in the hands of a few; and
  4. Protecting tribal communities from the deprivation of land occupied by them.

Motivated by the abovementioned concerns, land reforms in India can be classified into the following categories:

  1. Reforms which abolished intermediaries such as zamindars. For example, the zamindari abolition legislations which were passed in several states across India such as Rajasthan and West Bengal.
  2. Reforms which provided for the regulation of tenancies and rents. For example, the Rajasthan Tenancy Act, 1955 and the Mahrashtra Rent Control Act, 1973, which regulate the rights and interests of different class of tenants.
  3. Reforms which imposed ceilings on landholding. For example, the Rajasthan Imposition of Ceilings on Agricultural Holdings Act, 1973 and the Urban Land Ceiling Act, 1976, both imposing ceiling on the holding of land.
  4. Reforms which sought to restrict land use for certain purposes only and indirectly affected transferability, except for the restricted uses. For example, the Maharashtra Land Revenue Code, 1966, imposes several restrictions on the transfer and use of land.

The policy underlying the reform led to the imposition of several restrictions on sale, lease and mortgage of land. While many reforms completely prohibited the transfer of land, others required the transferor and the transferee to obtain the permission of the State for making the transfer and others permitted transfers only to certain classes of persons. This increased the transaction costs attached to land transactions.

Case Study of Maharashtra

We studied the laws relating to land prevailing in Maharashtra with the objective of identifying the restrictions imposed by them on land transferability.

The following table gives a snapshot of the laws in Maharashtra which impede the transferability of land:

Land Laws of Maharashtra
S.No Title Description Restrictions
on transferability (Sale, Lease and Mortgage)
1 Bombay Tenancy and Agricultural Lands
Act, 1948
An Act governing tenancies of agricultural land The Act vested the ownership of agricultural land in the tenant who cultivated such land personally, with effect from a certain date. It permits the deemed owners of agricultural land to sell, mortgage and lease land only under certain conditions and with the permission of the Collector.
2 The Maharashtra Agricultural Land (Ceiling on Holdings) Act, 1961. An Act which imposes a ceiling on agircultural landholdings. The Act allows agricultural land to be sold or partitioned only in certain circumstances with the permission of the Collector.
3 The Bombay Prevention of Fragmentation and Consolidation of
Holdings Act, 1947.
An Act to prevent the fragmentation of and better consolidation
of agricultural land holdings.
The Act allows the holder of a notified piece of land to sell or lease it only to a holder of a contiguous piece.
4 The Maharashtra Land Revenue Code, 1966 An Act which consolidates the law relating to land revenue in Maharashtra. The Act imposes several restrictions on the transfer and use of land such as (a) restrictions on transfer of tribal land to non-tribals; and (b) restrictions on the use of land used for one
agricultural purpose for another agricultural purpose. However, such transfers and use-related changes can be made only with the permission of the Collector.
5 The Maharashtra Co-Operatives Societies Act, 1960. An Act governing co-operative societies in
The Act imposes various restrictions on lease, such as a mortgagor of property mortgaged to an Agriculture and Rural Development Bank, must not, except with the prior consent in
writing of the bank, and subject to such terms and conditions as the bank may impose, lease or create any tenancy rights on any such property.

Thus, the laws in Maharashtra impose several restrictions on the sale, lease and mortgage of land. While some legislations require the landholder and the transferee to obtain the collector's permission before transferring the land, others mandate that the transfer may be made only to certain classes of transferees such as the holder of a contiguous piece and so and so forth. Under some legislations such as the Bombay Tenancy and Agricultural Lands Act, 1948, the Collector has been permitted to give permission for transfer of land only in certain circumstances, such as if the land is gifted to a member of the owner's family or an institution named in the Act or if the owner is perpetually giving up agriculture or is unable to cultivate the land personally. It dispenses with the requirement to obtain the Collector's permission in certain other set of circumstances such as the purchaser is an agriculturist and the collector's fees are paid.

Restrictions such as the ones illustrated in this case-study have severe implications for the land market, as described in the next two sections.

Prevents bundling of rights in land

In classical economics, when one speaks of land as a factor of production, one does not restrict the purport of land to the physical possession of land. What the land owner, in fact, possesses is the right to carry out a circumscribed list of actions (Coase 1988). Hence, land, as a factor of production, refers to a bundle of rights, which enables a person to "enjoy" the property, namely, the right to sell, lease and mortgage (Commons 1893).

As illustrated in the table above, land reforms in India have effectively prevented the bundling of rights by prohibiting or restricting the right of the holder of the property to hold, sell,lease and mortgage the property. They extensively diluted the value of land as a factor of production.

Transaction costs

The second obvious outcome is the impact of such restrictions on transaction costs attached to transfer of land. Apart from direct costs such as the requirement to obtain the Collector's permission for a whole range of transfers, the transferee of the property also needs to take into account the costs associated with investigating the title of the transferor. To take an example from the abovementioned case-study, where the transferee is acquiring agricultural land in Maharashtra, a title investigation will include an enquiry as to whether the transferee has the authority to unconditionally transfer agricultural land, whether the transferee qualifies as an agriculturist and whether the land is eligible for conversion.


Thus, unlike financial reforms which conventionally focus on creating liquidity in assets, land reforms in India have hampered liquidity in the land market. India would not have had a liquid securities market in securities if the right to transfer securities was similarly restricted. This principle is applicable across asset classes.

Land reforms made in India were a symptom of the malaise that prevailed at that time. Today, the reforms themselves are the malaise. Apart from increasing transaction costs, they create tremendous scope for rent-seeking and corruption in the form of mandating permissions for land transfers. Any conversation on land reform for the creation of a liquid land market in India must, therefore, make a clean break from the past.


