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Every year, the government presents its annual budget and there is enormous fuss over it.
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It is a media spectacle and I wonder when some smart person in the finance ministry will
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get the idea of inserting commercial breaks in between the live telecast.
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I can totally imagine the finance minister saying, and now to tell you about how we will
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recapitalize public sector banks, but first a quick commercial break.
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This could be India Super Bowl.
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No, but seriously, it irritates me that the budget is given so much importance by people
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because it reflects how much coercive power the state has over its subjects.
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If the Mybop Indian state did only the things it was supposed to and interfered nowhere
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else, the budget would be insignificant.
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Provide the rule of law and society will see to its own prosperity.
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Whatever prosperity we do achieve is usually in spite of the interfering state rather than
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helped along by the enabling state.
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Anyway, that's the world we live in and the budget does matter because the state has the
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power and capacity to mess so much up.
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It does also have the capacity to make things a lot better, especially when things are already
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so bad because the worse things get, the greater the scope to make things better, I guess.
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In such scraps of pointless hope, do people such as me find the will to go on living?
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So did this budget give me any cause for hope?
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But I still look at the bright side of things.
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More joblessness means more people will have more time to listen to my podcast.
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Welcome to The Scene and the Unseen, our weekly podcast on economics, politics and behavioral
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Please welcome your host, Amit Verma.
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Welcome to The Scene and the Unseen.
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My guests today are the Shahrukh Khan of economics, the infamous Vivek Kaul and the Shyam Benegal
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of economic policy, Ajay Shah.
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I call Ajay that after due thought because Shyam Benegal's excellent artistic and aesthetic
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sense has as little of a reflection in Bollywood as Ajay's fantastic and clear ideas do in
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the world of actual policy making.
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In both spheres, populism dominates.
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I had Ajay on the show a few weeks ago to discuss his masterful book, In Service of
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the Republic, co-written with Vijay Kelkar.
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Every patriotic Indian should read it and indeed every patriotic Indian should listen
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But first, let's take a quick commercial break.
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If you're listening to The Scene and the Unseen, it means you like listening to audio
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and you're thirsty for knowledge.
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That being the case, I'd urge you to check out Storytel, the sponsors of this episode.
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Storytel is an audiobook platform that has a massive range of audiobooks from around
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Their international collection is stellar, but so is the local collection.
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They have a fantastic range of Marathi and Hindi audiobooks.
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What's more, I do a weekly podcast there called The Book Club with Amit Verma in which I talk
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Download that app and listen to my show.
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And as long as Storytel sponsors this show within this commercial itself, I will recommend
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an audiobook that I liked on that platform every week.
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My recommendation for this week is Fascism, a Warning by Madeleine Albright.
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This is a subject that is relevant today and a book you should listen to.
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That's all I'll say about it.
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Fascism by Madeleine Albright on Storytel.
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Download their app or visit Storytel.com.
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Remember to Storytel with a single L, Storytel.com.
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Guys welcome to The Scene and the Unseen.
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So Ajay, tell me a little bit about how your book has been doing in the last few weeks.
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Is it a load off your shoulders in the sense that now all of this knowledge, these ideas
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are actually out there in a packaged form and is there a sense of relief?
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It felt great when the book was finished.
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This is going to sound cliched, but the reception of the book has just been a surprise to me.
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I thought that this was going to be some obscure geeky book with people like Vivek and you
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taking interest in it and just about nobody else.
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In fact, the book seems to have found a life of its own.
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In the first month after the release of the book, Kelkar and I got 60 speaking invitations
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and I just seemed to be going around the world doing conversations, doing podcast episodes
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and so on about the book and it's overwhelming how many people are finding the book to be
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I increasingly see bits of it creeping into the culture, which is the best thing imaginable.
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I was with Junaid Ahmad at a book conversation at the World Bank and he asked me, what's
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your highest dream for this book in five years?
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And I said, the highest dream is that these ideas should become commonplace and nobody
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should even remember they came from us and bits of that are already visible.
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And how have people actually in the business of policy making responded to it?
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I think it's too far from practice.
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I think this is still at the thinking levels.
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That's a very good question.
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And one question no one can ask you Vivek is, do you write?
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Because you have written some 24 pieces since the budget came out three days ago, it feels
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I wrote just five this time and one was actually in Hindi, which was sort of a summary of the
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So, you know, one criticism, not of you, but in general of commentators and pundits that
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I read on Twitter is that after people stop criticizing the government, you know, they'll
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turn to the pundits because all the pundits will say the same old cliched things year
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after year that oh, structural reforms are needed and oh, these are just piecemeal solutions
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And after I read that tweet, I think Sid and made a tweet like that.
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And then I came across one of your pieces which spoke of structural fixes.
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Now, I mean, these are cliches because they're true and it is true that structural fixes
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But just as a writer, how do you get past the, not just the fact that you're writing
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five pieces, how do you not repeat yourself?
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But how do you not stop repeating yourself year after year because you're basically
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this is the same thing, right?
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I don't have a problem with repeating myself because a lot of people, you know, a lot of
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writers have this that if you're repeating yourself, it's not the right thing.
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But my point is, you know, if that's the right thing to say, then that's the right thing
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I mean, if it's a repeat, it's a repeat.
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I mean, how does it matter?
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I mean, see, I have grown up on, you know, masala Hindi movies, they're basically the
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Two boys, one girl, three songs, father doesn't like the boy, boy is poor, but people used
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People watched it over and over again.
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What I'm trying to say is that when I do this, I'm not being mediocre, but that's what it
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One is when you want to say the right things and two is that there is only so much that
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you can say against, you know, that is happening.
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Don't shoot the messenger.
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That's what the truth is.
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Name the truth, not the truth teller, as it were.
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So you know, before we kind of start talking about this specific budget, what it did, and
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frankly, a lot of it is already feels a bit meh and blah and all of that.
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But before we kind of get down to the specifics, Ajay, I wanted to ask you, you've actually
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been an insider in all of this, you've been part of the process, the process of kind of
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making a budget and, you know, getting things out there.
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Give me a little bit of insight onto that, like how do bureaucrats and politicians think
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about economic policy per se?
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I left the Ministry of Finance in 2005.
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I was reasonably aware of how things worked in the 90s as well.
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So let me describe that world and it may or may not tally up with what is done today.
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So the way this used to work was like this, that there used to be something called a budget
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group in the Ministry of Finance, which consisted of the secretaries of the three departments,
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the Department of Economic Affairs, which does economic policy, the Department of Revenue,
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which used to do tax administration, and the Department of Expenditure, which is a bit
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of an accounting operation, which has oversight over the money flows into the departments.
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These three secretaries, along with the chief economic advisor, would sit with the finance
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minister every morning.
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So when I used to be in this, there used to be a budget group meeting every morning, and
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these four civil servants would sit with the finance minister and they would debate every
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Partly, they would debate from scratch, what is it that we would like to do?
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Partly, they would respond to the large number of notes and proposals and ideas and the impulses
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that were coming from outside.
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And day after day, over a two-month period, they would refine the concept of what we want
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to do this year, where we want to go this year.
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And that discussion led to these two critical documents that came out.
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The first was the budget packet and the other is the economic survey.
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In the budget packet, it's partly a financial statement about how we propose to raise revenues
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and how we propose to spend that money.
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But alongside that is part A of the budget speech, which is a bit of a work plan statement.
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So it's a promise that over the next one year, these are all the things that various departments
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of government, all over government, not just the Ministry of Finance, will do.
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This is important for three reasons.
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The first is that the budget speech has a certain legal status as a cabinet resolution.
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So short of being a parliamentary law, it is a document to take seriously.
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Every word matters in an almost legalistic way.
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So it's a commitment device where various departments of government commit themselves
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that I'm going to do this.
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Second, in the same vein, because that budget speech is then backed up, was then backed
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up with a follow-up and a tracking mechanism through the year, that people all over government
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would be held accountable for delivery on the sentences in that budget speech.
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So this tracking mechanism was introduced, I think, at the time when Yashwant Sinha was
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minister, where every sentence in the budget speech is mapped to one responsible person
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somewhere in government.
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And there would be a process of building a spreadsheet through the year that was an MIS
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about the state of completion of what was done and what was not done.
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So again, I think that's why the words in the budget speech matter.
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It's not just a speech.
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It's a legalistic document where every word counts and the words are actions.
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They're not statements of aspiration.
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They're not vacuous phrases.
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They're actually supposed to be almost legal sentences that are actionable and that can
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The third reason why part A of the budget speech matters, and it flows logically in
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the budget process, is that in those years, in the 90s and in the 2000s, the Department
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of Economic Affairs was the engine of economic reform, not just of the Ministry of Finance.
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The Department of Economic Affairs was the engine of economic reform, and it used budget-making
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power to negotiate reforms with other ministries.
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So as an example, the Ministry of Civil Aviation would ask for money to do ABC, and the DEA
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would say, yeah, we'll give you this money, but you've got to privatize the Bombay and
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So this is how deals were made, that surrounding every year's budget process, there would be
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negotiations that are done for reforms in government more broadly, and that required
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that the DEA had to have an economics capability more broadly and be able to negotiate meaningfully
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with every single secretary in government, and then those promises would turn into sentences
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in the part A, where they become legalistic.
