While excellent newsletters on specific themes within public policy already exist, this thought letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. Audio narration by Ad-Auris. If this post was forwarded to you and you liked it, consider subscribing. It’s free.
Programming Note: We will be on a short ‘writing’ break. Normal service will resume from Oct 29. Global Policy Watch: When Traditional Institutions WorkInsights on topical policy issues in India— RSJ King Charles III was coronated last week. I saw the pictures of the event, and if you did not know the history of the British monarchy, the whole thing looked like a Monty Python sketch on a Nolan-esque budget. The King wore a costume that might have appeared outdated even in the 12th century when the Westminster Hall was built. The political class in their finery bowed, the aristocracy in splendid robes kept a stiff upper lip, the media continually upped the circus quotient for public consumption, and the Yeomen of the Guard marched in precise steps while some grand music (Handel?) played on. It was all pomp and circumstance (Elgar would have approved). Charles I was beheaded for treason by the parliament led by Oliver Cromwell at Whitehall, not too far away from where Charles III was seated. The second King Charles led a charmed life with childhood exile, a triumphant return to the restoration of monarchy, and finally, a long suspension of parliament in the last years of his rule marking his legacy. Uneasy may not lie the head that wears the crown these days (there’s really no day job here), but Charles III cannot be too careful about the institution that he represents. The institution is in a perilous state, and he’s seen by many as an oddity unfit for the role. The commonwealth states don’t have any time for the monarchy. The link to the colonial past is no longer about nostalgia. That’s been erased and replaced with an indifference bordering on disdain for monarchy and its role during the excesses of colonialism. Among the young in Britain, the support for the monarchy is on the wane. Only 33 per cent in the age group of 18-24 support monarchy today compared to the 59 per cent who did a decade back. Some feel with the passing of Queen Elizabeth II, the institution of the monarchy will struggle to remain relevant or to serve its vital role of being the ceremonial head of the state. An elected president could do it better. I mean, what’s the point of monarchy barring providing grist to the paparazzi mill, occasional photo shoots with visiting heads of state and announcing a few royal honours every year? Why spend enormous money and effort propping up an archaic and undemocratic institution? Why have a democratic constitution and then have a hereditary basis for choosing the head of the state? Isn’t that a traditional and conservative imposition on the people?
Secondly, in this age of polarisation and tribal loyalties trumping reason, the idea of an apolitical sovereign reigning as the head of state is appealing. There’s a hope there that such a sovereign might not help rally people toward a populist cause but could perhaps hold them back from falling prey to raw emotions and passions. This moral authority, however undeserved, can constrain any political movement that threatens to derail democracy in the name of populism or majoritarianism. There’s an additional element to the exercise of undemocratic sovereign power. When things are going good, the checks and balances of power between the legislature, executive and judiciary work effectively. There are debates and consultations before a consensus on the way ahead is arrived. But in times of crisis and exigencies, there’s a need for an additional reserve of power or authority that can supersede or expedite the usual decision-making process of a democracy by imposing its will. A constitutional monarchy run on a parliamentary system has that reserve. A presidential style of government lacks this and runs the risk of not being agile enough to counter such exigencies. Like Bagehot put it:
Lastly, a functioning and aware monarchy helps assuage the deeply embedded anxieties about identity in society while gradually accepting the inevitable change that times bring with it. One of the things that the British monarchy, with Queen Elizabeth II at the helm, did well was to stand for what was to be British in times of tremendous upheaval. She was resolutely Christian, proud of the empire, rarely apologetic about its excesses, devoted to her duty as the unelected sovereign and funny in a very British way. Each of these was (and is) a fault line in a society wanting to modernise and cast away the sins of its past. She carried them along because maybe she understood the importance of being a gradualist. Or it is likely the legacy of the institution guided her to be one. It is strange, but the monarchy, the most top-down of the institutions, perhaps has been the bulwark against any hastily concocted plans of a top-down imposed change in societies. I went back to some of the early speeches of Queen Elizabeth II to see if she always knew this was what she had to contend with being a modern constitutional monarch. It could be her speech writers who saw this, or it could be her imprint on them, but her early speeches give a sense of her awareness about this. In her coronation day address, she said:
