Tag Archives: state capacity

HippoBrain conversation

HippoBrain conversation

05 October 2020

In 2015, I was summoned to the North Block from the office of the then Minister of State for Finance, Jayant Sinha. For somebody who worked in a bank, my first thought was that some hell had broken loose somewhere; I may have written something that was a slip-up or something. We ended up having a one-hour long conversation and that was it. Nothing happened; life moved on as usual.

Then, in 2016, I received another call that I now think possibly changed the trajectory of my career path and maybe, even life. I was asked if I want to work with Mr Sinha as the Officer on Special Duty. After mulling over it, it was decided that I will work with him for 18-24 months—even after Mr Sinha moved from the Ministry of Finance to the Ministry of Civil Aviation. 

Why? I wanted to explore the world of policy. Such opportunities are hard to come by. 

Besides, it’s where I learnt two of the biggest lessons that I now see panning out around us these days, especially during the debates on the #FarmBill2020.

It’s nice to see public interest in policy-making. After all, in Tier 1 metros, we may be disconnected with the public policy. After all, our basic needs are met by private services; we hardly rely on the government for these things. But that’s not true for the vast majority of people. 

In Tier 2/3 cities, in the interiors of India, you can see how closely people are dependent on the government. For them, be it bijli, sadak, paani or roti, kapda aur makaan —these are important components that the government provides. The same applies to shiksha, swasthya aur suraksha.

With the government overwhelmed and unable to provide, there is a legitimate ‘private cost of public failure’. And yet, we often find ourselves disconnected from what’s happening in the world of policy making. So, it’s nice to see interest and rich debate on an aspect of public policy-making. 

This brings me to the second biggest lesson I learnt during my experience working with the government as OSD—it’s only by getting involved that one can understand how complex policy-making is; it has various multi-faceted impact that may often be hard to predict.

When we were working on the UDAN policy, we had consultations and meetings with numerous stakeholders. That was our way of taking into consideration numerous different perspectives and angles.

Despite all the hard work, policy-makers often have to make trade-offs. One of the other things that I learnt which is very interesting is that, when you are in public policy and trying to solve multiple stakeholders, you will not be able to keep everyone happy every time. 

That’s why, for as a policy-maker, time is your friend. Today, we bring out a policy that may be more favorable to one party; but we take the time to understand where it hurts the other party. So we then take it up in the subsequent iterations. It’s a finely balancing act—one that’s a continuous process. 

These are lessons I would have never learnt had I not been lucky to partake in public policy-making. And while I appreciate that not everybody would be able to be so actively involved, I do believe there is merit in being actively informed about updates as well as different points of view.

Getting the vaccine to a billion plus people

Getting the vaccine to a billion plus people

10 September 2020

India can learn a lot from its experience in managing cash – getting a billion people what they need can be planned effectively.

A vaccine for Covid-19 is expected to come sometime over the next few months – hopefully in this year. Once a vaccine is available, getting it to India’s billion plus people is a logistical challenge with many moral and ethical questions attached. How should India plan for the vaccination program? 

Before we go there, let us recognize that a few very important questions still remain to be answered. What shape and form the vaccine will be remains to be seen: it is expected that it will be intravenous and hence may require skilled or trained practitioners to administer. It is also not clear whether there will be only one vaccine or many competing ones, and how effective each might be. All of this will feed into the number of doses that might be required – whether a single shot would do or multiple jabs may be required. Hopefully, India will develop its own vaccine; however, if vaccines are available from other countries, how soon can they come to India? 

Given all these imponderables, one may be tempted to push back the planning till there is more clarity. With fast-paced changes taking place in this field, it is possible that many of these questions will be responded to rather quickly. It will be useful, hence, to have the policy framework for the delivery of the vaccine in place. 

Make it flow like cash

A vaccine is a good with significant positive externalities: the more the number of people who take the vaccine, the better it is for everyone in the society. Ideally, if everyone is inoculated, then everyone is safe. There are a few providers (or maybe even one) and everyone is a buyer. All citizens in the country will queue up to get a vaccine, as and when it is available. 

Cash is a similar type of a good. There is only one supplier (the government) and everyone needs it: all are required to have the same type of cash when they transact with each other. All citizens in the country queue up to get the notes as required. 