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It's not just an informal promise that some department makes, which they can later on
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So these are the three reasons why the budget is pretty important.
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It's a work plan for the year with some legal status behind it, with some negotiation that
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has led up to it, and it's the stuff that will get done at a high priority.
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Of course, other things can also be done, but this is like the minimum work plan of
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the year in terms of what government can do.
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And now let me describe the role of the economic survey.
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The economic survey is a document that's built by the team of economists in the Department
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of Economic Affairs, led by the chief economic advisor.
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It is not the policy statement of the government.
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It's a view of the world of the chief economic advisor and the other economists in the Ministry
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It mattered because the chief economic advisor was a member of that budget group, and the
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chief economic advisor was the intellectual in that group, who was a part of every single
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discussion that, do you really think it's worth privatizing the Bombay and Delhi airport?
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What's your intellectual construct?
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What's your intellectual framework?
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How are we going to think about it?
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The CEA was present in every budget discussion.
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And by the way, in those years, the CEA would draft the budget speech, because the CEA generally
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had the best writing capabilities compared to many of the career civil servants, whose
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written English is often quite poor.
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So the CEA was the intellectual who cast a light of economics into every budget discussion,
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and also personally was the author of the budget speech, the quality of language, the
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coherence of the budget speech.
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You can see that richly, say, in the July 1991 budget speech, or what I experienced
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some of the budget speeches written by Rakesh Mohan, and so on.
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So that was the unique role of the CEA.
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Now that's all the policy work of the CEA, but you and I as private citizens would find
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it interesting to read the economic survey because it gave a window into the intellectual
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framework of the CEA and of the economics team inside the Ministry of Finance.
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Not that they control economic policy, not that they make economic policy, but that they
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had a seat on the table in all the discussions and influenced the worldview and the philosophy
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of the Ministry of Finance, because otherwise the career civil servants tend to not have
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They tend to do more expediency.
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This was the old arrangement, and so that was the significance of the part A of the
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budget speech and the economic survey and the budget process.
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Now, a couple of thoughts kind of strike me here.
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I mean, a couple of questions.
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One is that, which you can answer in a yes or no right away, which is that structurally
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are things more or less the same?
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I think they've changed quite a bit.
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I'm not competent on how things work today.
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And the other question is, even assuming that there is a structure which is similar to this
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with little bits of change here and there, what strikes me is that the smooth functioning
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of this seems to depend on having, say, the right individual with the right impulses in
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For example, you talk about the third aspect of the budget that you pointed out, that it
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became a tool for the Department of Economic Affairs to negotiate reforms with other departments.
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For example, civil aviation will give this budget if you privatize these airports.
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Now, that works both ways.
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For example, if you assume, as in public choice, you'd assume that there's certainly a direction
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towards all ministries being captured by special interests.
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Now, if that is to be the case, and if that holds true of economic affairs as well, and
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you don't have a utopian situation of actually having someone there who is reform-minded
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and thinks about policy the right way, then what you have is really a negotiation between
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And therefore, none of the reforms that we kind of speak out, which are for the larger
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good, ever really happen, because then you're just negotiating transactional stuff.
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So, I want to take you back into history.
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We had a terrible time in the 70s and the 80s in terms of the working of institutions
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in India, and that gave us a balance of payments crisis and an IMF program in 81 and 91.
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And after that, a larger consciousness developed in the Indian government process that there
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is something special and important about the Ministry of Finance, about the Department
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of Economic Affairs, and there was a very self-conscious attempt at building a certain
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kind of capability in the Department of Economic Affairs.
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I remember there was a time when I was in the Department of Economic Affairs where we
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were just playing games, sitting over a chai and arguing about things, and we had the rough
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calculation with paper and pen that if the economists in the Department of Economic Affairs
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stepped out and became a new academic economics department in the country, we would be the
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number one economics department in the country.
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That was the kind of firepower that had accumulated in the DEA in those years.
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So, in similar fashion, I just want to talk about tax policy, where your question shines
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When you have tax policy that is being controlled by the Department of Revenue, then you have
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a real problem because the tax administrators will choose tax policy that is convenient
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And one of the historic achievements of the 91 onwards period is that the primacy in tax
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policy shifted from the Department of Revenue to the Department of Economic Affairs.
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Elsewhere in the world, this is done explicitly, that in places like the UK and the US, there
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is no role for tax administrators in determining tax policy.
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We didn't do that institutionally in India, but de facto, that's what happened in India
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also starting from the 91 reforms, that we got great progress in tax policy.
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You may recall, we started out with a peak marginal income tax rate like 98%, we had
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a wealth tax, we had all sorts of craziness going on in tax policy, when tax policy was
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dominated by the tax administrators.
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And from 91 onwards, the primacy of tax policy moved out to DEA.
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And somewhere in the last 15 years, tax policy went back to the Department of Revenue.
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And that's part of a lot of the troubles that we've been having in terms of the conduct
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of how India thinks about taxes.
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So this is an example of the role of an economics team in DEA to think about taxes as opposed
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to letting it be controlled by the tax administrators.
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And would it be correct to say, like, I tend to be skeptical about the drift of government
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towards being captured, and would it be correct to say that, okay, 91, we were lucky that
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And all the reforms that happened happened not just in terms of policy, but in terms
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of actually getting people in department who had a strategic vision, who looked at the
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bigger picture and who got this stuff through.
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But what appears to have happened since then, and even though you haven't been in the ministry,
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you've been close enough to comment on it.
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And what appears to have happened is a drift back to the old kind of system where your
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chief economic advisor is not necessarily any more an academic who is the big alpha
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in the room, respected by everyone, a person with a vision.
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But perhaps, like in this case, frankly, I must say, it's a political crony who is there
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because he wrote columns in support of demonetization, which not many respectable economists would
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And I won't ask you to comment on that.
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And again, like you pointed out, tax policy going back into the hands of tax administration.
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So two questions, is this sort of some kind of cyclical thing which can be reversed or
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is it necessarily, as I would skeptically say, that the tendency of government to be
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captured, power and money, the interplay?
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So I want to, again, locate this in our historical experience.
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As Kelkar emphasizes, at the time of the 1991 reforms, there was actually remarkable capabilities
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There were people in many parts of government, there was a very strong academic community
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which had understood that the old Indian socialism was broken, which had thought hard about the
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kinds of changes that we might like to see.
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And then in that context, when the crisis came, there was a capability in doing something
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So as you know, in the book, we actually belabor this point that don't overstate the extent
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to which a crisis will give us the requisite changes.
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Pakistan has had 14 IMF programs and never bootstrapped itself out of a low level equilibrium.
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So I would emphasize some very high minded people who took away the lessons of the 81
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and the 91 IMF programs and the balance of payments crisis, who thought about how to
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do things differently and who took one key lesson away that you need to build an intellectual
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and a professional capability in the Ministry of Finance, in the Department of Economic
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For example, there was a break in convention when Monte Carlo Walia became the finance
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secretary, who was the first amongst equals, even though he was not the most senior of
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But that's the right way to do it.
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It is only the secretary, Department of Economic Affairs, who has the full picture who should
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be the finance secretary.
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And these are not things that can be easily messed with and you are able to then maintain
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So I think that we need to introspect a lot more about these institutional foundations
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of good economic policy.
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What I wanted to ask you Ajay is that, you know, we have this funny thing, you have one
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guy who's finance secretary one day and then becomes tourism secretary the next day.
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So how do you get, you know, we live in the era of specialization.
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So how, is this some sort of a joke or?
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Well, the best civil servants are good managers.
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They will reply that is Steve Jobs an engineer?
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Is Tim Cook an engineer?
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So I think that the truth is halfway that you do need leadership skills.
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Leadership is a very human capability.
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It's about a certain kind of charisma.
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It's about handling people.
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It's about pulling technical teams together of geeks and being able to get work out of
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It's about communications capabilities.
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It's about good human capabilities of being well liked by people below and above you.
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It's also about understanding, right?
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So you do need a body of knowledge and it does need a certain kind of capability.
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So I'm not one of those who will argue that you always need to be a professional economist
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to be a good secretary DEA.
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But I will also say that you do need what in government is called 10, 20 years in finance.
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So you know, look, an ideal person will have spent five, 10 years in a finance department
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in Tamil Nadu, will have spent some time at the IMF, will have grown up the hierarchy
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inside the Ministry of Finance, will have gone a little bit distance away, Economic
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Advisory Council to the Prime Minister, and then developed 10, 20, 30 years of job relevant
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experience, which is the ideal preparation to do DEA.
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And that used to be the way things were done in the past and it's less so today.
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I mean, to add a little bit to the point that Vivek was making, the fundamental difference,
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it seems to me between say Steve Jobs and a bureaucrat is the incentives at play.
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That you only rise in the private sector if you perform.
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You know, we think of Steve Jobs because of the survivorship bias.
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He is a guy who happened to perform at that insane level and got up there and it is irrelevant
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what he was trained in.
