From ex gratia to insurance

Insurance payouts maintain human dignity and create incentives for safety

The derailment of Indore-Patna Express, near Kanpur in Uttar Pradesh, is the first major accident after the introduction of an extremely low cost travel insurance scheme. Under the “optional travel insurance” scheme passengers (or their kin) can receive up to Rs 10 lakh in payouts if they pay a premium of less than a rupee.

Despite the extremely low cost of insurance, only 128 of the 695 passengers on the train opted for the insurance. The accident victims, or their kin, will still receive Rs 5.5 lakhs from the Union government, Rs 5 lakh from the Uttar Pradesh government and Rs 2 lakh from the Madhya Pradesh government. These are the ex gratia payments that governments have traditionally paid to victims of accidents and disasters.

What is an ex gratia payment? It is a payment made voluntarily, out of grace, sympathy or kindness. It precludes any legal liability or obligation on the part of the payer. It treats the passenger as a subject or a supplicant, rather than a citizen with rights and dignity.

An insurance payout on the other hand is an obligation on the part of the insurance company to pay the insurer, if the accident were to unfortunately occur. Insurance companies have an incentive to try to lower the risks, for example, by pressing the transport company to invest in safety.

Clearly, it makes sense for a democratic country to move away from the monarchical, patronising ex gratia system to an insurance system that upholds the dignity of the passenger, allows individuals to decide how much they value their own lives and create incentives for railways to improve safety.

Therefore, the introduction of an insurance scheme by Suresh Prabhu’s railway ministry was an important step in the right direction. If the insurance scheme catches on, greater competition in railway insurance could emerge, with passengers being able to choose how much insurance they would like. A basic low-cost insurance scheme, like the one currently operated by the government, could ensure that even the poorest passenger is insured.

Given that only around 20% of the passengers availed the low cost insurance scheme suggests that people have to be educated on the importance of insurance. One proposal—that relies on insights from behavioural economics—involves changing the insurance from an opt-in to an opt-out. This makes sense, given that the insurance premium is a tiny fraction of the ticket price.

The other proposal is politically more difficult: the phasing out of the custom of awarding ex gratia payments. At the margin, people will be more inclined to pay a tiny insurance premium if they know that they cannot expect governmental charity. The phasing out can be gradual and accompanied by a campaign to educate passengers on the importance of insurance.

Cash crisis, reform and pain

Structural reform does not have to be painful.

It is clear by now that the Modi government’s currency reform, involving replacement of old high-denomination notes with new ones, is inconveniencing people across the country to various extents. The expectation that the inconvenience will last only a few days has given way to fears that it will take longer: weeks, a couple of months, or more. Many economists estimate that the cash shock will cause an economic slowdown and hurt economic growth in the short term. [Mint has a very good economic analysis of the currency reform]

So question obviously is: was the move worth the pain? Are the benefits of a one-time cleanup of unaccounted cash worth the disruption of almost everyone’s daily life and the short-term—albeit irreversible to some innocent businesses and individuals—damage to the economy? It’s too early to tell.*

In the meantime some defenders of the move argue that inconvenience and pain is an essential part of structural reform. This is both inaccurate and disingenuous. This month’s currency exchange is not a structural reform. And structural reforms do not have to come with so much pain for so many people.

Those old enough to recall 1992 will hardly recall any pain or inconvenience. Similarly, it is hard to envisage the people of the country undergoing pain if say, schools no longer required licenses, businesses could be set up and closed down without hassle, tax laws became simpler, or even labour reform allowed easier hiring and firing of people.

Those linking structural reform to pain are doing a disservice to the cause of liberalisation. There is no reason why structural reforms must be painful. If anything, by removing red tape, preventing official harassment and lowering friction, structural reforms will make life a lot less painful—both in the short term and in the long term. Baby, bathwater and so on.

* Postscript: Many have asked me whether this currency reform will be successful. The honest answer is that it is too early to tell.

In fact it is hard to even analyse its impact had everything gone smoothly. The Indian economy is very complex, and we know less about the ‘unorganised’, ‘informal’ economy. Like blood that runs through the body’s veins, money supply affects every sector and over a billion people. It would be flippant and arrogant to claim to be able predict how it will pan out. Further, given that the transition is not going smoothly, what was complex has become even more so.