The authors thank Sattwick Biswas for useful discussions on this subject.


The Firm, the Market and the Law by R. H. Coase (1988), Page 155.

John R. Commons, The Distribution of Wealth (1893), Page 92.

The authors are researchers at the National Institute for Public Finance and Policy.

Friday, February 26, 2016

Reporting information about individuals in self help groups

by Karuna Krishnaswamy.

The problem

On 14th January 2016, RBI issued a circular for banks to report the financial and non-financial data of the individual members of the Self Help Groups (SHG) that they lend to starting July 2016 to credit bureaus. However, while bank know their groups' credit performance, data on the individual members and internal loans reside, if at all, on paper-based registers maintained by SHGs and cannot be readily accessed. This RBI circular is a reiteration of an earlier one dated 27 June 2014 since banks did not make much progress the first time around. There is a chasm to cross between thinking about one group at a time and thinking about one individual at a time.

In March 2014, there were 74 lakh SHGs, with 42 lakh active borrowers, with loans outstanding of INR 43,000 crore (0.3% of the GDP) and savings of INR 9,900 crore (source). However, there are sector-wide concerns about the quality of the groups. With better data we will know how many groups are active and functioning well, and if loans are being disbursed democratically and not captured by the group leaders. RBI's stated intention is for banks, and MFIs to make an informed decision on lending to SHGs after considering their members' indebtedness and past performance through a credit bureau, monitoring NPAs and for research purposes. NABARD and DFS would like to link SHG members to Aadhaar-based programs like PMJDY to offer a wider range of financial services and for direct benefits transfers. Indeed, this is a first step for banks to graduate SHG members to individual services.

Separately, NABARD's e-Shakti program supports the Digital India program through SHG MIS digitisation as does the National Rural Livelihoods Mission. However, past SHG digitisation efforts have not succeeded because they were expensive and/or operationally difficult to implement. The RBI circular further states that banks may incentivise SHGs to adopt digitisation but that they cannot set any pre-conditions (including opening individual saving accounts) to giving them new loans. This makes it an even more difficult task.

The penalty for not complying with RBI's circular is that the loans to the unreported SHGs will not count as Priority Sector Lending (PSL). Given that the SHG portfolio represents a small fraction of the PSL portfolio of most banks, this penalty may not be high enough.

Gramin Bank of Aryavart (GBA), a large Regional Rural Bank, has successfully piloted a novel agent banking model to, inter alia, service SHGs, that promises to overcome these challenges while offering many other benefits. This article discusses the challenges and how this model that could address them.

Past challenges

Past efforts since 2006 have used a bookkeeping software for SHGs for digitising their information such as a laptop-based MIS by SERP for self-entry, groups paying a computer munshi by Pradan, and NABARD's tablet based software. These efforts have not taken off in a big way due to the following challenges:

  1. Funds to finance the hardware and software capital expenditure.
  2. Hiring and training a computer literate operator who can do the data entry for a large number of groups to make the user fees affordable for the groups without sempiternal support of the SHPI; finding people to do the training, and servicing of the hardware and software.
  3. Getting SHGs to adopt the MIS and to pay for it.
  4. Given the low data quality, ensuring data correctness, aggregating, verifying and transmitting (especially in areas without GPRS connectivity) to the bank.
  5. Securing the cooperation of the banks when it is a low priority for them.

The Bank Sakhi model with dual authentication

Based on a successful demonstration project by GBA, supported by the Rural Financial Institutions Programme (a cooperation program of NABARD and GIZ), NABARD issued a circular on 14 January 2016 encouraging banks to appoint SHG members as their Business Correspondents Agents (BCA) for financial inclusion. An indirect benefit of this approach, that is discussed below, is that individual group member data can be collected at low extra cost.

In this project, SHG members, were trained and appointed as BCAs, popularly called Bank Sakhis, to provide doorstep individual financial services as well as to conduct SHG transactions such as savings deposits, loan disbursements and repayments using a conventional PoS device. They were contracted by Bartronics Pvt. Ltd., the Corporate Business Correspondent (CBC) of the bank. The Bank Sakhis were supported by the SHPI, the Rajiv Gandhi Mahila Vikas Pariyojana and their Block Level Federations who were contracted as a sub-BC to Bartronics.

The key innovation of this model is the use of a dual authentication software that resides on the PoS (NABARD and GIZ have a video explaining this). This software enables BCAs to conduct SHG transactions that require two members' approval to be authenticated. Previously, SHG loan disbursements and loan repayments required two leaders from each group to come to the bank branch, fill in the forms along with two signatures. However, now, SHG transactions are conducted like any other BSBDA transaction by a BCA. An electronic debit to the SHG's group account is authorised using fingerprint-based authentication of the two group leaders by the PoS device. These transactions are recorded in real-time at the bank's core banking system (CBS). The Bank Sakhi does cash-in /cash-out to the group account and its individual members and later squares off at the bank branch. Each Bank Sakhi in UP has a service area of 3.5 villages on average and has five SHGs in her command area due to the low SHG penetrations there.

Banks can now have accurate information in their CBS of the loan disbursal, utilisation and repayment performance of individual members along with their Aadhaar IDs obtained through the KYC process of opening the individual and group accounts. Hence, the information to be collected by banks and reported to RBI can be accomplished through this model at low extra cost.

Assessment of the approach

This approach can mitigate the challenges previously identified with the bookkeeping software approach.