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He was very good at what he did and there was a way of measuring that, which is something
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I mean, to be fair, Steve Jobs had the genius for asking a question, let's build something
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like an iPod or an iPad, but he didn't really know anything about how to do it.
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That's a distinction I want to make.
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But I'm saying that genius gets rewarded in the free market, in government, basically
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where you rank in the IAS exam, the UPSC exam, which you give when you're 20, 21 will determine
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promotions for the rest of your career.
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So you know, if you were going to judge, say, Steve Jobs on what he was doing at 21, you
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But I think Ajay answered my question.
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I mean, what I was basically trying to say is that, I mean, I was also not even for a
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moment suggesting that the head of DEA should be an economist, but there has to be some
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experience along the way, but you know, so I find it very funny that...
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So Arvind Mayaram, excellent example was the finance secretary and then they made him the
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Now, tourism in itself is a very, very specialized area, I mean, so is finance.
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So I find that a little, you know, difficult to handle.
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I mean, the same thing happened with Subhash Chandragarh, you know, he was finance secretary
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and then he was made power secretary, power in, you know, the kind of regulations and
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everything that are there in India, it's a minefield in itself.
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So I think on the way in, on the people who rise into the DEA, some of the most important
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stints that they do are at a much younger level.
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When they are a director level officer, when they're a joint secretary, if they've done
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time inside the DEA, that really helps.
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So DEA is actually the ground in which we grow the future leadership carder for economic
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policy or again, that is the way things were done many, many years ago.
#
But I mean, what role do political incentives play?
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For example, in the last episode, you did point out that it is in one sense to the interest
#
of a party to actually, you know, have a shadow cabinet and have competent people running
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And when they come to government, you know, start implementing that while you have your
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five year term ahead of you, which seems to make sense.
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You know, if all that was there in politics was you come to power, you govern well, and
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on the basis of the governance, you get elected again.
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But that's not exactly how the chain is.
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For example, if you look at the current party in power, you don't have that situation where
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they seem to value that kind of governance and building that kind of competence.
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I mean, if you, you know, they started with a bunch of pretty remarkable economists in
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their team, so to say, with Raghuram Rajan and Subramaniam and all of that, and they
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And you know, even those who have remained, I think have to some extent debased themselves
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by supporting things like demonetization and defending the monstrosity that GST has become
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is the politics in part responsible for the degradation of the process?
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Like you've kind of described, I mean, the process has degraded, you would accept.
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So Vivek, if I may, again, I think I'm halfway to again, make an analogy with corporations.
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In Hindustan Lever, you will want a phenomenal capability in branding and in marketing and
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But all the branding and the marketing and the distribution is not a substitute for
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actually the R&D that develops good products and the manufacturing and the supply chain
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management that delivers the products all over the country.
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So I think it's not either or, it's both.
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Now my opinion is that the politicians of that period took away a lesson from the balance
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of payments crisis of 81 and of 91 saying that this is too costly for us.
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So let's build an intellectual capability in economic policy.
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And then we'll of course go on and do our politics.
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So all of us know the history of that period.
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It's not as if post 91 politics was characterized by consistent greatness.
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They were not paragons of excellence.
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It was a practical and logical thing to do.
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So I think that the Indian political system has to ask itself, what are the costs and
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benefits of greater intellectual capacity in the economic policy process?
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We have seen various kinds of experiments of doing it more and doing it less and let
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history judge what is the most useful thing to do and whether there is a causal connection
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between the kind of Department of Economic Affairs that you build and the kind of long
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term growth outcomes that you get.
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The links are not there in the short term.
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In the short term, it will always appear that there are no consequences to diminishing the
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institutional capacity of the DEA and of the other economic policy institutional apparatus.
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But is there a link in the medium term?
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Is there a link in the long term?
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I believe the answer is yes.
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And it is for the people in politics to debate whether those kinds of time horizons and those
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considerations of performance are salient when thinking about their own optimization.
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No, that's fair enough.
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And that's again a problem.
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Again, I won't go over that ground again.
#
We discussed it in the episode we did where the issue is that a politician always has
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a very short time horizon in front of him.
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The next election is not even five years away, it's all the time because state elections
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keep happening all the time.
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And if you are asked to build capacity or do things that will pay off in the extreme
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long term, what are the sort of incentives there?
#
But leaving that aside, Vivek, if I may turn to you, one of Ajay's colleagues at NIPF,
#
former colleagues, Suyash Rai, who is now at Carnegie India, wrote this piece where
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he said that this budget is more tactics and strategy.
#
Do you think that that is a case that there is the absence of somebody sitting in making
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Because at one level, you could say that a lot of it is piecemeal announcements, yeh
#
karenge, wo karenge, and possibly the result of sort of different silos within the government
#
demanding this or demanding that.
#
And there's no overall broader vision.
#
Is that a sense you're giving?
#
I haven't read Suyash's piece, so I don't know.
#
But what I can, I mean, I'll give you an example here.
#
So in this year's economic survey and also in the speech, in finance minister's speech,
#
was a mention of the fact that we need to become a part of global supply chains, okay?
#
So exports over the last, let's say, 20 years have happened if you are a part of global
#
I mean, like take the example of China, right?
#
In fact, the best example is that of the iPhone.
#
So everything that goes into the iPhone is made in different parts of the world and then
#
it gets assembled in China, right?
#
So in that sense, China is a part of a global value chain.
#
Now, it may obviously be that assembling is probably the lowest part of the value chain,
#
but it helps because it is a labor-intensive industry, right?
#
Years later, we have started to talk about it.
#
Now, at the same time, there has been a rise in protectionism.
#
In fact, Arun Jaitley in the last budget speech that he made said very, very clearly that
#
we are going against what has been policy for the last 20, 25 years.
#
So now the moment you start going towards protectionism, you're obviously allowing
#
the local guy not to compete.
#
And if you can't compete, how do you become a part of the global supply chain?
#
So there is an inherent contradiction.
#
At one part, you're talking about the fact that we need to export more, become a part
#
of a global supply chain and so on and so forth.
#
And on the other part, you're increasing custom duties on products.
#
So something as simple, I was talking to some random guy and he was telling me about something
#
as simple as porcelain plates, right?
#
Now a lot of hotels, they import it from China simply because we don't make those plates
#
We don't make plates which are good enough in India.
#
So something like a big hotel would require a plate which can be loaded onto a dishwasher.
#
So that kind of product is not available in India.
#
Now the moment you increase the customs duty on that, you're essentially making his life
#
I find it very difficult when people say, hey, Chinese product.
#
But the point is at the end of the day, no one is forcing an average Indian to buy a
#
Chinese product, right?
#
We buy Chinese products knowingly, if I mean, a lot of people buy unknowingly as well.
#
But if you're buying a Chinese product knowingly, you're doing it because you feel that the
#
product has more value for money.
#
So the moment, you know, you start talking about protectionism, you're essentially going
#
against the average consumer.
#
And you know, I mean, this is something you and I have discussed over and over again that
#
when you sort of increase protectionism, the scene effect is that someone benefits.
#
But there are a whole lot of unseen effects as well.
#
Well, let's say, you know, the Chinese mobile phone companies operating in India, there
#
are a lot of custom duties are put and then Chinese mobile phones become expensive.
#
And then people start buying mobile phones made in India.
#
So automatically that mobile phone being made in India will be expensive.
#
Then what is the Chinese mobile phone?
#
So everyone has a sort of a consumption basket, right?
#
I mean, we will not suddenly start to make more money.
#
So if you're spending more money on a particular product, we'll obviously cut it down on something
#
So it may benefit a particular sector and a particular product, but it hurts the overall
#
In fact, before I come to Ajay, I'll kind of sum up with the two broad unseen effects
#
of protectionism seem to be one, of course, is that if I am paying because of tariffs
#
on foreign products, let's say a foreign Chinese widget was available for 20 rupees.
#
I instead, you know, there's a tariff on that.
#
So I have to buy the Indian product for 25, the unseen effect is a five bucks, which I
#
don't have to spend on something else, which would otherwise have gone into the economy
#
and generated jobs and generated productivity.
#
And the second unseen effect is also that the Indian firms aren't being forced to compete.
#
And therefore, like, you know, if those tariffs were not there, the Indian firms would also
#
have to lift their game to be able to provide enough value for money to sell at 20 or whatever
#
And their standard, their quality would go up and the good guys would survive.
#
And that would, in fact, then lift them to do better in the exports market.
#
And I just had one point.
#
So you know, when I was growing up as a kid during Holi, the water pistols that used to
#
be available and if you compare those water pistols with the kind of Chinese made water
#
pistols that come, I mean, the difference is huge that the product available now is
#
so much better than the rubbish that used to be sold back then.
#
So ultimately, the benefit is for the consumer.
#
Obviously, the producer of those, you know, the water pistol, the Pichkari, has lost out
#
because he couldn't compete.
#
I'm utterly amazed at your recent scrutiny of water pistols.
#
It seems to be the case.
#
Why are you examining water pistols?
#
I'm just telling you something I remember.
#
When I first went to America, this was one of the things that struck me.