Complexity, the lack of required level of knowledge and inability to predict outcomes is one reason for governments to be tentative and parsimonious in their actions. This forms the basis of the argument for “small government”, or “minimum government”. The Modi government has wagered against this wisdom.

Only time will tell. Take expert predictions with a pinch of salt.

Chinese inroads

The new silk road is being built faster than the world’s ability to grasp its consequences.

China has worked out a railway route to Afghanistan and, from August this year, begun operating two trains a month from Nantong (China) to Hairatan (Afghanistan) passing through Kazakhstan and Uzbekistan along the way. This remarkable achievement suffers from a temporary hitch — the trains have to go back empty to China because Uzbek authorities are yet to give permission for Afghan goods to transit their territory.

Last week, Chinese trucks drove south-west across the Himalayas, passing through the Karakorum pass into Pakistani territory. They transited through Gilgit-Baltistan and Balochistan before unloading their cargo onto a Chinese ship at the Chinese-built, Chinese-operated Pakistani port of Gwadar. [Gwadar is finally in Chinese hands, after Washington released its pressure on the Pakistani government due to an inability to persist or out of a lack of interest.]

On the eastern side of the Indian Ocean, analysts in Singapore are concerned over what appears to be a commercially dubious proposal to build a new port in the Malaysian town of Melaka (Malacca) that sits at the northern side of the important Straits of Malacca. The Malaysians have pulled out the stops to enable the project to take shape quickly. In typical fashion a little-known local firm is partnering a Chinese company to build the port.

Since there’s enough capacity in existing Malaysian ports, and it is relatively easy to expand them, the Melaka Gateway project is of questionable business value. But a foothold that commands the Straits, the Bay of Bengal and the Indian Ocean makes a lot of geostrategic sense if someone is willing to foot the $10 billion bill. And China is.

It appears that Xi Jinping’s One Belt, One Road (OBOR) is proceeding at a pace faster than the region’s policymakers can handle.

Connectionistan
Building transport connectivity in Central Asia is likely to unleash economic potential in the landlocked region, and depending on where the roads and railways lead, to other regions too. This will come with the usual political economy of Chinese overseas economic expansion: newly enriched local entrepreneurs, strengthened local political strongmen and grumblings due to Chinese labourers imported en mass. This will also be accompanied by fears of a demographic invasion from China into the sparsely populated Central Asian states.

The Chinese railway through the Central Asian states to Afghanistan presents India with a tantalising opportunity, if it were possible for Indian cargo and passengers to use the route. Pakistan would be deeply concerned, of course. Indeed, Pakistani strategists would already be worried that for the first time, China can trade with Afghanistan without having to transit through Pakistan.

New Delhi should explore arrangements with China, Kazakhstan, Uzbekistan and Afghanistan to connect to this railway. At the very least, Beijing’s intentions can be put to test.

Another port in the straits
The Chinese interest in Melaka comes at a time when the United States is likely to rebuff the painfully negotiated Trans-Pacific Partnership. Singapore, among other East Asian states will be unhappy with the turn of events. Another port along Malaysia’s west coast abutting the Malacca straits implies further competition to the island’s own ports. With the projected overcapacity, it gets worse.

While there is little New Delhi can do to ameliorate this, there is an emerging convergence of interests between India and Singapore. So too, we are likely to see, with other East Asian countries as they grapple with the undesirable prospect of having to jump onto the Chinese bandwagon given the increasing unreliability of the United States. This has been true for much of the past decade. Now, however, it has gotten all the more intense. The Modi government is clear that it seeks to engage East Asian states with greater boldness and purpose. Whether this will prove adequate or fast enough remains to be seen.

The big deal in Tokyo

After concluding the nuclear deal with Japan, the Modi government must review India’s atrocious nuclear liability regime.

It is a big deal. Owing to the controversy over the replacement of currency notes, though, it has almost slipped popular attention. India and Japan have concluded an agreement that allows Japanese vendors to compete in the India’s nuclear power market.

The deal holds potential for greater competition in the Indian market for nuclear reactors and technology. It also is a shot in the arm for Japan’s beleaguered nuclear power sector, and can help in attempts to rejuvenate the Japanese economy. That’s the economics of it.