Listen, much of this can seem like pompous drivel to the more cynical among us. But it is uplifting and meaningful to a lot more. There’s a lot worse that was being said—then and now—to people from positions of authority. I’d rather have thousand-year-old institutions rooted in modern or outdated traditions speak uplifting drivel like this. People should get more of this. Matsyanyaaya: The Chips are Down for Russia's Defence CompaniesBig fish eating small fish = Foreign Policy in action— Abhiram Manchi & Pranay Kotasthane (An edited version of this post first appeared in the Times of India’s September 23 edition) Russia is considered a dependable defence partner to India, and rightly so. An underlying assumption is that Russia will continue to be a reliable supplier even in the future. But this assumption fails to consider that Russia’s defence production capabilities will continue to decline well after the ongoing war in Ukraine ends. Here’s why. Consider these telltale signs first. Russia has delayed the delivery of two Talwar-class stealth frigates for up to six months. There are also short-term delays in the supply of S-400 Triumf missile systems and spares for Kilo-class submarines, MiG-29 fighters and Kamov Mi-17 military transport helicopters. These setbacks shouldn’t be dismissed as routine. They indicate a deeper problem: Russia’s inability to access semiconductor chips for defence platforms going ahead. Ukraine put out an alleged shopping list of semiconductors, connectors, transformers, etc., that Russia is desperate to purchase. Politico, a US-based media company, divided this list into three parts Critical, Important, and Not-so-important. The Critical list has some chips of basic complexity, such as connectors, and memory chips, besides digital signal processors and Field Programmable Gate Arrays (FPGAs), which fall slightly higher in the complexity grade. There are no cutting-edge chips on the list. These items are pretty standard and can be manufactured on a large scale in most cases. This surprising lack of complexity in Russian equipment has also surprised the US. There have been claims that college students majoring in electrical engineering could reverse engineer and build most of the electronics used. Also, there have been instances of Russian-guided missiles missing their mark purely due to the old versions of navigation systems. When Russia invaded Ukraine in late February, the US quickly banned selling semiconductors used in defence systems to Russia. The new controls target chips, encryption software, lasers and sensors, etc., for Russia’s defence industry. The other three pillars of the semiconductor industry, i.e. Taiwan, South Korea and Japan, also banned the export of items through the export control list provided by the US. These controls essentially mean that none of the high-end chips will be available for use by Russia. Russia also does not have the infrastructure to manufacture these chips domestically. Only two Russian companies, Angstrem-T and Mikron Group, are reported to have elementary production-grade chip manufacturing capabilities. As a result, Russia is feeling the pinch. It is running low on hypersonic weapons because of the unavailability of microchips. Examination of the remnants of the missiles Russia launched on Ukraine showed the usage of older technology parts with elementary GPS systems. Sometimes Russia even used chips taken out of dishwashers and refrigerators. This puts India in a precarious position. India is the largest importer of Russian weaponry in the world. Even after the ongoing war ends, it is unlikely that the West will remove these high-tech sanctions. With these constraints to negotiate, Russia could proceed in two ways, neither of which augurs well for India. As seen in most weapons in Ukraine, Russia could use chips from western manufacturers by indirectly sourcing them. It is tough to track chips once they leave the foundry, as there may be multiple unregulated second-hand markets for them. There are also third-party firms sourcing chips and then directly selling them to Russia. While Russia has been a reliable defence partner of India, it would prefer to replenish its declining stocks of chips before considering India’s requirements. From the Indian perspective, even if Russia does continue the supplies, India has to think twice before using chips obtained from these dark markets. The other option for Russia’s defence industry is to approach China and obtain the chips from them. While this may work for Russia and be advantageous for China to have Russia in their debt, India has to be wary of these Chinese chips entering into the defence equipment being sent to India. Do we want Chinese chips in our missiles and submarines? Whatever the option Russia opts for, India must prepare for a sharp drop in Russia’s ability to deliver on defence purchase orders. Their technology is dated, and the chips would come from the black market or China. There will also be delays and cost overruns, with supply chains disrupted, financial systems in tatters and Russian manufacturers closing shop. India will now also face issues with its exports to other countries, a case being the partnership with Russia to work on assault rifle export. Given the reality of Russia’s defence sector, India must diversify its weaponry in the short term and focus on local manufacturing over the long term. Regardless of Russia’s intentions, its