#
The water guns were so great.
#
I loved those water guns.
#
Today, those lovely water guns are ubiquitous in India.
#
There's no fuss anymore.
#
Whereas in the olden days, the water guns in India were just bad.
#
To come back to the strategy versus tactics kind of thing, you know, you've written recently
#
that and I think it's in your book also, I don't remember if it's in your book, but you've
#
written about it recently, how in the 2000s, Vijay Kelkar and Rakesh Mohan rallied the
#
Ministry of Finance around the slogan, every time we cut tariffs, our exports go up, stop
#
quote, right, which is one of the unseen effects that and which is very counterintuitive to
#
people that if you cut tariffs, you will have imports coming in.
#
Why should exports go up?
#
But they force your local guys to be competitive and so on and so forth.
#
And a lot of that thinking had come because like you pointed out over the decades from
#
the 80s onwards, that intellectual capacity had built up and you actually had people like
#
that in positions of power.
#
And a lot of those insights are counterintuitive.
#
So you do need people with specific learning and insights.
#
You can't, you know, just sort of and today it seems that we are, you know, a lot of those
#
lessons have sort of been reversed in the sort of a lot of measures that these guys
#
carry out seem populist and they're intuitive and they seem to make sense.
#
But if you understand economics, you know that they have the opposite effect.
#
Similarly, I want to call out Arvind Veermani, who used to have a missionary zeal around
#
And it seems a little counterintuitive, but it's worth recounting.
#
He used to emphasize how important it is that if you're going to have a customs tariff,
#
just have a single uniform rate.
#
Don't have the slightest variation in rates, okay, because there are huge effective protection
#
rates that can come about from very modest differences in duties.
#
Like if you have a 10% duty on crude oil and a 20% duty on petroleum products, it works
#
out that you're actually giving a gigantic effective protection to refineries and so
#
I think many of those people used to appear semi-unhinged when they went around selling
#
the larger community on each of these propositions.
#
And I think that's the kind of passion that it takes.
#
It takes that certain kind of passion to just get fixated by an idea and to talk about it,
#
to woo people, to persuade people.
#
And over some years, the giant processes of public policy start moving in that direction
#
and we started getting some unification of rates and the reduction of rate dispersion
#
came into the policy agenda.
#
This stuff is not easy and it takes a mixture of deep intellectual insights and a certain
#
selfless willingness to not earn political capital in all transactions.
#
The ability to sell economics is not easy, so you need to have that deep understanding
#
so that you can explain things in...
#
This is why we call you the Shah Rukh Khan of economics.
#
So, you know, I mean, there are essentially sort of two kinds of things that, you know,
#
we discussed before the show that we'll talk about on the show.
#
One is a meta level of thinking about the budget and so on and so forth, the strategy
#
And the other is sort of the level of tactics, you know, and Vivek has written more about
#
the latter recently in the around 43 pieces he's written since the budget came out.
#
And you, Ajay, have written, you know, an excellent piece in Business Standard which
#
will be linked from the show notes though, you know, there's a paywall, but we'll link
#
it anyway for, you know, and encourage people to subscribe.
#
And I'll quote a line from that and ask you to elaborate on that, which is you basically
#
said, quote, the budget speech has done well to avoid the calls for a large fiscal expansion
#
and propping up GDP growth, turning around economic conditions requires greater strategic
#
thinking about the relationship between the state and the individual and addressing the
#
unease of private persons that has manifested itself in private investment.
#
Which goes a little bit against, you know, a lot of what the commentary art has been
#
saying before the budget is that we need fiscal expansion, that we need to somehow boost consumption
#
And you said that, no, our problem is more fundamental.
#
So can you elaborate on that?
#
So I'm going to hand wave around some magnitudes.
#
These are all complicated estimates and I'm happy to waste a half day on estimation.
#
But right now, please take my word for it on certain broad numbers.
#
My podcast often lasts a half day, but nevermind.
#
At its peak in about 2007-8, private corporate gross fixed capital formation, which is buzzwords
#
for investment, was about 16% of GDP.
#
And there's been a decline of about 10 percentage points of GDP.
#
So the first big ballpark figure to keep in mind is that the decline in private corporate
#
investment works out to about 10% of GDP.
#
10% of GDP is a gigantic number, is a very, very large number.
#
So you could say, we've got a demand shortfall, let's go overcome that.
#
So in some sense, you'd need to do 10% of GDP more by way of government spending as
#
compared to where we were in 2007-8.
#
Now is that even feasible?
#
Do we have that kind of fiscal capacity?
#
Do we have that fiscal headroom?
#
The next ballpark number is that the true state of the union government's fiscal deficit
#
And under any reasonable conduct of fiscal policy institutions, it is unreasonable to
#
think of anything more than 1% or at most 2% of a move in a year.
#
So note that the fiscal stimulus, many people are a little confused on this.
#
The fiscal stimulus, when you go from a 6% deficit to an 8% deficit, is 2%.
#
It's not like you are adding 8% to demand when you go from 6% to 8%.
#
You're adding 2% to demand when you go from 6% to 8%.
#
So it seems to me that these magnitudes are far apart.
#
And in fact, I also worry that we will be in a difficult fiscal state if we actually
#
go from a 6% deficit to an 8% deficit.
#
So I was pleased that the budget does not do such a thing.
#
I think that they've broadly retained the status quo of perhaps being about 6%.
#
I don't yet know a good analysis of this year's numbers, but perhaps it will be about 6%.
#
It seems to be something similar to what was done last year.
#
And then that takes you to the problem that what is this demand shortfall in the economy
#
and how could you change something?
#
And I'd say go to the root cause.
#
The root cause is that private persons have pulled back from investing.
#
We've gone from 16% to 6%.
#
We've got to go into the heads of those private people and wonder why.
#
So what has changed the optimism, the confidence, the trust of private persons in building business
#
is in India and investing in India and committing financial capital in India.
#
And that takes you to the relationship between the state and the citizenry that do we have
#
the rule of law environment?
#
Do we have a government which can be trusted?
#
Is there too much business model risk because of a government that interferes without warning
#
in the working of my business?
#
Is there too much legal and regulatory risk?
#
When you have CBI, SEBI, income tax, SFIO, ED, dot, dot, dot, prowling at your door.
#
These are the kinds of questions to ask.
#
As you know, Kelkar and I have written a book on these themes of doing a first principles
#
understanding of what is appropriate relationship between the government and the resident and
#
what is going wrong in India about that relationship and how we need to change that.
#
Yeah, and what also strikes me Ajay, when you speak about private people feeling confidence
#
in the rule of law and in the structure of the state and so on.
#
And it feels to me that's also affected because of, you know, I think since 2011 and certainly
#
more recently, what people call tax terrorism has just gone up massively.
#
And that's been exacerbated by the pressure on the government to increase tax revenues
#
because tax revenues every year, you know, simply don't meet what the expectations of
#
And that relationship just gets worse and worse.
#
And, you know, another very interesting stat, which I pointed out in your book is the massive
#
flight of millionaires over the last few years from the country and, you know, which is indicative
#
You can't just say, oh, a few elite richie riches are leaving the country, let it be.
#
But they are leaving for a reason.
#
And that's where the job creation and the entrepreneurship and the drive comes from.
#
And you know, that's something that we should worry about.
#
And you know, is there any cognizance of all of this?
#
How do you build confidence in people?
#
Well, so this is the frontiers of the Indian economic policy debate.
#
As you said, many people are thinking around small practical things like let's raise the
#
deficit a bit or let's raise some customs duties a bit and let's solve the problem of
#
It's no longer a problem that can be addressed in those small ways.
#
I think it requires going back to the foundation.
#
In the firm data, there is a very interesting story about smaller problems versus larger
#
In 2013, 14, 14, 15, 15, 16, you see what is called a normal credit profile that the
#
firms with high credit risk have pulled back on investment, but the firms with low credit
#
risk continue to invest significantly.
#
But from 2017, 18 onwards, you see weak investment by all kinds of firms, whether firm is credit
#
stressed or not credit stressed, investment has pulled back.
#
So why did it change for the latter category?
#
So I think in that early period, we were in the early stages of the balance sheet crisis
#
and there was still optimism about how the overall Indian growth story would work out.
#
But some firms were credit constrained, the lenders were unwilling to commit to those
#
firms while other firms were able to continue to invest.
#
So that is where we got what I would call a normal credit profile, that there was good
#
investment by the healthy firms and there was a crimping of investment by the firms
#
But in the more recent years, starting from, I seem to remember 2016, 17 or 2017, 18, the
#
So in all parts of the firm universe, you tend to see weak investment and it's no longer
#
become very credit sensitive.
#
So that is saying something else.
#
Even firms who have operating cash are reluctant to invest.
#
And so that's why you've got to go deeper.
#
It's not just a matter of rescuing the financial system.
#
It was at that time, in 2013-14, in 2014-15, the highest priority for policymakers should
#
have been to undertake the financial reforms and fix the foundations of the financial system.
#
And that opportunity was lost.
#
Today, of course, we should fix the financial system.
#
You should make the financial system work better.
