Currency transfusion and political cyni-, er, realism

Have Indians proved the cynics among them wrong?

A few years ago, a cynic postulated two laws of policy realism in India.

The first law of policy realism
A policy that relies on the Indian citizen to act in selfless public interest will not work. In fact, a policy that expects an Indian citizen to act in anything but self-interest and relative gain will not work.

The second law of policy realism
A policy that expects Indian citizens to adhere to a process—any process—will not work as intended, because people will ignore, work around or actively undermine the process. [Two laws of policy realism]

While these statements hold up almost in all cases, the Modi government’s currency transfusion (‘demonetisation’) appears to be different. Even considering that most people are conflating their personal opinion of Prime Minister Modi and of his currency policy, and despite almost every person undergoing inconvenience and hardship (to various extents), the policy is largely popular. So isn’t this a violation of the first law? Aren’t people acting in selfless public interest?

Not quite. First, the actions of the citizens are not voluntary, but enforced. They have no choice but to act in a manner prescribed by the government. Second, as I wrote in the explanation of the first law, “the citizen must feel s/he will get more out of it compared to others”. In this case, most citizens feel the cost they are incurring is a lot less than the cost others—those with unaccounted money—will incur. For the moment at least, intangible schadenfreude is outweighing tangible personal losses. The emotional support for the policy derives from the relatively higher value people are currently attaching to schadenfreude. This is consistent with the first law. If the inconvenience persists for longer than people’s endurance (which is different for different people), then it might begin to outweigh schadenfreude.

What of the second law? From the numerous announcements the Finance Ministry and the Reserve Bank of India are making with respect to the acceptance of old currency, conditions for exchange and withdrawal limits, it is clear that there is a cat-and-mouse game going one between those making rules and those finding loopholes. The second law holds too.

An eightfold path to improving urban traffic

There are quick an inexpensive ways to improve traffic flows in our cities

This is a version of an op-ed that appeared in the Bangalore edition of today’s Times of India:
We can approach a solution to the vexed problem of road traffic if we pay attention to one simple concept: flow. It is distressing to see so much of the public debate, civil society angst and government policy follow various red herrings. One the one hand policymakers blame lack of funds, and it is true that the municipal corporation’s entire annual budget is smaller than what is required to upgrade the road network to modern standards. On the other, citizens blame the pyramid of corruption that brazenly siphons off even what little funds are allocated for the purpose. There are also issues of masterplanning, infrastructure design and maintenance.

While there are degrees of truth in all these arguments, what seems to be lost is that conceptually, the problem of traffic is a problem of flow. While more money, less corruption, more infrastructure and better design are indeed medium-term and long-term solutions, they are complex and unlikely to be easily addressed in the churn of India’s democratic politics. Even so, we must push forward on them. However, in the meantime, if we focus on improving flows we can enjoy some respite from the tyranny of traffic almost immediately.

Here is an Eight Fold Path to improving traffic in the short term, without requiring to spends massive amounts of money.

First, and most important, focus on the flow. Do not get mesmerised by road-widening projects that are not only messy but might not improve the situation. Unless a road is of uniform width throughout its length, flow is unlikely to improve much by widening. In fact, uneven road width causes congestion and can actually worsen the situation. Do not widen a road unless you can widen it along its entire length.

Second, remove road cholesterol. In many places almost 40% of the road is unusable because, like clogged arteries, circulation of traffic is choked by various blockages. Potholes, construction materials, parked cars, auto rickshaw stands and street vendors interrupt traffic flow and not only cause congestion points but also endanger safety of motorists and pedestrians. No, this does not mean banning these legitimate activities. Rather, it means regulating them to minimise the impact on traffic flow. Make it compulsory for construction material and debris to be placed in bins, with a fee charged for occupying road space. Make parallel parking compulsory, draw parking lots and assign a serial number to each of them. Move auto-rickshaw stands away from street intersections. Similarly, ensure street vendors occupy designated lots.