Community adoption : An evaluation of the pilot project revealed that although voluntary, all SHGs leaders reported preferring to transact with the Bank Sakhi. This is because the doorstep service saves two members of each group a (bi) monthly visit to the bank branch which otherwise would cost them a day's time in addition to transportation and incidentals. They do not report unacceptable delays to the group meetings due to the technology.

The CBC has the operational experience in servicing PoS technology issues in the field, while the Block Level Associations of the SHG federations are well-positioned to train Bank Sakhis.
This service is more likely to be adopted widely than a bookkeeping software since it solves a specific pain-point of SHGs and their leaders and the incentives of the bank, BCA, group leader and members are well-aligned.

In any case, banks can strongly encourage SHG transactions to be routed through Bank Sakhis since dual authentication ensures that the BCA cannot de-fraud the members. Banks simply need to open an individual saving account (as envisaged by PMJDY) for their loans to land in and for repayments, since only transfers from individual accounts to the group account can be recorded by the PoS and not bulk cash deposits for the entire group, into the group account.

Being group members themselves, Bank Sakhis are very familiar with SHG processes whereas BCAs who are not members are less likely to be embraced by other SHGs. In terms of reliability of the service, in our project after two years, only three Bank Sakhis had quit out of 78 (despite low wages).

Costs and benefits to stakeholders: Banks would have access to SHG transactions data at a low cost. Consider a stylised SHG that has 12 members that deposit mandatory savings twice a month, and of which 6 members have a running loan that they repay once a month. At a fee of INR 3 per transaction payable to the CBC, this costs the bank a reasonable INR 96 per group per month, while the INR 7 lakh for developing the dual authentication software is the only additional capital expenditure. The other costs of device, training and servicing are part of the BCA expenses which are incurred anyway by the bank as part of its FI mandates. Furthermore, NABARD's DFIBT department offers subsidies to encourage use of Bank Sakhis; it will reimburse INR 20,000 to the banks for each PoS device and the wages of a block level coordinator to support the Bank Sakhi. Costs could be further reduced by using smart phones instead of PoS devices.

But the larger benefit to banks is moving the SHG transactions out of their branches and to the Bank Sakhi.

GBA found that migrating SHG transactions from its branch to the Bank Sakhi freed up considerable branch staff time, which could be repurposed for originating and monitoring more profitable credit customers. GBA also reports that the delinquency rates of their SHG portfolios have dropped after the Bank Sakhis were introduced. Financial inclusion through CBCs has not been an attractive business proposition for banks. Enabling Bank Sakhis to service the SHGs' credit portfolio will improve the viability of the BC channel per se.

For members, the INR 96 would be lower than the cost of two leaders going to the bank twice a month. Currently there are no user fees but it is likely that the willingness to pay to not go to the bank branch is higher than to pay for entering SHG transactions into a computer. In the past, there have been concerns that SHG federations may not encourage individual accounts fearing that it may lead to disunity and that the group may fall apart. The Bank Sakhi model has been successfully piloted by two RRBs in two states. The federations in these two sites support the model in spirit and in operations.

In our pilot areas, the number of SHGs per village was very low. In other states such as AP, the number of groups per village is much higher, contributing to a much higher fraction of the Bank Sakhi's income and make it worth her while.

Cooperation by banks: The downside to the banks is low. They are required to fulfil FI, PMJDY and PSL mandates in any case; they only need to appoint Bank Sakhis instead of their conventional BCAs. Bank Sakhis have proven to be more effective in servicing FI customers compared to men and are more tied to the village and are less likely to quit. The main challenge for them is to find qualified SHG members, though this restriction could be relaxed in future to scale faster.

Data quality and reliability: Accuracy of the data is expected to be close to perfect since money is changing hands and both parties will ensure that the amounts entered are correct. Challenges to real-time uploads are in those areas where internet reception is poor.

Human resources and training: This approach reduces the need for the eco-system to hire a separate computer munshi in addition to a BCA and hence the entailing hiring and training costs are reduced as well.


One limitation of a PoS device is that it is too unwieldy to install an SHG accounting software on it. This may possibly be addressed by using a tablet PC or even a smart phone, instead, with an accounting software in it and the Bank Sakhi could further play the role of computer munshi if she wants to augment her income.

For this model to work at scale, most of a bank's SHGs should regularly use the Bank Sakhi. Hence, the challenges to this are the same as the challenges to the BC model and to technology such as - availability of internet connectivity; the bank branch should not be too far away for the Bank Sakhi to visit for cash management; competent SHG members should be available in each Gram Panchayat; the Block Level Association or an SHPI should be available for hand-holding support in the early days; and a CBC should be operative in the SHG villages. In our early, experience, none of these have been showstoppers.

However, challenges may crop up in future; a scale-up will not have the abundant project management and oversight that the pilot did; identifying and training Bank Sakhis may take longer than the RBI deadlines; Bank Sakhis may get dissatisfied with their low incomes; the required support from the bank branch managers may not be universally available; funds to conduct campaigns to build awareness and trust in the Bank Sakhis may not be available. However, many of these challenges also apply to the accounting software approach.


In sum, the benefits of this approach are too many to be ignored especially if the banks consider their various mandates in toto and in states with large SHG outreach. Stakeholders are better incentivised to support this model than the bookkeeping model. RBI could support this effort by relaxing its instruction that opening a BSBDA cannot be a pre-condition to loan disbursements, since voluntary community participation is a challenge. However, as with large scale-up of any government program, careful design, and ongoing monitoring and evaluation feeding into design improvements, will maximize the likelihood of effectiveness.