#
But today it's become a bigger and different problem compared to where we were in 2013-14,
#
So I'll ask you to elaborate on that a little bit and digress a bit from the budget itself
#
and the budget making process itself, where you or Josh Feldman, I don't know which of
#
you and I met you once at one of our weekend reading groups, pointed out, use the analogy
#
of how our credit crisis is like a cancer in our economy.
#
It's a root cause which is making a lot of the rest of the economy very, very sick.
#
Is there an understanding of this within the economic policymakers today?
#
Is there anything in what they are doing, including in this budget, that sort of addresses
#
that or does that cancer continue to fester?
#
And what exactly is that cancer?
#
The cancer lies in the fact that perhaps half of the banking and NBFC balance sheet is distressed.
#
Perhaps there are bad assets on the LIC balance sheet.
#
And LIC is the biggest financial firm in the country today.
#
And the managers inside these firms know that their firms are not in good shape.
#
And that leads to risk aversion.
#
So that's the heart and soul of the cancer.
#
That cancer was, of course, created and aided and enabled by the financial regulators who
#
created rules that made it possible for the financial firms to not recognize these problems.
#
So the regulators supported the firms in kicking the can down the road, hoping that there will
#
be some thing that will happen in the future whereby the problem will magically go away.
#
And of course, these things don't go away by themselves.
#
So I feel we're still stuck in a difficult and challenging balance sheet.
#
But I will emphasize that in the 2016-17 and 2017-18 data, it's surprising how you do not
#
find a clear linkage between firm credit stress and firm investment.
#
So something bigger is our foot.
#
In fact, this is something that Mahesh Vyas has also been writing about over and over
#
So I would just like to add about the regulator point.
#
And it's very interesting.
#
So I've just finished writing this book on the banking crisis.
#
And from whatever I sort of researched, I think the thinking was that as we go along,
#
the economy will recover, the loan book will grow, and the bad loans will become a very
#
small proportion of the overall loans.
#
Now there are fundamental mistakes here, obviously.
#
One was the assumption that the economy will go back to growing at 9% and all, which did
#
The second mistake that I guess was the fact that they hoped that they would be able to
#
control the total amount of bad loans, which also did not happen.
#
I mean, they kept rising till 2018-19.
#
Now they are falling because they're being written off.
#
It's not like they're able to reclaim the bad loans actually.
#
So yeah, and there are some figures I can't kind of get around, like in one of your pieces
#
you mentioned that the amount it's allocated towards recapitalizing is 2 lakh rupees.
#
But then see what also happens is, so this is very funny, okay.
#
And this happened in the interim budget that Piyush Goyal presented last year.
#
The allocation towards recapitalizing public sector banks was rupees 2 lakh.
#
And this year also it's rupees 2 lakh.
#
Now the thing here is that obviously because we're working through recapitalization bonds,
#
so this is in a way budget neutral.
#
So essentially what happens is that the government issues special bonds, the banks buy these
#
bonds and then the government takes that money to reinvest in the bank itself.
#
So to that extent, it does not add to the fiscal deficit immediately, though over a
#
period of time it does because the government has to pay interest on these bonds.
#
And finally, you know, they need to repay it as well.
#
So obviously the public debt goes up.
#
But the point is that when public sector banks have bad loans worth 7,80,000 crore, there
#
has to be, you know, some sort of investment that has to be made into them.
#
And I guess the assumption this time around is that we've sort of, the banks have recovered
#
or probably they want to sell these banks, which is not very clear.
#
I mean, the only thing that she said very clearly was the government will sell the remaining
#
stake in IDBI to investors.
#
This was what was said very, very clearly.
#
Should public sector banks be recapitalized, Ajay, like how does one deal with this problem?
#
Because a lot of it to me seems like throwing good money after bad.
#
I remember when Yashwant Sinha was planning that we should reduce the government ownership
#
in public sector banks from 51% to 33%.
#
He got quite some pushback, not from the left of center parties, but from within the BJP.
#
It was BJP MPs who were uncomfortable about the idea.
#
I think we need a lot more high quality discourse in the country around the meaning of public
#
More people need to worry that every one rupee of government expenditure comes at an opportunity
#
cost of three rupees of GDP.
#
More people need to worry that for every 10,000 crore rupees, I can build 1,000 crore of express
#
Is that a better use of money than recapitalizing banks?
#
I feel we need to think more about what we do with public money.
#
If we could be more frugal in our use of public money, I feel the best of all worlds is to
#
privatize the public sector banks.
#
Maybe a government might like to hang on to an SBI for some government type functions,
#
but for the others, it seems feasible that each of them should be put through a big good
#
bank, bad bank operation, and then the good bank is sold to a private person and the bad
#
bank is liquidated by the government as was done with UTI.
#
I think that would be the best of all worlds.
#
I would say in passing that if that is your long range strategy, then it was not very
#
useful to do these mergers of PSU banks because it's much better to sell smaller banks.
#
The better of selling a bank with a 50,000 crore balance sheet or a 1,000,000 crore balance
#
sheet rather than trying to deal with 2,000,000 crore, 3,000,000 crore of balance sheets.
#
I agree with you completely.
#
This is where a little bit of strategic thinking would have been useful, that what's our long
#
Are we going to have public sector banks forever?
#
Are we going to privatize public sector banks if our long game was that we're going to privatize
#
public sector banks and we should have never done these mergers?
#
I mean, I'm not saying do you agree with the long game or not, but do these people have
#
any long game thinking at all or is it sort of all very ad hoc?
#
My understanding is that the current mainstream view of the long game is that there is no
#
problem and that incremental fixes will suffice, that public sector banks did badly because
#
of a few corrupt individuals and industrialists, and we will appoint better people and the
#
This is the mainstream view, and I happen to disagree, but this is my reading of where
#
And it's a classic fallacy.
#
Yeah, I mean, this is totally true and I'll sort of admit something here, five, six years
#
back I was also of the view that all these cronies have sort of taken our money and all
#
that from public sector banks, but having sort of written a longish document on it now
#
and researched the topic a little better, I think obviously there are crony capitalists
#
I mean, you can't deny that.
#
But that was not the only reason.
#
I mean, there were a lot of businesses just simply went overboard borrowing as well.
#
Having said that, this is where it gets very interesting, a lot of people and this includes
#
our policymakers, and I'll give an example here, believe, continue to believe that public
#
sector banks are the ones driving banking in this country, which is absolute rubbish.
#
So if you look at this year's economic survey, the economic survey quotes that public sector
#
banks have 70% market share in Indian banking, which is rubbish of the highest order, because
#
if you look at RBI data as of September 30th, public sector banks have 58% of the credit
#
and 62% of the deposits.
#
And this has been falling from the last five years, six years.
#
The deposits had peaked at around 75% and the credit had peaked at around 72-71%.
#
From that 72%, it's already fallen to 58%.
#
This essentially means that even though the government doesn't want to privatize these
#
banks, the banking sector is getting privatized on its own.
#
And a lot of these private banks are now attacking public sector banks directly.
#
You know, they go around, they go to depositors' homes, get their deposits transferred.
#
So all that is happening.
#
I mean, imagine the economic survey making a mistake as drastic as this, wherein the
#
share has fallen from 72 to 58% and you are still stuck at 70%.
#
I mean, 58% can be rounded off to 60%, it can't be rounded off to 70%.
#
So in their heads, they're still, you know, but then that's not true.
#
And you know, what is also happening is that the younger Indian does not want to deal with
#
I mean, when was the last time you heard a 30-year-old or a 25-year-old actually went
#
I mean, they like to do their banking online and the online banking systems or private
#
banks are much, much better than some of these public sector banks.
#
Vivek, I agree with you and I make an analogy with MTNL and BSNL.
#
You privatized VSNL, great.
#
The government did not privatize MTNL and BSNL, but by and large, it's irrelevant because
#
the business of telecom is turned into a private sector character and the resources are increasingly
#
controlled by private persons.
#
And you know, we are today surrounded by firms like Jio and Airtel and ACT and so on.
#
And these are the telecom firms of India today.
#
So in similar fashion, that is the transformation happening in banking.
#
Or Air India for that matter.
#
But I do want to call an alarm on the distinction between airlines and telecom versus banking.
#
That in telecom or in airlines, we don't really mourn the transformation away from Air India
#
in favor of, you know, I was about to say Jet Airways, but in the case of banking,
#
there is a fundamental problem, which is that there is an old saying amongst economists.
#
The one thing worse than a public sector bank is a badly regulated private sector bank.
#
So when the regulatory capacity is weak, private bankers will be rapacious and extract the
#
maximal personal benefits that they can out of every glitch in the regulations.
#
So if one could strategize this correctly, the right sequencing in which to do this is
#
to first undertake the required RBI reforms, to build capability at RBI.
#
Because ultimately RBI was the one on the watch as the entire banking difficulty unfolded
#
over the last 30 years.
#
And so we do need to recognize that there were failures of concepts and principles and
#
intellectual frameworks and regulations and of course the implementation of those regulations.
#
And we need to fix that before we confront large complex private banks who will be hard
#
driving in achieving million dollar bonuses for individuals inside those banks.