capability to meet India’s defence needs has taken a big hit. India must utilise partnerships with the US, Japan, Australia, France, and Israel to secure defence equipment and chip supplies. India Policy Watch #1: India’s Semiconductor Policies v2.0Insights on burning policy issues in India— Pranay Kotasthane Earlier this week, the Union Cabinet approved modifications to three of the four schemes introduced in December 2021 for developing a domestic semiconductor ecosystem. Several news websites have claimed that with the government “sweetening the deal”, investments in this sector will be more forthcoming. I agree, but not without some fundamental reservations. Here’s why. Semiconductor FabsTo attract chip manufacturing companies, the original programme promised up to 50% upfront financial support for leading-edge nodes (28 nanometres and below). The promised fiscal support for trailing-edge nodes employing older technologies dropped commensurately, going down to 30% for a fab that produces chips at the 45-65 nanometre nodes. (The node size is a rough measure for the size of a building block in a chip. The smaller that number, the more building blocks that can be packed in the same area resulting in higher performance). Under the new scheme, the government promises upfront fiscal support of 50% for all node sizes. The change reflects two realities. First, trailing-edge fabs are crucial for India. The demand for older node sizes will not disappear anytime soon. Future applications such as 5G radios and electric vehicles will continue to require manufacturing at these nodes. Most current defence applications also require trailing-edge chips. Second, many countries are wooing the leading-edge node foundries with much larger incentive packages. Companies such as TSMC are being courted by all major powers, and it’s unlikely they will pick India for the most-advanced nodes. India’s chances are better for securing older technologies. Display FabsMost display panel manufacturers are located in East Asia — companies from China, Taiwan, South Korea, and Japan dominate this industry. The scheme was designed with the explicit aim of import substitution. The original scheme promised up to 50% upfront financial support subject to a cap of ₹12,000 crores. As part of the changes, this upper cap has been struck off. To me, this scheme didn’t make sense even when it was announced. I have four reasons for the scepticism.
Thus, to spend ₹12000 crores for a product in the pursuit of a failed notion of import substitution doesn't justify the opportunity costs. Moreover, removing the upper cap after Vedanta-Foxconn got into this game raises concerns about rent-seeking — the tendency of businesses to distort policies to serve their own interests. Assembly, Test, Packaging Units, and Specialised Low-volume FabsFor assembly, test and packaging firms, & compound fabs, the promised financial support has increased substantially, from 30% to 50%. More importantly, the original scheme allowed disbursal once a facility had begun production. Under the modified scheme, the financial support will be upfront. Prepaid, not postpaid. These changes again warrant scrutiny. Is it another case of rent-seeking? At the margin, I am okay with the changes in this segment. India has a potential advantage because of the need for a large, mid-level trained workforce for this segment of the supply chain, in comparison to conventional semiconductor fabs. Semiconductor DesignSurprisingly, there were no modifications in the one area where India does have a comparative advantage - semiconductor design and design services. The capital requirement for this segment is at least two orders of magnitude lower than the first three segments. And yet, the response to the scheme for encouraging design firms seems less than lukewarm. We propose two changes in the policy for that segment in an article for Hindustan Times earlier this month:
On both these counts, the status quo prevails. To summarise, the modifications reflect the government’s seriousness in attracting investment in this sector. Through these changes, the government is acknowledging that India must start its chip manufacturing journey at the lower end and climb its way up. Getting good at this game takes a couple of decades. At the same time, a thin line separates responsive government policies from regulatory capture by businesses. All industrial policies run this risk, and we need to be vigilant. India Policy Watch #2: Six Essential Questions in Indian Public FinanceInsights on burning policy issues in India— Pranay Kotasthane Longtime readers might recall what I say about public finance: it is an underrated discipline that offers insights across all public policy domains. Many good public finance textbooks exist, but there are few books which explain the subject in the Indian context. Luckily, we now have a book which does that — M Govinda Rao’s Studies in Indian Public Finance (SIPF). To make it easier for all readers, I have a book essay that distills the insights from the book as answers to six questions of contemporary relevance. They are:
To know how the book answers these questions, read my Indian Public Policy Review essay here. And if you are serious about learning public policy, the book is unmissable. HomeWorkReading and listening recommendations on public policy matters
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