Greater significance lies in what persuaded Japan to set aside its decades-old anti-nuclear, ‘anti-proliferation’ stance and conclude a deal with a non-signatory of the nuclear non-proliferation treaty (NPT). Shinzo Abe is finding greater political traction in making big changes to Japan’s traditional foreign policy in the light of an assertive China that is fast expanding its geopolitical footprint. Prime Minister Abe’s policies are by no means fully accepted in the Japanese polity, but he is likely to have his way. With Donald Trump having created unprecedented doubts as to the United States’ commitment to its treaty allies, realists in Tokyo are even more likely to desire closer relationships with potential non-treaty allies (better known as ‘strategic partners’). 

To help get the deal through the Japanese Diet, Prime Minister Abe needs to reassure sceptics that Tokyo retains its anti-nuclear weapons positions. Hence, a note to the effect that Japan reserves the right to give a year’s notice and suspend nuclear commerce with India in the event of New Delhi conducting another nuclear test, was signed and exchanged following the formal nuclear agreement. The concession makes it easier to conclude the deal.

It is not unusual for Indian critics to complain that New Delhi conceded too much, based on a legalistic parsing of an international agreement and its associated notes. Such criticism is overstated. An agreement between two sovereign states depends to a overwhelming extent on the will of the parties to comply. If Japan seeks to renege, it can do so, no matter what is written and signed on paper. So legalities matter only to an extent. No sleep needs to be lost over the matter.

What policymakers and analysts in India should worry about is whether the atrocious law on nuclear liability is consistent with India’s energy, environmental and safety needs. At the moment it seems to restrict competition by keeping vendors from rule-of-law conscious countries out of the Indian market. Not only is the Indian power sector deprived of the possibility of newer and safer technologies, New Delhi (and its strategic partners) are unable to fully harvest the geopolitical rewards of nuclear deals. It makes little sense to sign nuclear deals with dozens of countries only to find that the liability clause is a show stopper.

All parties, including the BJP were complicit in enacting an unworkable nuclear liability law during the UPA government’s term. Now, the Modi government must undo the damage, confront the anti-nuclear lobbies and put in place a sensible nuclear liability regime.

President Trump. What now for India?

Play the ball as it comes to the bat

Peter Thiel, a Silicon Valley billionaire who backed Donald Trump’s candidacy, perhaps best explained the latter’s political appeal. Journalists and analysts, he said, took Mr Trump literally but not seriously, and wanted to know details of how he would implement some of the outrageous ideas he proposed. Ordinary people, on the other hand, took him seriously but not literally, and were persuaded that he intented to take policies in directions that they agreed with; the exact details didn’t matter. In the uncertainties that prevail in Washington and elsewhere on what policies President Trump would pursue, Mr Thiel’s explanation is a very useful signpost.

It would only be conceit for anyone at this stage to predict Trump’s foreign policy positions. Candidate Trump and his core supporters were anti-immigration, anti-Muslim and anti-trade. Mr Trump threatened to pull out of NATO, repudiate free trade agreements, engage Russia’s Vladimir Putin, withdraw the security umbrella from over treaty allies, renegotiate the Iran nuclear deal, deal with ISIS, back Israel and grab the oil in Iraq. And yes, build that wall on the border with Mexico. At this point, it is best to take all these, as Mr Thiel suggests, seriously but not literally.

To the extent that President Trump attempts to throw international regimes, norms and institutions up in the air, New Delhi will encounter opportunities that it must be prepared to seize. This means the level of diplomatic imagination and boldness in the external affairs, commerce and defence ministries must be boosted. India is far better placed today than ever before to take advantage of possible shifts in global order.

Of course there are risks. A world that retreats from free trade will hurt India’s growth and development trajectory. A global recession will shave off significant percentage points from India’s economic growth rate. Throttling of free movement of people — in the US as in Europe — will necessitate painful business and human readjustments, although the result might be more business for India’s outsourcing/offshoring industry. Most of these risks can be managed by proceeding with structural economic reforms, or Reforms 2.0 (yes, I sound like a broken record, but the point is valid and important to make).

The path to success in the world of President Trump is nimbleness, deftness and speed. New Delhi’s diplomats and policymakers will need to see the opportunities early and act faster than others, without being constrained by historical baggage. No pre-determined strokes: see the ball early and play it accordingly.

Related Link: My colleague Pranay Kotasthane has an opinion piece on this in the New Indian Express today.