India has recent experience of ensuring the wide availability of a good like cash to all its citizens. Unlike in the case of demonetization where the announcement was sudden, the expectation of a vaccine has been building up for some time – this allows us the opportunity to draw upon our experiences. The re-monetization process lasted only around 50 days: similarly, we need to think of timeframes in days and not years as we think of our vaccine delivery. 

The three As

Availability and training: There is an implicit Government assurance to all citizens that they will all have the notes in their wallets when they want them – this has been perfected over years of experience. As the RBI annual report of 2017 says, “…during a short span from November 9 to December 31, 2016, the Reserve Bank pumped in 23.8 billion pieces of bank notes into circulation aggregating ₹5,540 billion in value.” Assuming that every transaction meant the final customer picked up 24 pieces from a bank, it meant a billion transactions, similar to the number of vaccine doses that may be required. 

The availability of the new notes was made across all branches of the banks: more than 125,000 centres. A similar size and scale need to be brought to bear to the vaccination program which should be available across all primary and secondary healthcare units with an appropriate training for administration. We note that there are 0.9 mn Accredited Social Health Activist (ASHA) workers and many private medical care professionals in the country. The training for administering intravenous vaccines, if not already done, should be started now – even before the vaccine has been finalized. Similarly, the logistics and cold storage facility plans should be thought-through now. 

Access and prioritization: As we plan to roll-out the vaccines, access to every citizen has to be assured. Unlike in the case of cash, where there were concerns on hoarding, there should be limited concern that a citizen would want to take multiple shots when a single dose would suffice. Anyone who presents himself/herself should be offered a shot without concerning too much on whether the person has received a shot earlier. 

The government should invest its energies in getting the doses, not in administering the system that administers the doses. If an elaborate system of maintaining records is kept, it can lead to undue bureaucratic delays and hold-ups. Anyone who wants to take a vaccination shot should be allowed to without the need to show any documents. The crisis is not the time to create a health registry or a digital health id. 

The issue of who gets the vaccine first remains. The frontline health-workers, other essential workers, and senior citizens have a natural claim to be the initial recipients. The most effective way in which this can be practically and morally be addressed is if the other citizens know that their turn will come soon. This is a key reason why the target for overall vaccination has to be measured in days – not months or years. 

Affordability and pricing: An important component of access is the price at which vaccines will be available. In the case of the vaccine, a low price coupled with the solid expectation of availability-on-demand will remove most of the incentive to hoard. Government can give an assurance of supply (and hence keep prices in check) by contracting capacity for many hundreds of millions of doses. The government should use the powers at its disposal to grant licences to make the vaccines to a large number of players. It should consider and resolve whether India can invoke a process patent instead of a product patent in this case.

There should be a pay-out to ASHA workers or other health professionals who administer a dose. A local, social audit should be powerful enough to determine whether the vaccines were actually administered and not just stored or wasted away. Public announcements of when and what quantities of medicines reach the health centres should be periodically made.

A vaccine shot to heal them all

Once vaccines are ready, we should aim to reach as many of our citizens as quickly as possible. The Indian pharma industry has proven to be a world beater in manufacturing large scale doses. As we saw with the prices of ventilators and PPE kits, a large supply almost inevitably results in low prices – the government should use the scale to keep vaccine prices low. 

Quick dose of vaccination will lead to a quick restart of the lives of the citizens and the economy. 

The author is with Axis Bank. Views are personal.

Originally published in The Financial Express.

State finances: Finding the monies

State finances: Finding the monies

12 December 2019

As the Centre and States try to find GST compensation cess monies, it is time to look beyond the present, to see how the future could unfold for State finances.

The financial relationship between states and the Centre has been in news recently. The Fifteenth Finance Commission submitted its report to the president; there have been some delays in payment of the GST compensation cess, and there were some discussions on whether the Centre will honour its commitment of assuring a 14% revenue growth in the agreed-upon transition period.