#
In fact, talking about RBI and bad loans.
#
So after Governor Subbarao retired, he wrote this lovely little book on central banking.
#
And the interesting thing is that the term NPAs or bad loans aren't even used once in
#
And he was the governor from 2008 to 2013.
#
And most of the crisis unfolded between I would say 2010, 11, 12 and 13.
#
So that tells you as to where the attention, the focus of RBI was during those years.
#
I mean, I can understand 2008, 2009 given the financial crisis and everything else.
#
But you know, for the remaining four years, when the crisis unfolded, there had to be
#
something that would have happened at the bank.
#
So before we go in for a commercial break, three quick responses to what you guys just
#
And I think it's perhaps a subject for another episode on regulation and why banking is so
#
One tendency to view markets is that I think competition is the best regulation, that you
#
need the state to provide a firm rule of law.
#
But beyond that, any regulation will tend or even the custom of being able to regulate
#
will support some interest group that the benefit of the other competition is always
#
So if you can ensure easy entry and competition that takes care of a lot of those problems
#
and I know you'll have, you know, certain caveats to that and we can discuss that some
#
Secondly, I like the way Vivek, that you characterized the privatization of banking, where you were
#
saying that even if public sector banks aren't being privatized, banking itself is.
#
And the analogy you drew of, you know, telecom and airlines is to me very accurate.
#
That's what I always say that if, you know, I remember how they were government monopolies
#
in the 80s and you had to wait five years to get a phone and blah, blah, blah.
#
I'll give you an example here.
#
I still remember 1987, 88, my father, who was a public sector employee, we took an LTC
#
and it was the first time I think he was entitled for air travel.
#
And we went to Srinagar, which was hometown and we came back.
#
The total money we paid in Indian Airlines back then from what he told me.
#
And I remember it was 75,000 rupees back in the mid 80s.
#
I mean, obviously he didn't pay it.
#
He didn't pay any debt, but imagine, I mean, even now it would probably be the same amount
#
And if you just allow private participation in a lot of these areas, you'll soon find
#
that government participation will become redundant and the government should.
#
And before we go into a break, the final point is, you know, I just wanted to point out at
#
the fallacy that you pointed out in this case that people think that, oh, if we just put
#
the right individuals in charge, it's okay.
#
Things will become better.
#
It's a question of having good people running these things.
#
Here's a classic fallacy, which has ailed not just economic policy thinking, but also
#
politics in India, where what really matters is you have institutions, you have good rules
#
of the game in terms of the constitution and so on, which have good restraints on power.
#
And what I keep saying is that you should have a system whereby even if the most murderous
#
sociopath rises to power, he can't do much damage because of the way the rules of the
#
And we think too little in terms of institutions and too much in terms of individuals on which
#
note we can go into a break.
#
I just wanted to take one of Ajay's points forward.
#
So you know, on this thing of privatizing public sector banks, I don't get is, I mean,
#
I can understand you want to hang on to an SBI or a Bank of Baroda or a Punjab National
#
What I don't get is why do you want to hang on to an Indian overseas bank, a UKO bank,
#
a United Bank, a Central Bank, a Bank of Maharashtra for that matter, a Punjab and Sindh Bank.
#
So if you look at their, you know, the books of these banks, most of them are like riddled
#
But even that apart, the total amount of credit or loans that they have given out are minuscule
#
in proportion to the overall size of banking in India.
#
So forget, I mean, we can sell them if there are buyers, but if there are no buyers, you
#
can simply shut them down.
#
I mean, even that is a solution because that's going to sort of, you know, benefit the economy
#
So it's just about, so it's just, you know, at the end of the day, it's nuisance value
#
because there are people working there and a few lakh, I mean, the interesting thing
#
is there's a data point in this Times Economic Survey, which gives you that the total number
#
of employees in public sector banks in India are less than nine lakh.
#
So if you take these smaller banks, the total number of employees would at best be one and
#
a half, one, one and a half.
#
So for one, one and a half lakh people in a population of 130 crore, why do you have
#
to take a bad solution?
#
I mean, take the good solution.
#
And what you see is a benefit of the status quo on these nine lakh people, which is a
#
concentrated benefit, but not the diffuse costs on all the rest of us.
#
Because the rest of us don't realize.
#
The rest of us don't realize because we all need a break.
#
The citizens of this nation need a break.
#
So we'll take a quick commercial break and then all the citizens of the nation can continue
#
listening to the scene and the unseen.
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Welcome back to the Scene and the Unseen.
#
I'm chatting with Ajay Shah and Vivek called Shah Rukh Khan and Shyam Manigal about cinema
#
Vivek is looking most upset at that.
#
Why should you be upset?
#
So let's kind of sort of get back to the budget and, you know, to carry on from what I was
#
sort of the note I ended on just before the break is that, and a point that you have also
#
made very eloquently many times, Ajay, that, you know, the problem is not that we no longer
#
have good individuals who are sort of making the right decisions.
#
You know, there are individuals of the 90s and the early 2000s who are now semi-legends
#
within the community like Mr. Kilkar, Rakesh Mohan and so on, and they're not there.
#
But that's not the problem as far as I can see it.
#
The way it seems to me is that the problem rather is that somewhere the incentives have
#
That somewhere the individuals who are there are not thinking like that because there is
#
no need to because the pulls and pressures on them are very different.
#
So how would like leaving, I don't want you to comment on the specific dispensation right
#
That is for hunters like me.
#
But just at a structural level, how would you reform the system so you have the right
#
kind of thinking emerges?
#
You're squarely on track that we should not personalize these discussions.
#
As Charles de Gaulle said, the graveyards are filled with indispensable men.
#
So I'm not fussed about individuals.
#
But we should ask the question of incentives.
#
How do we create conditions under which various elements of economic policy making deliver
#
reasonably good outcomes?
#
How do we take a more dispassionate process perspective to the role of these various pieces
#
Finally, individuals inside each of these organizations will look out for themselves,
#
will pursue their own self-interest.
#
So we should not expect anything more of a line employee of a ministry of power or a
#
ministry of civil aviation or a DEA or a DFS or a RBI or a SEBI other than to pursue their
#
What we should do is think about their role, their function, their accountability, their
#
And it requires that kind of more dispassionate little bit of detached perspective on analyzing
#
these institutions, modifying the rules of the game and the check and balance so as to
#
create incentives for regular guys to produce superhuman performance.
#
I think that's where we have to go in terms of the economic policy reform.
#
In the sense not let nobility and excellence be happenstance, but actually allow for it
#
to be manufactured by design.
#
Does that happen in any government in the world?
#
I have been a frequent admirer of, for example, the UK Treasury.
#
The UK Treasury is a remarkable institution.
#
People come, people go.
#
It's a formal machine that knows how to think about economics, about budgets.
#
And so yeah, this can be done.
#
What is different there?
#
What have they got right that we haven't?
#
Why do those institutional incentives, how are they different?
#
How do they sustain themselves there and not fall prey to the pressures of everyday electoral
#
So to take an example about tax policy that I just mentioned, there is a tax administration
#
element of the UK, which is called Her Majesty's, I'm trying to remember the name of the agency,
#
Her Majesty's Customs and Revenues or some such thing.
#
And they are the tax administrators and they collect taxes from individuals all over the
#
They're kept at arm's length from the Treasury because you don't want the concept of the
#
political party in power inflicting income tax rates on their enemies.
#
So there's a very formal institutional apparatus to firewall the tax administrator from the
#
But then back to back with that, you need to construct tremendous amount of check and
#
balance so that that does not become a law unto itself.
#
So when we say independence for CBI or independence for RBI, that can very easily turn into officials
#
pursuing their own self-interest, which is probably worse than having them under political
#
Then in the UK, the entire control of tax policy is only with the Treasury.
#
So it is only the equivalent of DEA that writes the tax policy.
#
So these are examples of formal rules and procedures that create the correct incentives
#
and then we get the better outcomes.
#
And the thing is, when the framers of our constitution were writing the constitution
#
and the early rules of the game were being set, obviously you can't expect them to get
#
into such granularity on how specific ministries will function.
#
We need these rules today.
#
These tools presumably evolved over a period of time in England.
#
What would be the sort of impetus for the politicians in charge to actually now build
#
these checks and balances because it's in their interest to have the tax department
#
Why would they give that away?
#
So in the 70s and the 80s, we had some reasonably bad ideas in economic policy and it led to
#
the Hindu rate of growth and two balance of payment crises.
#
And that did give ample incentive to the politicians that business as usual is not working.
#
So in similar fashion, I think that men and nations will do the right thing after trying
#
every reasonable alternative.
#
And I think that a poor economic performance from 2011 onwards has got the pot on boil.
#
More and more people are curiously wondering, where did we go wrong?
#
And all of us are part of that discussion.
#
And I think that enough of the Indian intelligentsia is able to understand these problems and
#
agree on an approach on how to do this.
#
Then things will change.
#
I want to give you one last example about this kind of work.
#
In 2003, when Jaswant Singh was finance minister, he asked Vijay Kelkar to lead a team which
#
was titled the Ministry of Finance for the 21st century.