New currency notes for old

A one-off reduction of unaccounted money must be followed by long-pending structural economic reforms.

Some of the most insightful arguments on the demonetising of high-value currency notes have come from Takshashila associates.

Ajit Ranade has long been a proponent of getting rid of the high-denomination bank notes, pointing out that this will make a big dent in holdings of unaccounted money.

Karthik Shashidhar, on the other hand, has calculated that the exercise will be very costly. In other conversations with some colleagues last night, we noted that the real costs will be even higher, given the higher transaction costs, friction and so on.

[Update] Anupam Manur has a thorough analysis of the demonetisation.

Deepak Shenoy, one of India’s shrewdest analysts of capital markets, has more recent analysis that argues that the Modi government’s move will have short-term negatives but long-term positives. You should read the articles I’ve linked to above.

The Modi government’s move (even if it rightfully ought to be the RBI governor’s move) to demonetize Rs 500 and Rs 1000 notes and replace them after some time with new Rs 500 and Rs 2000 notes will act as a move to massively reduce the existing stock of unaccounted money and counterfeit currency. [Update: There will be new Rs 1000 notes too!] This will generally hurt the people who are sitting on large amounts of cash holdings (mostly for evading tax) and also, temporarily, those who are holding on to some cash, but have no bank accounts. This is significant.

A senior colleague argued that this was an extremely courageous move by Prime Minister Modi, not least because it hurts business communities that have long supported him and the BJP. However, given that this is one of the few moves that makes honest citizens feel good, it is likely to strengthen Mr Modi’s personal popularity. Effects on electoral outcomes have probably been calculated by those whose business it is to do so, and are probably as good as the best (or the worst) guess. There are just too many factors at play when it comes to how people will vote.

Now, if the government (or the RBI) had merely demonetized the big notes, the effect would have been to put permanent brakes on tax evasion and a faster move towards ubiquitous electronic banking. However, since the big notes will be back, the effect will be one-time. In fact, as another colleague pointed out last night, the same mattress will hold twice as much cash if filled with Rs 2000 notes. Also, many cash holders will convert their current holdings into gold, foreign currency or some other assets until they can change it back to cash again. There are limits to how much money they can hide this way, but many middlemen will make healthy commissions by providing such “services”.

Bank accounts will see a lot more transactions as latent account holders begin to transact through banks. This effect too will not be complete, as some might just decide to wait until the new notes arrive, and then lapse back to old habits. Behaviour is very hard to change easily. Until mindsets towards banks, taxes and scruples change, people will continue in the old pattern. It’s a good time to refresh the case for structural reforms: deregulation, getting rid of the license raj (no, it didn’t go away in 1992), tax reform and liberalisation. This will require even more courage on the part of this government (or any government, for that matter).

Will the move hurt confidence in the Indian Rupee? A sober Anupam Manur, Takshashila’s macroeconomics analyst, noted that denominations don’t impact the value of the currency. He doesn’t think the rupee will be hurt. On the other hand, another colleague likened this to Mr Modi’s Tughlaq moment — more politically, perhaps than economically.

The war against corruption and unaccounted money can only be won when economic incentives change, and in turn, change behaviour patterns (and ‘culture’). Disclosure schemes and demonetization of high-denomination currency notes have a salutary, but temporary effect. There is, however, no alternative to Reforms 2.0.

What lies to the right of centre in India?

The cohabitation of traditionalists and market liberals

Ever since India’s 2009 general election, it has become fashionable for many politically-minded people in the country to style themselves as being “right of centre”, “centre-right” and other terms where “right” and something else is joined together with a hyphen.

It is clear what people who label themselves thus are against — the Congress party, and especially the family that constitutes its apex leadership. Mostly, they oppose its “appeasement” of minorities, especially Muslims. They oppose its propensity to create “entitlements” in the form of reservations, quotas, subsidies and special treatment. They oppose the cronyism in the economy and political corruption in governance. They oppose its pusillanimity in foreign policy. There are many more, but these strike me as the big ones.