Karuna Krishnaswamy is an evaluation specialist with GIZ, Delhi.

Sunday, February 21, 2016

Interesting readings

Macroeconomic backdrop to the 2016 budget by Ajay Shah in the Business Standard, 22 February.

Maybe we are all anti-nationals by P. Chidambaram in the Indian Express, 21 February.

An open letter by Mani Shankar Aiyar to A. B. Vajpayee in the Indian Express, 20 February, tells a great story about C. N. Annadurai and A. B. Vajpayee from 1962.

Deconstruction of a crime by Surjit Bhalla in the Indian Express, 19 February.

Rage of the uncles by Shekhar Gupta in the Business Standard, 19 February.

We hang our heads in shame at actions of Patiala House lawyers by Somasekhar Sundaresan on the Huffington Post, 18 February.

Frontiers of beating capital controls from, 18 February.

A review of sedition in Indian law in the Indian Express by Maneesh Chhibber. For the intellectual framework, you must read the US Supreme Court in Brandenburg v. Ohio, 1969.

Frontiers of misbehaviour by banks from, 17 February.

Hong Kong's popular, lucrative horror movie about Beijing has disappeared from theaters by Heather Timmons on, 17 February.

After TRAI, it's now government's turn to do its bit for net neutrality by Rajeev Chandrasekhar in the Economic Times, 17 February.

An act of tyranny by Pratap Bhanu Mehta in the Indian Express, 16 February.

Somasekhar Sundaresan on Huffington Post, on the agenda for U. K. Sinha, 16 February.

A remarkable situation is unfolding in the US: The FBI asked Apple to break into the iPhone of a confirmed terrorist, and Apple refused. I wonder what would happen if something similar were to happen in India.

Plan B for free speech by Lawrence Liang in the Indian Express, 16 February.

Hong Kong has probably lost HSBC's headquarters for good: and Beijing is to blame by Heather Timmons on, 14 February.

Why 7.6% growth is hard to square by R. Nagaraj, in the Hindu, 12 February.

Tuesday, February 16, 2016

Protecting citizens from the State: The case for a privacy law

by Vrinda Bhandari and Renuka Sane.

Every breath you take, every move you make 
Every bond you break, every step you take
I'll be watching you 
-- The Police, 1983

Most of us are familiar with the song, and might hum along. When you pause to think about it, it is about a creepy level of surveillance. Things are particularly dangerous when the watcher is the State.  Here are some facts about the Indian State:

  1. In 2011, India was ranked by Google as the third most intrusive State in terms of number of requests for data on users with 1699 (1430) user data requests being made to Google alone. In 2015, we have climbed to the second spot.

  2. The Report on surveillance in India by the Software Freedom Law Centre (SFLC) found that on average, the Central government alone taps more than 1 lakh phone calls a year, with around 7500-9000 phone interception orders being issued by it monthly. Combining this with requests from the State Government, the Report concluded that, Indian citizens are routinely and discreetly subjected to Government surveillance on a truly staggering scale.

  3. The Central Monitoring System (CMS) set up by the Government of India allows authorised security agencies to instantly intercept and directly monitor communications on mobile phones, landlines and the internet in the country (including on social media) to strengthen the security environment. The CMS will have deep search surveillance and monitoring capabilities with little requirement for authorisation. Its "direct electronic provisioning" allows automated instantaneous interception, that enables direct access by bypassing telecom service providers.

  4. NATGRID, conceived in the aftermath of the 26/11 attacks, seeks to create a centralised database streaming sensitive information from 21 data sources, including banks, travel details etc. Information infrastructure like Aadhaar may make it easier to utilise this information. In a fledgling democracy, the emergence of this new technology comes with the possibility of misuse.

The State has its reasons for surveillance. Sometimes they may even be justified, when surveillance is integral to the working of the criminal justice system. But can we, as citizens of India, demand an explanation from the State on whether a certain act of snooping was justified? Can we be sure that the information is being collected about us is not going to be misused? Do we even know what information is being collected? Do we have any say: are we citizens or are we subjects?

Understanding the right to privacy

In most jurisdictions in the world, questions on State surveillance are evaluated in the context of how the State understands, recognises, and balances the right to privacy of its citizens. Article 12 of the Universal Declaration of Human Rights, Article 8 of the European Convention of Human Rights [ECHR] and Article 17 of the ICCPR recognise privacy as the right to respect for private and family life, home and correspondence. The Fourth Amendment of the US Constitution also secures the rights of the people in their persons, houses, papers, and effects against unreasonable search and seizures, being premised on the notion that a 'person's home is their castle'. It has also been interpreted as that which underlies the dignity and autonomy of an individual by the Inter American Court of Human Rights.

The lowest common definition of privacy goes as far back as Warren and Brandeis (1890), as the right to be left alone. This views privacy as a notion that is central to our identity, dignity, and sense of self. It determines our interaction with other peers, the society and the State; and our power to control and share information selectively.

The law on privacy in India

Unlike the American Constitution or the ECHR, the Indian Constitution is silent about the right to privacy or private life or the protection against unreasonable searches and seizures. It is thus an un-enumerated right.

The development of the law on privacy began with the decision of the eight-judge bench of the Supreme Court in M.P. Sharma v Satish Chandra (1954), followed nearly a decade later in Kharak Singh v State of Punjab (1963). Both the judgments took a narrow view of the idea of privacy as they were focused on the question of search and seizure, and not really on the value of privacy per se.