Constitutionally, Centre-State fiscal relations come up for review quinquennially (once every five years). States have ceded significant taxing powers to the Centre via GST. Earlier, the states had their own tax bases and could manage revenues by juggling taxation policies. This led to a large number of state-specific tax rates, a lack of uniformity in the tax structure in the country, and sometimes, a race to very low-tax regimes to attract investments—and hence, a move towards GST. On the other hand, such flexibility allowed the state governments to create their own fiscal policies which could be more suited to their needs: it also made the states, especially the non-special-category ones, less dependent on fund flows from the Centre.

While the states have a say in GST rates, one-third voting power for the Centre means that it has a casting vote to reach a three-fourths majority in case decisions needs to be taken by voting. The GST Council has, till date, taken decisions by consensus. Large sources of direct funds remaining for the states are non-GST goods, property taxes and stamp duties. Over time, non-GST goods like petroleum, natural gas, aviation turbine fuel, alcohol and electricity may also move into the GST framework to complete the input tax credit cycle.

This can leave states dependent on the Centre for a significant portion of their revenue inflows for funding their expenditure. If there is a slowdown of funds at the Centre, or if there is any misalignment between the priorities of the Centre and the states, the fund-flow situation at the states could become challenging. Since chief ministers are expected to deliver on their promises, the states are face a near-continuous requirement of funds. Note that the states have built-up a lot of “committed expenditure”, mostly on account on salaries (including pensions) and a plethora of social services that belong on the state list. The states also have defined fiscal deficit and debt targets that they cannot breach.

Over time, the states will again seek to build buoyancy in taxation. The only way for the states to keep to deficit and debt targets when expenditures are committed and growing is to increase revenues. Once the five-year GST transition period of committed annual 14% growth in revenues is over (in 2022), states may be required to find themselves new sources of revenues. We look at some possible sources that might come up: citizens and businesses should also remain cognizant about such scenarios.

Better efficiency in tax collection: Better implementation of existing taxing powers of the states by promoting greater compliance, making tax collections more user-friendly, and identifying taxes with large potential, say property taxes. The Economic Survey 2017 had identified that the states (and the cities) do not do a thorough job in identifying, assessing and collecting property taxes—it had mentioned that “Bengaluru and Jaipur are currently collecting no more than 5-20 per cent of their respective potentials for property tax.”

Better collection on state services: The states offer various services to its citizens like transport, water, electricity, schooling, primary health care, etc. User charges (in places which, and for citizens who, have the ability to pay), long recommended by economists, could start to become an important revenue source for state budgets. Many services may see refinement in eligibility criteria to sharpen targeting to genuinely-needy. As average incomes increase, the ability of citizenry to pay increases and requirement for subsidised services could reduce. Many areas which are currently completely in the purview of state governments (say transport services) could partially open up for private sector participation.

Finding new sources of tax funds: Necessity could be the mother of innovation: whatever one state does, it could quickly get copied across other states. Such taxes could be levied on products currently out of tax-net, or on goods and services that may be perceived to be luxury or ‘sin goods’, or be based on new ideas (like say congestion pricing). State-backed lotteries or similar new products/services can create a revenue potential for the state. There are very few state PSUs that could be disinvested for meaningful sums of monies—in any case, these ‘receipts’ will be one-time and only available to a few states which may have such PSUs. Possibly, the states could start their own social-security collections?

Land sales or value-capture: Chinese cities created a significant revenue base for themselves by selling land in the city and on its periphery. Whether by issuing TDRs, or by allocating higher FSI near public infrastructure creation (like a metro station), or by charging a well-documented premium for converting agricultural land to non-agricultural (NA), states can come up with new solutions on these.

Debt: Along with all the cash flow initiations/optimisations that we discussed above, states could look at their debt-raising ability and its profile—after all fiscal accounting in India is cash-based and not accrual-based. A recent OpEd in FE highlighted that Telangana is now borrowing more long-term to avoid the short-term roll-over pressures. Over time, many other states could come to similar conclusions: long-dated papers of state government could start to come to the markets.

These trends will emerge not only because of the current news flow on Centre and state fiscal relations but also because as India prospers, its tax-to-GDP ratio could increase to the levels of OECD countries—this will require both the Centre and the states to come up with new ideas, reasons and methods of collecting the monies.

The author is Head, Strategy and New Initiatives, Axis Bank. Views are personal.