It is less clear what they stand for. Many of our self-styled right-of-centrists are strident opponents of liberalism. Many have deep misgivings, if not outright opposition to markets and free trade. The most coherent “right” in India is the Hindu right, which is clear about its commitment to Hindu nationalism, broad or narrow. However, even the Hindu right does not have an economic agenda that is consistent with its political ideology: should the Hindu nation rely on individual liberty and free markets, or should it construct a strong state that draws lines on individual freedom and controls the levers of economic power? During and after the 2014 election campaign, market liberals and social illiberals found themselves in the same “right of centre” camp, often having to pretend to be each other in order to fit in.

This ideological confusion and political tension within the segment that calls itself right-of-centre in India comes because our political context and historical development is different from that of the West, where the Right and Left first came into existence. I’ve written about this in my Niti-Mandala post, constructing India’s political spectrum. I was reminded of it last week as I read Jonah Goldberg’s statement of the Conservative position in the United States: which connects tradition and markets and forms the basic worldview of the American Right that the Republicans used to champion before Donald Trump, er, shook things up.

As a Chestertonian at heart, I like and respect old things. I like it when stuff beats the law of averages for reasons we cannot easily fathom. The Hayekian in me thinks old things that last often do so for good reasons we just don’t — and sometimes can’t — know. Unfortunately, we live in an age where we take the razor of reason to every little thing and strain to know the whys of it, as if knowing the why will empower the how. [National Review, emphasis added]

The same argument would be self-contradicting in India: where there are inhuman inequities embedded in caste discrimination and social practices. You can either defend the traditional Indian social order or individual liberty (and markets and so on). You can’t defend both, because the former is constructed without regard to, and often in suppression of the latter. This explains the confusion and tension among our “right of centre” compatriots, who are at best, — to turn a phrase from a best-selling novelist — Half Right. No pun intended.

They can either be traditionalists who seek to defend the old order from social revolution, and therefore come into tension with the Constitution that demands it. Or they can be liberals who pursue individual liberty and free markets, and thereby come into tension with everyone else who opposes either individualism or markets or both. They can’t be both.

Logical consistency apart, the practical question is to what extent can the two Half Right constituencies come together in politics. Is the tension between them bridgeable? Well, that’s hard to say, but the side with greater political clout will force the other into submission. Market liberals are not driving policy in the Modi government today.

The arrangement will hold to the extent that their dislike for the Left outweighs their dislike for each other. If the Congress party sheds its baggage — and that’s a big, big if — or another party takes up its Centrist space, it is likely that the the more liberal of the liberal Half Right will gravitate towards it. Until that time, the liberal Half Right will cohabit with the traditionalist Half Right, because most who seek the security of an ideological label are likely to lack the courage and commitment to stand apart, because that means standing alone.

On public consultations and online polls

Why democratic governments must consult, but must neither be obliged to nor bound by the results

Aparajita Ray, Senior Correspondent (Urban Infrastructure) of Times of India asked me to comment on public consultation and opinion polls in the context of the Steel Flyover controversy in Bangalore. Here are the questions and answer.

Q. Recently a senior government official in Karnataka admitted that there are no SOPs in the system to take public consensus into consideration while announcing or executing projects. Is this not the right time to charter a protocol in the government on the need and how to hold public consultation as a procedural obligation?

Q. What should the basic norms/processes be like, in setting a standard for public consultation? What are the legal bindings, if any, on government to take public consent.

Q. In times of Digital India, how should should government hold public consultation that is transparent and will have maximum reach? BDA created fake twitter accounts and bots to claim it got 299 responses in 5 days of which 73% voted for the steel flyover and that gives the government an upper hand so far.

Q. What are the global examples that come to your mind and are there any guiding principles in public policy making on this subject in particularly? I have heard, in UK even before releasing a postal stamp, public consensus is taken.

Q. Most importantly, what do you think citizens need to have or must do to let themselves be heard, each time when the government thrusts upon them a decision like the steel flyover. How can citizens engage with governments or should there be a system in place as to how they can do it.

My response:
Governments across the world have used forms of public consultation on policy issues. In the Britain and countries that share its parliamentary system, there is a tradition of publishing white papers (stating the government’s position) and green papers (for public discussion). Now, in many cases, the decision to issue green papers is a matter of tradition, more than a statutory requirement.

It is necessary for governments to retain the discretion on when to go for public consultation. However, in the modern, hyperconnected world, it makes good sense for the government to engage in public consultation on important policy changes, design of buildings and infrastructure projects, location of power stations, airports etc. This is not to say that they must be obliged to engage in public consultations, rather, that they must have very strong moral and political incentives to do so.