After the 1970s, the Supreme Court started interpreting the right to privacy and the Article 21 right to life and personal liberty more expansively as is evident in the Gobind v State of Madhya Pradesh (1975), Auto Shanker (1994) and PUCL v Union of India (1997). The PUCL case is particularly important as the Supreme Court issued a series of guidelines on the steps the State must take before authorising surveillance.

In the most recent deliberations, the Indian Supreme Court during the Aadhar hearings in August 2015, put into question whether the right to privacy is a fundamental right at all under Part III of our Constitution and referred the following questions to a larger five judge bench:

  • Whether there is any "right to privacy" guaranteed under our Constitution.
  • If such a right exists, what is the source and what are the contours of such a right as there is no express provision in the Constitution adumbrating the right to privacy.

Understanding the surveillance architecture

As we debate the constitutional and legislative foundations of privacy, it's important to understand the surveillance architecture which has sprung up in the country.

While we debate whether privacy is a fundamental right, regulations such as Section 26 of the Indian Post Office Act, 1898; Section 5(2) of the Indian Telegraph Act of 1885 (read with Rule 419A of the Indian Telegraph Rules, 1951) along with the relevant Police Rules; and Section 69 of the Information Technology Act 2000 (IT Act) govern how authorisation is handled for interception of postal articles, interception of messages, and the internet respectively.

The India Post Office Act, and the Telegraph Act deal with targeted surveillance. For example, the Telegraph Act and Rules provide for a two-tiered threshold test, which require first, the occurrence of a public emergency, or in the interest of public safety to empower the Central or State government or any officer authorised therein to order the interception of postal/telegraphic messages; second, only if it is satisfied that it is necessary or expedient so to do in the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States or public order or for preventing incitement to the commission of an offence.
This is not true of the IT Act. There are three notable distinctions that make surveillance easier under the IT Act.

  1. Section 69 does away with the pre-requisites of "public emergency" or "public safety" for the appropriate government to "intercept, monitor or decrypt" internet data.

  2. The Act widens the second-tier of the test under the Telegraph Act by providing for two additional grounds when it is considered necessary or expedient to intercept in the interest of the "defence of India" and the "investigation of any offence".

  3. The Act imposes an additional obligation on all internet service providers (the intermediaries), the subscriber and the person in-charge of the computer resources to "extend all facilities and technical assistance" to the intercepting agency, or face imprisonment up to seven years.

Finally, internet metadata can be monitored and collected by any government agency under the low threshold of "enhac[ing] cyber security" or for "identification, analysis and prevention of any intrusion or spread of computer contaminant in the country" under Section 69B of the IT Act, which deals with the power to authorise to monitor and collect 'traffic data' (widely defined) or information through any computer resource for cyber security.

What is ironic about the regulatory framework in India is that the same IT Act provides for extensive regulations on sharing of consumer data collected by businesses. The Indian State clearly has high standards for protecting privacy of consumers from private individuals, but not equivalent standards for itself.

Areas of concern

Consider the new world of electronic communications. It is impossible for us to even know that our privacy is being infringed, or to know what information is being held about us. The Snowden revelations have proved that data collection, retention and analysis by the State is an immutable reality and that we have literally sleepwalked into a surveillance society. This has compelled governments in the US, UK and Europe, which have a far greater recognition of the right to privacy than India, to evaluate and revise their legal framework.

As we have seen earlier, in the absence of an over-arching law, our regulatory surveillance architecture is heavily weighted in favour of the State. This is extremely problematic as mass surveillance is being carried out in a legal vacuum, with little regard for the effect on individuals' rights to privacy. In such a situation, regardless of whether the Supreme Court of India considers privacy as a fundamental right, the State must define the circumstances in which it may intervene with an individual's rights. For example, right to property is not a fundamental right. However, we still have the Land Acquisition Act and we debate ad nauseam about the circumstances in which the State may take away land and the due process for this. Why should privacy be any different?

In the face of ambiguity regarding the status of the right to privacy as a fundamental right, the absence of any statutory privacy code, and the out dated applicability of the PUCL surveillance safeguards, it is necessary to enact a privacy law. Such a law would define key terms, govern the rights of users, detail the obligations of the State, lay down privacy principles and exceptions, provide guidance on resolving privacy-security conflicts (for instance by applying a European proportionality test) and would delineate various redress and compensation mechanisms.

Inspiration could be taken from the UK Data Protection Act or the US Electronic Communications and Privacy Act (ECPA). There have been some efforts in the past in India, although with no result. For too long, there has been a lack of statutory basis for various government endeavours that affect the privacy of Indian citizens, whether it is the notification of the Aadhar scheme (enabling the collection of biometric data) or the CMS. This has to change before it is too late.

We in India are in a fledgling democracy. In the best of countries, there is an undersupply of criticism. In India, our ability to improve the working of the Republic requires more fearless people who will criticise the status quo. Privacy law should be a priority. Once greater privacy is secured, the processes of democracy in all other areas would work better.

Looking forward

There is an emerging consensus that India requires a big step up in civil liberties. We need to bring political philosophy, ethics and law into the full picture, which comprises rethinking (a) Defamation (b) Sedition and (c) Privacy.

Vrinda Bhandari is a practicing advocate in Delhi. Renuka Sane is a researcher at the Indian Statistical Institute, Delhi. The authors thank Bhargavi Zaveri and Smriti Parsheera for useful discussions.

Saturday, February 13, 2016

Interesting readings

Robbing Peter to pay banks by T. N. Ninan in the Business Standard, 13 Feb.

Meet the Robin Hood of Science by Simon Oxenham on bigthink, 12 Feb.

