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. If this post was forwarded to you and you liked it, consider subscribing. It’s free. If you enjoy what’s written here, you will also like our book, Missing in Action: Why You Should Care About Public Policy. #273 Taking Things Too FarOne Nation One Election, A Money Supply Boost, Pager Attacks Ruin Electronics for Everyone, and China's Pension Reforms
India Policy Watch #1: Running With A Bad IdeaInsights on current policy issues in India— RSJThe Union Cabinet this week cleared the proposal of the High-Level Committee on One Nation, One Election headed by former President Ram Nath Kovind. The Bill facilitating these concurrent polls could be introduced during the winter session of Parliament. This Committee, set up in 2023, consulted 39 political parties, jurists, economists, and the Election Commission of India. It studied international practices to arrive at a conclusion that the Prime Minister had already foreseen a few years back. As we have written in the past, evidence-based policymaking is so boring. We prefer policy-based evidence-making. As they say, India is not for beginners. What happens next? Well, the Committee has suggested about 18 constitutional amendments, of which about half might need ratification by over 50 per cent of state assemblies and about 2/3rd support from both houses of parliament. The Law Commission is also preparing a report, and it will likely recommend simultaneous elections across the Lok Sabha, state assemblies and local bodies as early as 2029. As the HT reports:
We have written extensively about ONOE in previous editions. Our argument remains the same. The problems that it is trying to solve don’t need such fundamental changes to the constitution and the nature of our polity. Policy paralysis due to the continuous elections treadmill and the moratorium period before it; costs of holding elections in a disaggregated mode; the constant election mode parties tend to be in keeping the political temperature high; and the mobilisation of security forces multiple times because of various state elections—these are all issues we have debated and suggested simpler solutions than One Nation, One Election. The costs of moving to a quasi-presidential form of elections where the local issues, especially in smaller states, might get buried under the avalanche of national issues are quite real. There are other constitutional issues, too, in terms of how incentives change for elected politicians when they know any mid-term loss in the mandate of a government will mean an election that will be held for only the remaining term (a truncated term till the next date for simultaneous elections). It could also mean more elections because there could be more truncated terms, given the nature of politics in many states. Lastly, our contention has always been that the long-term nature of such changes is quite difficult to predict and could possibly be quite damaging to democracy. We should try simpler and less intrusive solutions to effect electoral reforms in India rather than go for something like this. But where is the drama in that? Addendum— Pranay KotasthaneYou’ll find all our arguments challenging ONOE in this thread.
Or in this edition.
These arguments apart, there are two additional points to consider. First, my opposition to ONOE is qualitatively similar to my opposition to the caste census. Sure, both ideas have some advantages. However, a linear decision-making calculus underestimates the long-run effects of such moves. These are leverage points in a complex system that will have disproportionately negative effects on the Indian State, market, nation, and society. So, we should be abundantly cautious and exhaust other reform alternatives. Second, a common assumption underlying the demand for ONOE is that parties are in a “constant election mode” under the current system, which is supposed to be terrible for policymaking. Now, let’s test this assumption. As I have said before, analysts often commit the mistake of comparing the best-case version of an imagined future due to policy reform with the worst-case version of the current status quo. That’s inadequate. We must anticipate a reform's unintended consequences before committing ourselves to it. So, here’s how the worst-case version of an ONOE, one that operates exactly as desired, might appear. Let’s assume that simultaneous elections largely happen only once in five years in a steady state after the initial transitional hiccups. What would that world look like? To answer that question, observe the stakes at play here. Voters vote for the same party when simultaneous elections are held. This claim is based on robust evidence. Association for Democratic Reforms (ADR) found that in the 31 instances of simultaneous elections for state assemblies and the Lok Sabha since 1989, major political parties polled almost a similar proportion of votes for the Assembly and the Lok Sabha on 24 occasions. Thus, a coalition that wins elections at the national level is likely to fare better at the other levels under ONOE. Thus, a party faces a stark choice: it will either simultaneously command power at many levels or risk political irrelevance for five years. In other words, it is a pressure cooker without any safety valve. करो या मरो. In such a high-stakes game, what would the incentives of an incumbent government look like? We already know state governments tend to postpone hiring in policing and other positions towards the end of their term. This trend will grow stronger. Governments might postpone all hiring decisions towards the end of their term. The same applies to populist freebies. With the stakes being this high, intermittent small-scale distributed populism might get replaced