Ideally, for large infrastructure projects like the steel flyover, a two stage public consultation would be appropriate. In the first stage, the government would invite industry and citizens to propose alternatives to solve a particular problem (in this case, decongestion of the airport road). This would allow the government to benefit from the diversity of expertise in the community. After it has shortlisted the option, or selected one of them, it can put it up for further consultation and refinement. It is important to include both cost & benefit estimates in the consultation, so that people can take a balanced view.

This said, ultimately, the government must have the discretion to make the decision. As Brexit has shown, doing what the majority wants does not necessarily benefit the public interest. If it comes to that, the government has the legitimate authority to decide against the most popular choice. It might have to incur political costs of doing this, but a constitutional government’s authority must be upheld.

Internet voting, especially online polls, are plagued with shortcomings: we do not know who is the electorate, how they vote and what is the credibility of the process. Given that social media trends are now almost always manipulated, we should treat twitter and facebook polls with a pinch of salt. Let’s not forget that a vast number of our citizens are not online, and are ‘disenfranchised’ from such counts of public opinion.

Manila on the Chinese bandwagon

The Philippines becomes the first Indo-Pacific country to declare itself for Beijing

On the geopolitics of the Indo-Pacific, I have long argued that “the small- and medium-sized countries of the region will prefer a balance where no single power dominates over them. If they do not see this forthcoming, they are likely to join the stronger side.”

Rodrigo Duterte, the president of the Philippines, appears to have decided that that stronger side is China.

“America has lost now. I’ve realigned myself in your ideological flow,” he said at a business forum in Beijing on Thursday. “And maybe I will also go to Russia to talk to Putin and tell him that there are three of us against the world: China, Philippines and Russia. It’s the only way.” [CNN]

There were indications of this for the last few months, but the manner in which he announced a “separation” from the United States, the Philippines’ treaty ally since 1951, could not have been more designed to ingratiate Beijing, his newfound benefactor. Mr Duterte calculates — correctly, in all likelihood — that China will now shower the Philippines with exemplary largesse. It is in Beijing’s interests to demonstrate that those who decide to join the Chinese side will be rewarded, as long as they are willing to ignore some trifling territorial disputes and international arbitration verdicts.

I have also argued that there is a Chinese wedge between ASEAN states that have a dispute with Beijing and those that don’t. That wedge has just gotten deeper and wider. The ASEAN agenda on maritime cooperation is now in question, as Philippines joins other pro-China ASEAN members in being uninterested in confronting China. Vietnam, in particular, will be under a lot more pressure.

The Philippines remains a pro-American country. It is also likely that parts of the country’s security establishment have deep links with the US armed forces. How Mr Duterte’s policy will go down with the people and the security establishment remains to be seen.

Time to abandon BRICS

New Delhi must not waste further energy on a forum that lacks any common basis.

Russia needs international platforms to show that the West’s attempts to isolate it are not too successful. So it finds BRICS very useful.

China needs international platforms where it is not challenged by norms its rulers dislike. So it finds BRICS useful.

It is unclear what is in it for Brazil, South Africa and for India.

States come together to form international associations out of common interests, common values, common geography or common necessity. BRICS is perhaps the only international forum to come together because, at a certain point in time, all of its members enjoyed similar rates of economic growth. Even if that were a sensible basis for association, rates of growth have changed since then. And they will continue to change. One of the mysteries of contemporary international relations — and common sense — is why did anyone think that a group of big non-Western countries enjoying similar rates of growth will have common cause.

Now, because BRICS exists and its summit brings together the leaders of the member countries, it is just as well that New Delhi used the opportunity to raise its concerns over Pakistan-sponsored terrorism. The response from the other members, though, shows that an outfit that lacks common interests and values will not be sensitive to India’s interests. Even so, it is just as well that New Delhi exposed the position China and Russia have towards international terrorism, so that there need be no illusions. Perhaps now, members of New Delhi’s foreign policy establishment will realise that when it comes to terrorism directed against India, India has more in common with the United States than with China, Russia and others.

BRICS, like SAARC, is a waste of India’s diplomatic time, energy and resources. Instead of wasting further resources, New Delhi would do well to invest in the G-20 and turn that representative forum into this century’s high table of global governance.