The diplomat and the killer by Raymond Bonner in The Atlantic, 11 Feb.

Fixing enterprise plumbing by Manish Sabharwal in the Indian Express, 10 Feb.

Debt deja vu by Susan Thomas in the Indian Express, 10 Feb.

NPS is a good product that lives in a bad market by Monika Halan in Mint, 10 Feb. Also see this video with Ashish Aggarwal from 1 February, from the NIFPMF channel.

A discussion on net neutrality, featuring Pavan Duggal, T.V. Ramachandran, Raman Jit Singh Chima, Smriti Parsheera, on the `Big Picture' show on Rajya Sabha TV.

The chips are down for Moore's Law by M. Mitchell Waldrop, in Nature, 9 Feb.

Is Modi Turning Policy Clock Back to Pre-1991 State Control Era? by Abheek Barman in, 9 Feb.

Wednesday, February 10, 2016

TRAI's move on net neutrality

by Iravati Damle, Mayank Mishra, Smriti Parsheera, Sumant Prashant, Ajay Shah.

On Monday, the Telecom Regulatory Authority of India (TRAI) released a regulation and associated explanatory memorandum prohibiting discriminatory tariff for data services. This has elicited interest and responses from all over the world. We watched the Facebook stock price curiously over that period:

Facebook stock price vs. the Nasdaq index
On 4th and 5th (Thursday and Friday), there were rumours in the Indian press about what TRAI was about to do. After that, when the US market opened, they may have had some impact. On Monday, the US market opened after the TRAI regulation had been released. Overall, in this period, the Nasdaq index dropped by 6% while Facebook dropped by 12%. Perhaps some of this was caused by the TRAI action.

The TRAI regulation was preceded by an extensive consultation process initiated by TRAI in December 2015, where it posed the following question: Should telecommunication service providers (TSPs) be permitted to charge consumers for data based on the content that they access?

One group, led mainly by TSPs, favoured differential pricing on the grounds that it would increase Internet penetration, encourage investments in infrastructure and allow for the development of innovative products. The supporters of net neutrality disagreed. They argued that content-based discrimination would vitiate the basic principles of the Internet, lead to discriminatory practices and hamper competition and innovation among content providers. TRAI ultimately chose to answer its question in the negative, supporting its regulations with an explanatory note that shows the process and rationale for its decision.

Placing it in context

The topic of network neutrality has captured the Indian public discourse for the past several months. Network neutrality is the principle of equal treatment of data packets moving across the Internet. This touches on three core aspects of how TSPs should conduct their business:

    Access: No authority to allow/block access to any content.
    Speed: No throttling or increasing speeds to access particular content.
    Pricing: No paid prioritisation. No content-based pricing.

The current regulations speak only to the third issue of price related discrimination, putting an effective end to the following types of practices:

  • Zero rating - Access to specific content without counting it towards a user's data charges (e.g. Free Basics)
  • Sponsored data - Content provider bears the cost of access (e.g. Airtel Zero)
  • Content-specific packs - User pays for data but based on type of content (e.g. Special Facebook and WhatsApp packs)

The larger issue of how India will deal with the other core components of net neutrality still remains open.

A summary of the regulations

The regulation prohibits TSPs providing both wired and wireless services from (i) offering differential pricing to consumers, based on the type of content being accessed; and (ii) entering into agreements that have a similar effect. TRAI's rationale for moving in this direction rests on a detailed explanation of the basic architecture of the Internet, which is grounded in the idea of openness. Besides this, the explanatory memorandum also speaks about the market failures of information asymmetry and negative externalities, which created a need for regulatory intervention.

The prohibitions are subject to two sets of exclusions. First, TSPs are permitted to have differential pricing in closed communication networks - where the data is not transmitted over the Internet. This could include local intranet services and products like Internet Protocol Television (IPTV). The law however guards against potential misuse of this provision by saying that TRAI will keep a watch on practices that use the exception to evade the discriminatory pricing prohibition. Second, a reduced tariff can be charged in case of emergency services, subject to reporting to TRAI within seven days. For instance, the Chennai floods saw the instant mobilisation of applications targeted specifically for relief and rescue work. Such initiatives would not be hampered by the regulation.

The restrictions also do not cover differential pricing that may be charged independent of the content being accessed. To take an example, Aircel offers a limited period of free capped data on purchase of certain mobile devices. Within those limits, the user can access any available content on the Internet. This is not a violation of discriminatory pricing, as defined by TRAI.

Impact on the Internet and its stakeholders

The heart of the new regulations lies in what TRAI has labelled as "the need to preserve the unique architecture of the Internet". This is in line with TRAI's mandate to promote the orderly growth of the sector (i.e. Internet services). Our analysis of the impact on key stakeholders is as follows.

Internet users: The regulations uphold the user's right to choose from among multiple sources of information on the Internet, free from the white noise of discounted offerings. This means that users will have to continue paying for the data that they use while retaining the full freedom to choose the websites and applications that they access.

Some may argue that the regulations potentially harm consumers by slowing down the process of digital inclusion and denying users access to free services. As highlighted above, the restrictions pertain specifically to the use of price discrimination to create "walled gardens" within the Internet. Other schemes that may provide free access to the Internet as a whole will continue to be allowed.

TSPs: TSPs will have to terminate existing arrangements that allow them or their content partners to subsidise access to specific content. They will also have to discontinue schemes that offer content-specific discounted rates. Another important impact will be felt in cases where a TSP is also a content provider - it will not be allowed to leverage its position as a TSP to promote its own content for free.