Third, get cows and other animals off the road. It should be astounding that a city that connects India to the global economy, and one that suffers so much traffic congestion, tolerates herds of cows on its major roads. Cows might be holy but that does not prevent them from causing congestion and endangering their own lives and the lives of motorists.

Fourth, make all lanes of uniform width. Today, lanes are mostly not marked, and where they are marked, they bisect the available road width. The lack of lane markings and lanes of varying widths create no behavioural triggers for people to drive in a disciplined manner. Lane markings should always be clearly visible and not left to drivers’ imaginations.

Fifth, enforce queuing for right turns. One of the biggest reasons for congestions on major roads is that when vehicles wait to turn right, they do not queue up one behind the other. Instead, they line up side-by-side in an right-turning arc. What this means is that all the vehicles that intend to go straight ahead or turn left are blocked. It doesn’t matter how wide the road is, if right-turning vehicles do not queue up. Barricades can be placed to create a right-turn queue to create this driving behaviour norm.

Sixth, there have to be a lot more directional signs on our roads. Overhead gantries identifying lanes for left, right and straight ahead are necessary. These must be placed well-ahead of the intersection so that vehicles can change lanes much before the intersection.

Seventh, the stop line at intersections must be prominent. Right now its exact position is left to the imagination and discretion of drivers. This makes it impossible for pedestrians to cross safely or other traffic to pass across the junction. The stop line must be a lakshman rekha crossing which should attract severe penalties. Cameras already exist that can enforce this easily.

Eighth, movement of heavy vehicles and tractor-trailors cannot be unrestricted as it is now. Slow moving vehicles such as these not only slow down traffic but also create incentives for illegal and dangerous overtaking by other motorists. If they cannot be limited to certain corridors and certain times, then they must be compelled to move only in the left-most lane. Again, camera footage can be used for penalising offenders without burdening on-ground police personnel.

Finally, although pedestrians ought to have the first right on the road, they are constantly robbed of their safety and dignity. Traffic lights for pedestrian crossings seem to have been designed for Olympic sprinters, as it is almost impossible to cross even a mid-sized road in the ten seconds that are allocated for the purpose. Skybridges and underpasses are impractical if they have steep staircases or are located at unnatural crossing points. At times where traffic lights are sought to be synchronised to create “green channels” and smooth traffic flows, the pedestrian’s rights must not be sacrificed. Give them more time to cross the road; and dissuade them from crossing where they shouldn’t.

Pouring supreme scorn on liberty

The Supreme Court must not hold in contempt what it is mandated to uphold

At first glance, today’s Supreme Court ruling making it mandatory for cinema halls to play the national anthem before screening movies, and requiring cinema-goers to stand up while it is being played, can be seen as yet another decision that appears more whimsical than grounded in Constitutional principle. Instead of refusing to waste its precious time hearing unimportant petitions from self-righteous busybodies who seek to impose their norms on the whole country, the Supreme Court has entertained many such, and created incentives for people to waste the Court’s time, and the citizens’ peace.

But a comment made by the Bench—perhaps revealing the rationale for the decision—should make us sit up and take notice:

When the national anthem is played it is imperative for everyone to show honour and respect. It would instill a sense of committed patriotism and nationalism…Time has come for people to realise that the national anthem is a symbol of constitutional patriotism…people must feel they live in a nation and this wallowing individually perceived notion of freedom must go…people must feel this is my country, my motherland. [LiveLaw emphasis added]

The Supreme Court just dissed individual liberty!

The bench sneered at one of the pillars of the Indian Constitution. Troubling as it is, more than the ruling itself we should be concerned that India’s highest judges think this way, and think nothing of expressing it this way. The Supreme Court is, after all, the ultimate guardian of individual liberty. It gets this responsibility from no less an authority than the Constitution of India. Citizens will be justified in wondering if the Supreme Court can discharge this assigned responsibility if it harbours such cynicism or disdain for individual liberty.