Originally published in The Financial Express.

Housing needs a stronger mortgage market

Housing needs a stronger mortgage market

17 October 2019

A house is not merely a place to live and build a life, it is also one of the most significant assets of the family. An investment in a house roots a family to a location, giving them a significant stake in the development of the local area.

Housing is a fundamental requirement of human existence. The requirement of shelter is so basic that in common parlance in India, it is clubbed together with food and clothing as the troika of basic human needs of roti, kapda, and makaan. It is no wonder that housing is a key social demand, and a priority area for governments, both at the Centre and the states.

Housing as a socio-economic construct

The development of housing is a function of the economic reality of a location and its era. India has seen, and will continue to see, significant urbanisation. Where people choose to live is a complex optimisation of how close houses are to their places of economic activity (work, business catchment area, etc), how conveniently it is located (from schools, hospitals, common public areas like gardens, etc), and how cheaply and effectively it is connected with various other parts of the city.

Housing is intricately linked with urban planning, and public transportation. A well-designed city, with low cost and high speed of intra-city transportation, will have dispersed and more formal housing, which keeps prices low. A not-so-well-connected city will see dense clusters of housing—many of which may be informal, “illegal”, or “slums”. Any discussion on housing is, hence, a wider discussion on the economic development of a city, and the country.

A house is not merely a place to live and build a life, it is also one of the most significant assets of the family. An investment in a house roots a family to a location, giving them a significant stake in the development of the local area. If the house also happens to be an appreciating asset, it creates its own wealth effect, allowing families to stretch themselves somewhat in times of need, or to increase consumption. In this role of housing, there is a natural trade-off for policymakers to think about: should housing supply remain constrained relative to demand so that there is a natural scope of appreciation, or is the public good better served by continuously reducing the costs of making a house so that more and more people can aspire to formal housing?

Is housing a public or a private good?

A point that requires conceptual clarity and political consensus is whether housing is a public good or a private one. Housing is a basic human necessity, and good housing creates strong linkages with the local society. However, beyond the basic aspect of shelter, housing increasingly starts to become a private good, with significant investment by families and individuals in shaping their houses according to their specific usage and needs. The political consensus on this topic is relevant because the economic lens through which a public and a private good is viewed are very different. In case housing is seen as a public good, tight low-rental laws, or high supply of government-constructed flats are tools to keep in check the overall prices of houses. In case housing is viewed as a private good, there are incentives for asset-owners to preserve and grow the value of their assets.

Across most societies, there is a thin, sometimes undefined, line between economic segments of society where housing moves from being a public good to a private one: it is important to keep policies meant for one segment from impacting the viability of the other.

Mortgage securitisation

Development of a housing mortgage market is the conversion of a physical unit of infrastructure into a bundle of economic rights and liabilities that are reasonably standardised. The standardisation of economic agreements and legal architecture can lead to the creation of a tradable market in such rights and liabilities. The rights in a property can create significant economic value—such rights allow various players like lenders, tenants, service providers, etc, to take an economic interest in a property.

Standardised loan covenants can allow pooling, sharing, and diversification of risks by allowing investors to assess the risks and returns of bringing together different types of borrowers in a portfolio. Converting a basic human need into tradable economic contracts leads to significant gains from financialisation: costs of ownership can be reduced and purchasing ability increased as lenders have comfort in financing home-equity owners.

Regulatory support can help in the creation and development of this market. Harsh Vardhan Committee formed by the Reserve Bank of India (RBI) to improve mortgage-backed securitisation recommended the formation of a new government-sponsored intermediary through the National Housing Bank (NHB) specifically for housing finance companies. The committee has suggested formation of an intermediary company, with an initial capital of Rs 500 crore, in which the government will hold 51% stake, which will gradually be brought down to 26% over five years. The intermediary would be allowed to invest in the pool it securitises.

Shareholding in, or association with such an intermediary can offer originating entities (banks, and housing finance companies) the ability to shape the standardisation of the mortgage contracts, servicing agreements, legal recourses, etc. Especially, in times of stress in the underlying housing market or within the financing entities, such a market can help transfer assets and risks to hands that are more capable of taking them on. A well-functioning housing and its finance market is a fundamental requirement of an economy.