by large-scale concentrated populism from all sides towards the end of the term. Currently, parties in the opposition invariably have an election to look forward to. Election losses are followed by chintan shivirs where party leaders try to regroup and motivate their cadre. But once you have simultaneous elections, there is little to look forward to for the next four to five years, which increases the chances of opportunist leaders splitting parties and jumping ship more often. None of these outcomes appear beneficial to public policy outcomes. Perhaps parties being in a “constant election mode” is not optimal for public policy, but one-shot elections will likely be far worse. Public policy is the art of selecting the second-best option; in this case, ONOE remains a far third. India Policy Watch #2: Where’s The Paisa?Insights on current policy issues in India— RSJThe Fed cut rates 50 bps last week in an 11-1 vote with Jay Powell indicating inflation in the US was in the realm of comfort with a less tight labour market. The 50 bps cut indicates an admission that the Fed was behind the curve, and a 25 bps cut could have come a couple of months earlier. Following the Fed rate cut, Hong Kong and Indonesia also cut their rates by 25 bps and other emerging markets will follow suit during the next month. The next Monetary Policy Committee of India (MPC) meeting of RBI is on Oct 7-9, and I sense we won’t see a rate cut so early. Also note the October meeting will see 3 out 4 MPC members complete their terms and an almost new team at the helm. So, it will be a wait-and-watch kind of MPC discussion with a likely shift in stance only in the December meeting. The earliest likelihood of a rate cut is going to be at the February MPC meeting unless we see another Fed cut by then. The RBI increased the repo rate by 250 basis points between May 2022 and February 2023. Since then, the MPC has kept rates and stance unchanged, citing inflation concerns and risks in an uncertain global environment. But that might be behind us now. A month here or there doesn’t alter the fundamental point here. We are at the start of a rate-cut cycle now. There’s a slowing down of growth in the economy, as the Q1 GDP numbers showed. Consumption isn’t growing as fast as in the past, and government spending was weak owing to elections. Also, China’s weak demand and overcapacity are starting to show up in export numbers across countries in one way or the other. India is no different. That apart there is another constraint to the GDP growth that will exacerbate when the rate cuts start. For a few quarters now, we hear banks struggling to raise deposits. The reasons offered are many, from household savings coming down to money going into equity and real estate to banks not raising deposit rates to attract money. While these may seem apparent, the real underlying cause is that the central bank hasn’t increased the stock of money in the system since 2022. After the surplus liquidity that was injected and created in the system during COVID-19, the RBI has continued to drain the liquidity out of the system to tame inflation and manage the rupee. The rise in government cash balances and higher cash in circulation in the economy over the past 2 years have created a fairly tight liquidity situation for the banks. The credit demand in the system hasn’t abated though. What this has meant is that for over 2 years now, the credit growth has exceeded the deposit growth in the system by 300-500 bps. This has been flagged by the RBI as a risk since the loan-to-deposit ratio (LDR) has gone up significantly for the Banking system during this period (from about 67% in Oct ‘22 to almost 80% now). The banks have tried to get the LDR down, but that can only come at the expense of credit growth because the deposit growth remains. This has meant a sharp fall in credit growth in the last 6 months in the system, from about 17 per cent to 13 per cent. Now to be sure, some of this growth was happening in the risky unsecured loan segment, which had become overheated, and it is good for the system to avoid such bubbles. But it is also true this credit growth decline will hurt other productive areas of the economy like housing and small businesses. Once the rate cut cycle starts, banks will have to be in sync with the cuts in pricing their loans. The credit and subsequent growth expectations will go up in the system with rate cuts. But if the liquidity situation remains as tight as it is now, there will be a huge gap between credit demand and credit availability and the actual transmission of rate cuts won’t happen. This is already seen in the slowing growth numbers in consumption but could get aggravated further in future. More than the interest rate stance and the timing of the cuts, the central bank will have to signal it is opening up its fist on the money supply in the system. That will give the required boost to the economy for the rest of the year. Global Policy Watch: Pension Reform with Chinese CharacteristicsGlobal policy issues relevant to India |
Pagers, Walkie-Talkies, and Supply Chain Security Takshashila Institution |
[Article] Ori Goldberg explains the flaws in the conventional discourse about the pager attacks. It is a must-read.
[Resource] China Digital Times translates and brings out uncensored news and online voices from China.
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Our top 5 editions thus far:
#240 Peering Into the Future: Sharp Predictions for 2024, the Services and/or Manufacturing Debate, and the PolicyWTF that Downed India's Textile Industry
PolicyWTFs—A Hall of Shame: A compilation of all the failed policies that have received not-so-honourable mentions in this thought letter
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