Legal scholars will no doubt cite scores of High Court and Supreme Court judgements that are unambiguous on the matter. Except when “individual liberty comes into conflict with an interest of the security of the State or public order”, individual liberty is supreme. It would be stretch to argue that people not standing up for the national anthem presents a scintilla of risk to the national interest. Indeed, India’s security or social order has suffered little damage from people not standing up for the national anthem in cinemas from 26th January 1950 till date. The judge’s words do not have a force of law, but to the extent they reveal thought processes, we have to worry.

It is bad enough for the Supreme Court to scorn individual freedom. To do so on an issue as unserious and arbitrary as what should be done at cinema halls is terrible.

Tailpiece:

Our emergency at the moment has perhaps led us toforget that if we do not give that scope to individual liberty, and give it the protection of the courts, we will create a tradition which will ultimately destroy even whatever little of personal liberty which exists in this country. [K M Munshi, Constituent Assembly, 6 December, 1948]

China warns Singapore

As Singapore confronts difficult choices, it must sound out New Delhi.

It is an open secret that the Singapore Armed Forces (SAF) train in the Republic of China in Taiwan, and the two countries have enjoyed a quiet, but very productive partnership since the early 1970s. Like how actors in ’70s Hindi movies used to become totally unrecognisable merely by putting on a moustache and a beard, Singapore’s soldiers would become Taiwanese ones when they exercised in that country. The subterfuge was out of respect for diplomatic niceties, to placate the People’s Republic of China. For instance, Singapore service personnel would assume Taiwanese aliases. Sometimes this would lead to hilarious outcomes: like when my friend, an ethnic-Tamil Singaporean infantry platoon commander, had to pass off as Chong Wai-kiong.

Singapore’s defence cooperation with Taiwan (Project Starlight) predates the establishment of diplomatic relations with China. For its part, Beijing was content with this arrangement, even when it came close to war with Taiwan in the mid-1990s. Ian Storey writes that Li Peng, then China’s Premier, said that China ‘should not mind too much’ if Singapore continued its military relationship with Taiwan, but had asked that this be done discreetly.

So last week, when Hong Kong customs authorities — tipped off by their Chinese counterparts — seized nine infantry vehicles on a ship that was making its way from Taiwan to Singapore, it appears that Beijing has decided to deliver a warning. Or more.

It comes as a surprise, but is clearly yet another manifestation of an emboldened China taking aggressive positions in its extended neighbourhood. Even if Beijing were to end the impasse by releasing SAF’s equipment in return for renewed Singaporean commitment to the One China policy, it would further strengthen the perception among East Asian countries that it is best not to antagonise China. It would also put greater caution, and perhaps even a suspension of the four-decade old Singapore-Taiwan military cooperation. Chastising Singapore has multiple benefits for China.

It is too early to tell if Beijing’s actions are informed by an expectation that the upcoming Trump administration will disengage from Asia, leaving the field open to China. China’s actions over the past few years suggest that Beijing is confident of upping the ante even in the face of US “pivot” to Asia. It may be American conceit to believe that Trump is leaving East Asia to China. The rulers in Beijing perhaps believe they already have Asia.

This is a crucial period for India’s own Act East policy. New Delhi must reassure Singapore, Hanoi, Jakarta, Seoul, Tokyo and Canberra that India has the wherewithal and a commitment to shape an Asian balance that does not surrender to Chinese hegemony. If the United States wishes to be part of such an arrangement, then it is all for the better. If not, the six Indo Pacific powers must manage on their own. Let’s not forget that if the United States is no longer in the picture, India is the only nuclear power on the other side of China.

Hindu, Hindoo, Gentoo and Indian

What came first and what was more popular

While researching the origins of liberalism for another project, I came across an interesting analysis by Daniel B. Klein in the Atlantic magazine, where he used Google’s Ngram Viewer to trace the origins of the use of the word ‘liberal’ in a political sense.

I used the same tool to see when and how frequently the words Hindu, Hindoo, Gentoo and Indian were used in the English language.


So, although the word spelt as “Hindu” was used early on in English, the word “Gentoo” was more in vogue until 1781, after which “Hindoo” took over. The “Hindu” returned to popularity around 1867 and stayed in currency since then. We will have to ask historians to explain what happened in the 1780s and the late 1860s that led to these changes.