Author of ‘The Making of India’. Views are personal.

Originally published in The Financial Express.

Guiding markets from crisis to calm

Guiding markets from crisis to calm

03 October 2019

This requires confidence, coordination and capital; resolution can’t be imposed using policy actions.

When commemorating anniversaries, we tend to reserve our special attention for round-number, decadal years. Last year, around this time, the world—and India—remembered and recounted its lessons from the Great Financial Crisis (GFC) that reverberated across the globe in September 2008. Since it is the nature of history to repeat, but not to rhyme, decadal recounting of experiences and learnings serve as good markers, but may not be timed to perfection.

The challenges in the local banking and non-banking finance companies 11 years post the GFC require us to take a relook at the learnings, especially, on the aspects that eventually led to the calming of the markets. India is nowhere near the situation that the world witnessed 11 years ago—however, GFC offers helpful pointers on how to navigate the sometimes choppy waters.

The business of finance is built on the edifice of trust and stability—witness the large, stately, grand, stone buildings of the banks of yore. Whenever a challenge strikes the financial markets, there is a need to calm the markets to restore trust and rebuild stability. The path from crisis to calm requires confidence, coordination and capital.

Confidence

Almost always the trigger for a dislocation in the financial markets is breakdown of trust. Restoring trust requires building confidence. This can happen either (a) by using the ‘last resort’ powers of the regulators and the government, or (b) by limiting the trust deficit to the entities which are in trouble in reality and not just in perception.

The most famous example of engendering confidence in the financial markets remains that of Mario Draghi, the then-president of the European Central Bank (ECB), who in July 2012 said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”. This boosted the confidence of market participants not just in the European Union, but across the world.

On the (yet another!) anniversary of the news of defaults at IL&FS, the financial system in India is being buffeted by news of stress in non-banking finance companies and cooperative banks. Reserve Bank of India has assured depositors—timely and forcefully—that the banking system is safe. Hopefully, no further news-flow disturbs the trust that links the financial markets together. However, if such a situation were to come to pass, the authorities should be willing to build confidence by “doing whatever it takes”. Sometimes an asset quality review can also help restore trust by identifying and isolating problem areas, allowing the market to function normally for the remaining participants.

Coordination

The US government put together the Troubled Assets Relief Program (TARP), a $700 billion fund in October 2008 to purchase toxic assets from financial institutions. The Federal Reserve cut rates dramatically, and also started a quantitative easing programme of an unprecedented magnitude. Meetings of central bank governors, and of G20 leaders and finance ministers helped create forums for global coordination. The intent of such coordination was to restore the trust in the financial sector and avoid the impact of the Wall Street spilling on to the Main Street.

The Indian authorities have taken cognisance of the economic slowdown and have been responding with cuts, both in tax and interest rates. The coordination of the monetary and fiscal authorities in reviving investment via these cuts should yield results. However, the economic slowdown and tax rate cuts could cast a shadow on the fiscal glide path (and a consequent impact on inflation) making the coordination with monetary authorities more difficult. The ministry of finance and RBI could announce a medium-term coordination framework which works in this new environment. Since challenges span a large number of regulated sectors, various regulators like ministry of company affairs, Reserve Bank of India, Real Estate Regulatory Authority, Securities and Exchange Board of India, various investigative agencies, etc may need to coordinate their actions so as not to spook the confidence.

Capital

Warren Buffett invested $5 billion in Goldman Sachs at the peak of the crisis in September 2008. This came soon after many investment banks shut shop, triggering domino effects of unravelling credit links globally.

Any financial dislocation requires capital to come in from ‘strong’ hands to give confidence to the ‘weak’ entities. Speculative activity which bets on survival or demise of an entity can significantly abate, if such an entity is seen to be backed by strong shareholders who have the ability to outlast a speculative phase. Takeover of certain types of financial institutions may be constrained by shareholding restrictions for financial institutions. Regulatory provisions, which allow regulators to create a caveat for concentrated holdings for some time, can offer opportunities for large private equity funds or strategic investors to commit capital to troubled financial institutions, thereby restoring trust.
Resolution

It is important to recognise that ‘resolution’ cannot be imposed using policy actions. Actions can be taken to diffuse challenges and rebuild trust, but resolution requires the varied market participants to find their own equilibrium. The process of finding a new equilibrium can be long-drawn: it may be guided by the 3Cs, but cannot be hurried.