It is important to recognise that the value of the Internet will grow as more and more people become part of it, a process that is already taking place even without discriminatory pricing. This will continue to translate into economic benefits for TSPs. Their grouse may however be on the denial of the windfall profits that could result through discriminatory practices.

TSPs will have to then compete in the tough commoditised game of producing bandwidth at ever lower prices.

Content providers: The regulations ensure that the Internet will continue to offer a level playing field for all content providers. There will be no entry barriers for small content creators. This will foster greater innovation and competition.

Those that had already entered into private arrangements with TSPs will of course have to alter their plans to bring them in line with TRAI's regulations. Paying the TSP will not be an element of business strategy.


Many people from the world of business are used to unlimited complexity in business contracts. Hindustan Lever has all kinds of innovative contracts with distributors, retailers, etc. By analogy, it is felt that the world of telecom should be similarly unencumbered. However, the revolutionary achievements of Unix and the Internet, from the late 1960s onwards, are rooted in a particular philosophy and design strategy, of openness. We must recognise the value of this philosophy as a universal multilateral disarmament treaty, which ensures cooperation in some respects, and channels competition in others. Gentleman's agreements have given hygiene in the past. However, the commercial pressures of today's technology world do not give adequate guarantees about the future. Net neutrality law uses the coercive power of the State to protect this design philosophy.

TRAI's differential pricing regulations place India alongside countries like Chile, Netherlands and Slovenia that have also taken a clear stand against differential pricing (or zero-rating in particular). The interesting difference however is the fact that those countries did so within the framework of their net neutrality laws. Others like United States and the new regulations in the European Union have also taken a stand on net neutrality but have decided to consider zero-rating on a case-by-case basis. By ruling on the issue of differential pricing without waiting for a broader net neutrality law, TRAI has in effect won the last battle first, within powers under the TRAI Act, 1997.

The policy analysis will now turn to practices like blocking and throttling. It would make sense to think of deeper amendments to Parliamentary law which address net neutrality in a more complete way.

Monday, February 08, 2016

Transforming the operational efficiency of tribunals and courts

by Pratik Datta.

Almost two decades ago in L. Chandra Kumar v. Union of India (1997), the Supreme Court had lamented that Indian tribunals function inefficiently since there is no authority in charge of supervising and fulfilling their administrative requirements. The Court had gone on to suggest that until a wholly independent agency for administration of all such tribunals is set up, it is desirable that all such tribunals should be under a single nodal Ministry. Finally, on January 18, 2016, a Constitution Bench of the Supreme Court in Madras Bar Association v. Union of India reportedly directed the Central Government to consider setting up a nodal body or agency for managing all tribunals across all Ministries.

In spite of pending tribunal reforms, Indian policy makers are heavily relying on tribunals to achieve the policy objective. For instance, the Insolvency and Bankruptcy Code, 2015 (IBC) recently introduced in the Lok Sabha envisages an efficient Adjudicating Authority which must dispose of matters within hard deadlines. The entire IBC is subject to this condition precedent. However, given the dismal performance of Indian tribunals, there are legitimate doubts as to how the DRTs and NCLTs will be able to achieve the ambition set out in IBC.

India needs to urgently reform its tribunal system. The Supreme Court's recent direction is a good starting point. This post explains the institutional reforms that would be needed to rachet up the performance of Indian tribunals.

Back-end institutions

Institutions are crucial to the development of a nation. Backward nations have poorer institutions. They may try to develop and yet consistently fail to improve their institutions. One usual reason for this is that these countries often try to adopt forms of other functional states and organizations which camouflages a persistent lack of function. This is the case with Indian judicial institutions. There is a general agreement in India on the desirable front-end features needed for tribunals (independence, efficiency, accessability, transparency, user-friendliness). These are visible features of any Western judicial institution and have been co-opted into the Indian context through legal transplant (by statute and case-laws). However, the back-end institutional systems supporting these front-end features in the West are neither readily visible to an outsider nor always possible to adopt by legal transplant (especially by case-laws). Therefore, there is an acute lack of awareness in India of what back-end institutional support systems are actually necessary to sustain these front-end features.

The key idea

Every judicial institution has judicial as well as administrative functions. In most advanced common law jurisdictions, the administrative functions are hived off into a separate agency with a corporate structure. This agency can take advantage of economies of scale and provide standardised administrative support services across courts and tribunals. Additionally, judges are freed from administrative burden and can fully focus on core judicial work. This simple yet critical institutional reform has enabled these countries to enhance the performance of their judiciary.

International best practice

UK has HMCTS which provides administrative support to its courts and tribunals. Canada has a similar agency set up under the Court Administration Service Act 2002; Australia has a similar agency set up under the Court Services Victoria Act 2014; US has a similar agency set up under the Administrative Office Act of 1939.

What are we doing in India?

In contrast, India does not have a similar agency for managing its courts and tribunals. Each tribunal has its own registry. They are administered by their respective sponsoring Ministries. Consequently, there is no standarisation of services across tribunals of different Ministries. Economies of scale are completely lost. In this overall flawed institutional design, blindly setting up more "fast-track" tribunals will not improve justice delivery. Instead, India should adopt the international best practice and set up a Tribunal Services Agency (TSA) to properly manage all the existing tribunals across different Ministries.