In comparison, the word “Indian” has always been more popular than “Hindu”, although they mean the same thing semantically. There might be some overcounting as the former was also used to refer to Native Americans during most of the period covered in this chart. The pattern is similar in other European languages that Google provides for.

Why PM Modi should push economic liberalisation now

The best use of his store of political capital is to undertake big ticket economic reforms.

When a small Takshashila team walked around Bangalore’s wholesale markets, Dobbspet town and a few tiny village in the latter’s vicinity as part of our #FootNote initiative, we noticed many people reporting that they were not only inconvenienced but suffered monetary losses, yet supported Narendra Modi’s currency reform (‘demonetisation’) initiative. This is counter-intuitive, except perhaps in the context of religious faith.

To better understand this phenomenon, I conducted a twitter poll earlier this week that sought to investigate to what extent have people conflated their opinion of Prime Minister Modi and his currency reform initiative.

The results, after just over 1800 responses, were as follows:

Obviously, there is no claim that this poll is representative of the entire population of India. It is more likely representative of the forty thousand or so people who follow my twitter handle. Even so, the responses are interesting, and support what we noticed on the #FootNote tour.

Modi-Demonetisation-Poll

What does this mean? As Karthik Shashidhar, our resident quant, remarked, in 87% of the respondents there is an overlap between their opinion of Mr Modi and his policy. In other words, people’s attitude towards him overshadows their opinion of his policy. My colleague Nidhi Gupta, who recently reviewed Christopher Achen and Larry Bartels’ Democracy for Realists (Princeton University Press), that exposes the flaws of democratic systems, noted that in this case too, the notion that people vote on issues does not seem to hold up.

We’ll repeat the poll again in January to see how much the responses change.

In any event, the upshot is that the demonetisation episode shows that Mr Modi enjoys tremendous political capital that he can use to implement the type of structural reforms that would be extremely difficult for other leaders to pull off.

He should not lose the opportunity.

Postscript: Mr Modi’s team conducted their own poll using his smartphone app. Both the framing of the questions and the type of sample suggest that the poll is essentially a device to rally his supporters rather than obtain an objective estimate of public opinion. It would be wrong to assume it reflects what Indians think, just as it would be wrong to use my twitter poll for the same purpose.

On OBOR’s commercially suspect projects

Win-win, for China.

Analysts have observed that many projects that China is financing and building under Xi Jinping’s One Belt One Road (OBOR) initiative are commercially dubious. People whose job it is to worry about such things have have surmised that the real motivation might be military-strategic in nature.

There is another — less sinister, but non-mutually-exclusive — explanation. Fitch’s Kalai Pillay says that the real motivation is “exporting China’s excess construction capacity that is accompanied by financing from Chinese state-led enterprises.”

“A lot of the big construction companies in China have bulked themselves up significantly over the last 10 years to carry out the big infrastructure projects in China. As many of these come to the tail end they have this excess capacity, the know-how, the real technical knowledge, a lot of patented technology that can be sold abroad, that needs to be exported abroad,” Pillay says.

He adds that there may be little room for non-Chinese banks and institutions to play a role in financing OBOR infrastructure projects.

“The final leg to this is the capital. There is excess capital which finds itself into all kinds of things, international bond markets, the spread market wherever. But one way to export it also is through financing projects that’s going to take place outside of China. So that’s part of that OBOR strategy,” Pillay says. [The Asset]

In other words, China is providing cheap loans to regional countries to build infrastructure — that might not be commercially viable — using Chinese construction companies. If the projects take off, China benefits. If they don’t, then regional governments will be stuck with debts to the Chinese government.

Not bad. For Beijing, that is.

What did the currency reform intend to do?

Countering terrorism, counterfeit currency, unaccounted wealth, unaccounted income…?

Anupam Manur and I have a brief analysis of what the currency reform (popularly, and inaccurately, known as demonetisation) might have been intended to do, in the eight following slides.

India's Currency Reform 2016 from The Takshashila Institution Click on the slide to enlarge.

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.