Author of The Making of India – Views are personal.

Originally published in The Financial Express.

Building State capacity to protect citizens

Building State capacity to protect citizens

03 May 2016
The Financial Express

For the citizen to be confident, the state has to first believe that it can enforce the rule of law

In Mumbai (and this may be true in many other cities in India), many traffic signals start blinking the yellow lights after around 10 pm. These traffic signals are not tucked away in the low density residential areas; they are a common sight on key arterial roads and dense junctions. The blinking yellow lights are supposed to signal to the traffic that they are on their own—the drivers and the pedestrians need to look out for their own selves: the state or the law will have been considered to have done its bit by warning them to slow down.

The scenes at many such junctions left to fend for themselves suggest that the state abandoning its responsibility creates a low equilibrium for all its citizens. The traffic slows down, gridlocks emerge which take patience or fights to sort out, loud honking and road rage add a dash of rough music to the brew and pedestrians wonder when they should cross the roads (well, gridlocks do help sometimes!). This is, it is safe to imagine, not the intended outcome from anyone’s perspective.

The state is clearly signalling two things: (1) it does not have the resources to police the junctions at night and (2) since the signals will not be policed, the state does not expect its citizens to follow the rules and hence the state leaves each citizen is on their own. The questions to ask then are whether the state should spend more on increasing its budget on policing or should it create an environment where the citizen find it worth their while to follow the rules of the red and green lights even when the state is not watching.

When questions are couched like we have done above, the warm and fuzzy feeling of the answer of the second question seems to point towards that being the right answer. It is also a matter of common experience that simply throwing more money at problems rarely provides the best solution. So, how does the state go about building its capacity to deliver better equilibrium for its citizens?

Turning on the red and green lights every night just after reading this article would possibly be useless. The implicit assumption of the state that citizens don’t really expect it to come after them if they flout rules would become an explicit fact. The citizens will be further coached into believing that the rule of law does not exist. This is where the ‘frog and boiling water’ scenario creeps in.

The way to build state capacity for policing at night is to demonstrate it during the daytime. The repercussions of breaking the rules should be fast, unflinching and, as far as the system can be made fool-proof, devoid of corruption. Technology, the other catch-all of all solutions after money, should indeed be an important component of ushering in the changes. Creating confidence in state capacity comes from the state’s own belief that it can indeed enforce the rule of law. This has a salubrious effect on the citizenry which needs to start believing again in the state.

Let us turn to another example where the yellow, blinking lights persist: the title to land and property. The state does indeed charge a hefty price for registering property documents. Depending on who you are (gender is an important component) and where you are, the charges can range from 4% to 8% of the transaction value. Indeed, after the GST is implemented, state property taxes will become the largest component of revenues for the states. Taxes and levies under this head brought the states more than R1 trillion in FY15.

For all the money it charges, the state currently stops at merely recording the transaction without giving the buyer the comfort that the seller is genuine. This has, over time, reduced the confidence of the citizenry in the state’s ability to protect it if there is a dispute. It is no surprise then that the citizenry also tries to reduce its outflow for this ‘service’ that the state provides. Cases of registering the property at rates much lower than market rates are pretty common.

Central governments have, for almost a decade now, worked towards making the Land Titling Bill a reality. Land being a state subject, Rajasthan has recently taken the lead in moving partially towards the Torrens system which gives the buyer the comfort that the seller indeed had the rights to the property s/he is selling and the state will stand guarantee to that right. Rajasthan is implementing this law for urban properties and with a waiting period of two years (in case no claims come up).

If over time, across the country, buyers can believe the sellers and not second-guess them and their motives (as they do at every blinking, yellow signal for fellow drivers and pedestrians), the overall economic equilibrium will settle at a significantly higher plane.

Tilotia is the author of The Making of India—Gamechanging Transitions and is an associate director with Kotak Institutional Equities. Views are personal.