#
Now this is an incredibly important problem because the Indian Ministry of Finance is
#
frankly a 1960s institution.
#
It has not been thought through in these ways about organization, organization design processes,
#
incentives, check and balance, information.
#
These foundational things have never been done differently since the 60s and the 70s.
#
So in 2003, Jaswant Singh said that we need a Ministry of Finance that is commensurate
#
with the complexities of what India is today and where we are going for the next 25 years.
#
And Vijay Kelkar led a team which had some remarkable people who worked on that.
#
And that report was presented to Mr. Chidambaram who unfortunately ignored it completely.
#
But I think that that report is an example of the kind of work that is required.
#
Is it available in the public domain?
#
It was unfortunately never put up on the Ministry of Finance website.
#
So it's a little bit of the black art of Indian economic policy to know these things.
#
Periodically, people ask me what were the key ideas of that report.
#
Every one or two years, I get asked for what were the key insights of that report.
#
So I think it's lurking in the imagination of people, but it's not official in the public
#
One should send in an RTI request to obtain a copy.
#
If Saqib Gokhale is listening to this, kindly put an RTI for this.
#
This also matters because economics has, as I keep saying, humanitarian consequences.
#
So before we go to the specifics of this budget, my big takeaway from the meta is that all
#
of us are afraid that things are going to get worse.
#
Perhaps we should hope that things get worse because only a crisis seems to provoke the
#
kind of deeper thinking and action that is sort of required in that case.
#
Would you agree with that?
#
Even though you have previously said in this episode that we overstayed the importance
#
I worry that we have to lay the groundwork of the thoughts, the concepts, the frameworks
#
about what you would like to do different in the Indian economic policy problem.
#
There is a lack of knowledge in this field.
#
There is a lack of an elite consensus in this field.
#
There is a lack of community.
#
There is a lack of people that understand these things.
#
So I think now is the time for thinking and discussion and cogitation, the development
#
of people, the development of community.
#
So that when there are politicians asking to do things differently, then there is a
#
body of knowledge and a community that is able to carry these things forward.
#
Something commensurate to the initial conditions of 1991.
#
And I would really hope that the young lady who is going to be finance secretary in the
#
year 2045 is taking copious notes as she listens to this episode.
#
Vivek, sort of moving on to you and your favorite company, which actually seems to your favorite
#
company, of course, LIC.
#
And that seems to illustrate what you were saying, you know, what you often keep saying.
#
And it's true of this budget that it looks like different parts of it have been written
#
And you know, the proposed LIC sale seems to be, sorry.
#
Amit, it's more than that.
#
Not only have different parts been written by different people, they've also been typeset
#
The other thing I was wondering was that, you know, again, to take a digression, Vivek,
#
you pointed out that it's some 18,900 words, 18,971 words, so a good book these days has
#
around 90,000 words or less than that.
#
No, I'll give listeners a better context, you know, one of my guests once transcribed
#
a two hour episode I did with him and it came to 25,000 words.
#
So therefore 18,000 words.
#
No, but that depends on how fast you're speaking.
#
So she spoke for almost two hours, 45 minutes, which is a record.
#
And she gave up in the end.
#
I thought the great master plan is she'll go on till the end of the new cycle and you're
#
in the next new cycle and then people have forgotten about the budget.
#
But that hasn't happened.
#
We don't let these things go.
#
I managed to listen to it because what happened was at around 10, 15 in the morning, I was
#
feeling terribly sleepy.
#
Then I woke up at around 11, 45.
#
No, 11, 45 woke up and I thought it'll be done in an hour, so let's listen to it now.
#
And then it finished at around 1, 45.
#
So it was quite, otherwise I would have fallen asleep.
#
If I hadn't slept before the budget speech started, I would have fallen asleep during
#
So it went on and on and on and there was, I mean, it was all sorts of things from Kalidasa
#
to, I don't know, I mean, to the great Harappan civilization.
#
And a lot of very random posturing also, let us show off our erudition and our knowledge
#
and let us, you know, while we have the two Abdullah's in jail, let us quote from a Kashmiri
#
poem written by a Kashmiri poet for senior Abdullah, Sheikh Abdullah.
#
The irony of all of these things escape these people, but sort of let, let's kind of talk
#
about and the reason I also want to talk about specifics while this has been a really good
#
discussion on the sort of meta level that I like rather indulgently, there has been
#
great public demand for Mr. Vivek called to comment on all the nitty gritties of the budgets
#
and a number of people even asked me, why, when are you doing an episode on this budget?
#
So I didn't plan to do an economics episode so soon, but since there was so much public
#
demand here it is, but the next 12 episodes will not involve economics, LIC.
#
So what you have written about LIC is that at one level is good news because it means
#
that, you know, it will become more transparent.
#
Hopefully, hopefully it showed the incentives go that way.
#
But what you are confused about is that to quote, you quote, LIC has acted as an internal
#
financier of the government and has been used to bail out the government on multiple occasions.
#
So it will be interesting to see whether this equation changes in the future.
#
Yeah, I mean, so there are, I mean, obviously, you know, once you list on the stock exchange,
#
you have to put out a certain amount of information.
#
So to that limited extent, it's a great move.
#
But then there are a lot of other issues which will need the clarification over a period
#
I mean, so LIC as of now, the structure of the LIC is, I mean, and you would probably
#
know better, is that it's essentially a pool of investors coming together and their money
#
being invested and then the returns being shared with them, right?
#
Also, whatever remains goes as a dividend to the government.
#
So you have to, you know, that structure has to change because once you become a listed
#
entity, there is to be a proper, you know, balance sheet, profit and loss account statement
#
and so on and so forth.
#
Then there is this huge thing, as I said, about how LIC has rescued so many government
#
IPOs over and over again, a lot of LIC, you know, the policy, the endowment and the money
#
back policy is the money they collect, get simply get invested in government bonds.
#
So to that extent, it is a very large financier of the government.
#
Also there is the issue of solvency.
#
I mean, I think the capital backing LIC is some five crore rupees or something like that.
#
And that is primarily because the Indian government obviously backs it.
#
So will the government continue to back it after it is listed?
#
So there are a lot of questions, which it will not be easy to list LIC.
#
I mean, I guess it will take at least, I mean, it should take them a minimum of seven, eight
#
months to just get the process going.
#
Another thing about this budget, which also the contradiction here is, and so now it seems
#
we are moving to a tax system where there will be no exemptions.
#
So people will not be encouraged to save because they are saving tax.
#
And at the other end, you're trying to list LIC.
#
So LIC's premium, the main reason that LIC survives is because people want to save tax.
#
Nobody buys life insurance from LIC, right?
#
People think they are buying life insurance.
#
What they're buying is essentially an investment product, masquerading as a life insurance
#
product and something which helps them save.
#
They're almost being nudge slash coke worse towards it by bad incentives forced upon you
#
Now, see, the other thing that comes out is like, you know, if you look at these endowment
#
and the money back policies of LIC, the returns of them are hopelessly low, 4%, 5%.
#
It's just that the average Indian or even the average human being cannot sit and calculate
#
the IRR on the policy, the internal rate of return on the policy that he or she is buying.
#
So all this will gradually start to change.
#
And the moment you take away the tax thing, the tax incentive of investing in insurance,
#
the business model of LIC goes for a toss.
#
I think that it is an extremely positive move to think of putting LIC into an IPO and bringing
#
Accountability incentives, everything gets better.
#
I'm really happy that this has happened.
#
It's a tough, difficult thing.
#
You can just see all kinds of people getting unhappy, but this is the right thing to do.
#
So I'm very happy that that move has taken place.
#
As Vivek says, there are many hoops to jump.
#
I want to just emphasize two of those hoops.
#
The first of them is that we will need regulatory capacity at IRDA and we need to confront basics
#
about capital adequacy that it's almost amusing how little equity capital there is in LIC.
#
And LIC has given loans to a lot of the same firms who have defaulted on banks.
#
And I don't know how that mark-to-market is done inside LIC.
#
The bad loans, so it's like, you know, banks are facing bad loans and LIC has also got
#
LIC has lent to all the same people.
#
So if there is a problem inside many banks, it's probably a difficult problem inside LIC
#
On this note, I also want to emphasize the importance of IFRS accounting.
#
This is like high geeky accounting terrain, but I'm one of the people that gets really
#
happy when you move accounting from a cash-based system to an accrual-based system.
#
And that is what is called INDAS.
#
LIC was on a cash-based system?
#
There are only two industries in India which are not in INDAS at the fervent request of
#
RBI requested that we continue to do bad accounting for banks and IRDA requested that we continue
#
to do bad accounting for insurance companies.
#
So that's one more barrier that I think will end up needing to be crossed, that you really
#
need accrual-based accounting for an insurance company.
#
It's just totally wrong to think about an insurance company on a cash basis because
#
the demographic composition of the payouts and the new customers is profoundly different.
#
On a cash basis, you may always feel you're okay.
#
But then you don't know.