This idea is however not completely new in India. It has been discussed in rudimentary forms by the Law Commission in 1988 which suggested setting up of a National Judicial Centre. In 1997, the Supreme Court in L. Chandra Kumar (1997) suggested that until a wholly independent agency for administration of all such tribunals is set up, it is desirable that all such tribunals should be under a single nodal Ministry. Again in 2015, the FSAT Task Force led by Justice N.K. Sodhi (Chairman) and Mr. Darius Khambata (Vice-Chairman) also suggested incorporating a company to provide administrative services to tribunals in financial sector. And finally, on January 18, 2016, a Constitution Bench of the Supreme Court in Madras Bar Association v. Union of India reportedly directed the Central Government to consider the possibilities of setting up a nodal body or agency for managing all tribunals across all Ministries.

Recently, the Law Minister himself recognised concerns that tribunals are not working satisfatorily. However, the Central Government is yet to come up with a concrete plan on tribunal reforms.


In a recent Working Paper released by IGIDR, I argue that Indian policymakers should seriously consider setting up a TSA to support Indian tribunals including the ones under IBC. The detailed organisation design is also discussed along with board structure and financial arrangements.

The author is a researcher at the National Institute for Public Finance and Policy.


The author thanks Mehtab Hans and Mayank Mishra for useful discussions.

Interesting readings

Areas of weakness in the thinking of financial traders by Ajay Shah, Business Standard, 8 February.

As China's economy unravels, Beijing's attempts at damage control are growing increasingly desperate by Heather Timmons,, 4 February.

Stealing White: How a corporate spy swiped plans for DuPont’s billion-dollar color formula by Del Quentin Wilber in Bloomberg Businessweek, 4 February.

Is $3T in reserves enough? by Christopher Balding on Bloomberg.

Let the rupee slide by Ila Patnaik, Indian Express, 3 February.

How India Pierced Facebook's Free Internet Program by Lauren Smily,, 1 February.

Saturday, February 06, 2016

Lecture series on the Public Economics of Health Policy in Developing Countries

Jeff Hammer will deliver five lectures at NIPFP in the coming week. All are welcome.

Recessions uncover what auditors do not

On 14 December 2008, I was nervously looking around at the world and wrote a blog post Goodbye great moderation, hello financial fraud?  Almost on cue, we got the Satyam scandal: 21 December, 24 December, and then 7 January. We also got a few other problems in India which (I think) surfaced owing to the Great Recession : NSEL, a rash of ponzi schemes, Sahara, Saradha.

In China, unprecedented times are bringing forth revelations on an unprecedented scale [link, link]. Some of the rackets that are described in China appear quite familiar to us in India, but the magnitudes seen there are astonishingly large. We had such problems in developed markets also -- Madoff and MF Global.

Institutional reform: Consumer protection

One part of addressing this problem is the familiar machinery of the Indian Financial Code (IFC) version 1.1. As an example, see this analysis of ponzi schemes. As an IFC quality law is not found in either China or India, we have a rash of such problems in both countries.

Institutional reform: Criminal justice system

An important subset of financial crime is about plain criminal law. While the main track of financial policy has been along the Indian Financial Code, we need to develop a work program on improvements of the criminal justice system also. Put together, these will create an enforcement machinery that will generate deterrence against big financial scandals.

Procyclicality of trust?

Watching China unfold in recent weeks, I wonder if there's a general proposition of the following nature. Recessions will uncover what auditors could not, but under conditions of low institutional quality, this will happen on a bigger scale. Conversely, when institutional quality is low, business and finance will be hampered at all times by low trust. But in good times, when it's easier for the crooks to keep things under wraps, fewer scandals will burst into the public consciousness, and trust will go up. Procyclicality of trust may be heightened in places with low institutional quality.

Monday, February 01, 2016

Interesting readings

`The EU is on the verge of collapse' -- An interview with George Soros by Gregor Peter Schmitz in the New York Review of Books, 11 February.

"This Is Much Larger Than Subprime" - Here Are The Legendary Hedge Funds Fighting The Chinese Central Bank by Tyler Durden on ZeroHedge, 31 January 2016.

To really counter terrorism by Manvendra Singh in the Indian Express, 30 January.

Narendra Modi is losing India's market liberals by Sadanand Dhume in the Wall Street Journal, 28 January.

Pains of a young republic by Somasekhar Sundaresan in the Mumbai Mirror, 28 January.

Christopher Balding on proposals for capital controls in China, 28 January.

What a normal startup actually needs by Sumanth Raghavendra,, 27 January.

The market's troubling message by Ashoka Mody, Bloomberg, 27 January.  Also see a video of his talk of 25 January.

China: Surviving the camps by Zha Jianying, the New York Review of Books, 26 January.

How will China influence us? by Ajay Shah, Business Standard, 25 January.

PBoC in a quandary over capital controls by Tom Mitchell, Financial Times, 25 January.

`My personal vendetta': An interview with Hong Kong publisher Bao Pu by Ian Johnson in the New York Review of Books, 22 January.

Highway for tigers by Padmaparna Ghosh, Mint, 19 January.

Be tight-fisted by Ila Patnaik, Indian Express, 18 January.

Cory Doctorow in the Guardian on India's net neutrality question, 15 January.

The dragnet by Russell Brandom, on TheVerge, 13 January. 

How Ukraine weaned itself off Russian gas by Leonid Bershidsky on the Bloomberg, 12 January.

The mother of all currency defences by Ajay Shah, Business Standard, 11 January.

A better bankruptcy regulator by Pratik Datta and Rajeswari Sengupta, Business Standard, 9 January.

Wilderness and economics by Thomas Power and George Wuerthner, Counterpunch, 8 January.

Hiring without signals, David Henderson, EconLog, 7 January.

The amazing maize by Surinder Sud, Business Standard, 4 January.

The big sleep by Julia Medew, the Sydney Morning Herald.