#
You've got to do accrual-based accounting to think in a forward-looking way about what's
#
You feel that these are hoops to cross, but the point is, it is this decision that will
#
force a reckoning on these questions, which is so great.
#
So my next question is about something else.
#
This also brings us back to what Ajay was saying that different parts of the budget
#
have been written by different people.
#
No, and I was again going to, my next question was also going to deal with that dissonance
#
and in the process managed to ask a larger question as well, a microcosm and a macrocosm.
#
Microcosm, of course, is that interestingly the NREGA budget has gone down a little bit,
#
But the larger question is that this is a government which, so Mihir Sharma had a very
#
interesting tweet about how this government seems to mistake reforms or is trying to recast
#
reforms as welfarism, which is an extremely valid point.
#
Well, it's interesting on the one hand, because all of these guys who are in power now used
#
to rail against the welfarism of the Congress, the NREGA and so on, that the Congress did
#
circa the late years of the last decade.
#
What they have done since is that they have renamed some of those schemes, but they've
#
kept a lot of the welfarism going.
#
A lot of that welfarism is actually why they won votes in the heartland.
#
It's not all, you know, as some allege, it's not all bigotry and Hindu Rashtra.
#
The welfarism did help, I think Parthamin did a bunch of pieces on this where he showed
#
that people's perceptions of the Modi government was that they're actually doing a lot for
#
the people and many of these schemes are delivering.
#
If not for them, they've seen it deliver for others and so on.
#
And in an episode I did with Ram Gohar for this year's Republic Day, he also pointed
#
out and he agreed with me that a lot of prime ministers, Modi's view of the world comes
#
from what he has experienced as opposed to what he has read.
#
So while a lot of the more abstract concepts which you need to know to run an economy might
#
escape him like spontaneous order and positive someness and so on, he gets the importance
#
of things like water and roads and electricity, which, you know, and the delivery of those.
#
And therefore, he is someone who actually genuinely does believe in welfarism, ideologically
#
Given all of this, what's going on here that, you know, they do stress more on welfarism
#
than fundamental reforms.
#
But at the same time, the NREGA budget has gone down, is there some broader thinking
#
So which is what left me confused because when I looked at the numbers, so the NREGA
#
budgets are down from around 71,000 crore this year to 61,500 crore next year.
#
But the PM-Kisan allocation continues to be the same at 75,000 crore, even though this
#
year they'll end up spending only around 54,000 crore.
#
So my thinking is, you know, if you're giving the landowners some amount of money, you might
#
as well, you know, spend a little more money on NREGA.
#
I mean, I mean, I thought that was quite also, you know, when you keep putting equity into
#
dud companies like MTNL and BSNL, I mean, it's not fair that, you know, you cut 10,000
#
I mean, I don't think there is a broad thinking behind all this.
#
They're just randomly, you know, doing stuff here and there because, you know, this sort
#
of contradiction is very difficult to explain.
#
So perhaps the political environment surrounding welfarism changes when there is economic stress.
#
Perhaps if the same Mr. Modi had presided over a strong economy, his calls could have
#
So I wonder how much of this push in favor of welfarism is in fact the consequence of
#
poor economic performance.
#
So to break that down, are you saying, if I interpret you correctly, then what you're
#
basically saying is that, look, welfarism, perhaps for the word itself, welfarism, it
#
has a positive ring to it, makes for good political optics that, hey, you know, you
#
guys are suffering, we're going to help you out, we're going to, you know, these are all
#
the handouts we are sort of going to do.
#
But of course, you know, economists would know that there is a trade off between redistribution
#
and growth and growth is what actually lifts people out of poverty.
#
But because growth isn't happening and all of that, they're going for the political optics.
#
I don't know how much of this is a reflection of the underlying ideology as opposed to an
#
expedient response to the difficulties that we face.
#
Incentives again, therefore.
#
In fact, you know, another thing, this sort of slightly different point, you know, a lot
#
of media this time went around reporting that subsidies have been cut.
#
Now, you know, that was so wrong at many levels, because subsidies have not been cut, the government
#
is just not paying the subsidies.
#
So take, take like, I mean, food cooperation of India, best example, which is actually
#
I was thinking when you said favorite company, you would say food cooperation, but that's
#
So, you know, look at food cooperation of India, right?
#
So the food subsidies for 2019-20, when the budget was presented, were around one lakh
#
eighty four thousand crore.
#
In the revised number, it's around one lakh nine thousand crore.
#
So that essentially means that the food subsidy has been cut by close to seventy five thousand
#
Food cooperation of India's subsidy bill this year stands at three lakh seventeen thousand
#
nine hundred five crore.
#
So that's a difference of around two lakh ten thousand crore, which the government has
#
to pay FCI, but it is not.
#
Now the government has to pay FCI because FCI is buying rice and wheat from farmers
#
directly at a certain minimum support price.
#
And it's selling that rice and wheat at a very low price through the public distribution
#
So that difference has to be paid for so that, you know, FCI remains a going, that's a mechanism
#
of the food subsidy base.
#
So, so it's not that food subsidy has been cut, you know, food subsidy is still the same.
#
It's just that FCI is not being paid and FCI is now being partly financed out of the national
#
small savings fund, which is where the investment that, you know, people make in the national
#
savings scheme, NSS goes to.
#
So they are essentially borrowing money from that.
#
And the remaining part of the money is being borrowed from banks.
#
So is the NSS forced to lend to the FCI if it wants to borrow?
#
I mean, what is forced to?
#
It's like it's government one hand, money moving from one hand to another.
#
And are we incentivized to invest in the NSS because of taxing?
#
No, obviously, the rates are very high.
#
So basically these sort of coercive regulations force us to invest in NSS to save tax and
#
that money then goes to pay FCI bills, which the government isn't paying and then it is
#
claiming that hey, we're going to do subsidies.
#
So there are multiple problems here.
#
So the first thing is that FCI is buying this rice and wheat and it ends up buying an excess
#
amount of rice and wheat.
#
So I was just seeing, looking at the numbers for as of January, FCI had around 75 lakh
#
tons of rice and wheat when it needed to have some half of that or something like that.
#
The excess stock has been paid for by the FCI, which has borrowed money from NSS and
#
So basically it's been paid for by UNI.
#
I mean, it ultimately comes down to us.
#
The second thing that happens here and this is where it all starts getting very, very
#
bizarre is that when the FCI borrows all this money from banks, obviously there is going
#
to be crowding out less money left for others to borrow and your interest rates remain where
#
and you know, the other interesting thing is because NSSF needs money, the interest
#
rates on that continue to remain higher than fixed deposits because NSS needs money because
#
it has to finance FCI, it has to finance the national highway authorities of India.
#
So all this comes together to essentially ensure that monetary policy does not work
#
because the government needs a high interest rate environment to keep all this going and
#
because it needs a high interest rate environment, your interest on small savings schemes continue
#
to remain higher than interest on FDs.
#
So because interest on small savings schemes continue to remain high, FD interest rates
#
cannot be slashed even though the monetary policy has been cutting the repo rate for
#
And you've written articles about how cutting the repo rate doesn't actually make a practical
#
difference in our lives.
#
I just want to riff on what he has been describing.
#
Everything you say is of course correct, but here's the deeper story of what happens.
#
The first element is that social systems are complicated and each move you make has unintended
#
And the second problem is this is the consequence of low strategy, high tactics.
#
So every day one feels very clever coming out with one more element of a solution which
#
seems to solve my point of pain today, but actually that just creates a more and more
#
intricate web of interlocking policy constraints that tie down policymakers in knots.
#
And this is why there is a greater role for strategy.
#
So very often people tend to wonder that what's wrong with just taking one day at a time?
#
You see a problem, you solve the problem.
#
You see a problem, you solve the problem.
#
In public policy, it's important to have a strategic sense.
#
What is the role of the state?
#
What market failure am I addressing?
#
What is the detritus of inherited, messy interventions and institutions that we need to wind down
#
And then many decisions can be taken that will put us on a better path.
#
So I just wanted to sort of make one more point.
#
I mean, that's a very important point.
#
So what I wanted to say was that Ajay was talking about how the rate of investment has
#
come down dramatically.
#
So I'm obviously simplifying things here a little.
#
So because the rate of investment has come down, obviously jobs haven't been created
#
at the same pace as when needed.
#
When jobs haven't been created, obviously a lot of people are not making money or they're
#
not making the kind of money they would have otherwise made.
#
So income growth has also come down.
#
Because income growth has come down, people have been consuming a larger proportion of
#
their incomes or they have been borrowing to finance consumption.
#
So when you do both, obviously what happens, your rate of savings comes down, right?
#
In all this environment, while the rate of savings has been coming down, the public sector
#
borrowing, which is central government, state governments of budget has been going up, right?
#
So how will interest rates come down?
#
So it's all, it's not like you're doing this and that doesn't get impacted.
#
I mean, it's all connected at some level.
#
And a lot of it is, you know, people don't even understand that it is connected.
#
And so my next question is again about something you've written about with a certain amount
#
of bemusement and which the middle-class was very eagerly looking at, which is what is
#
going to happen with income tax.
#
And there was this initial impression that, oh yes, the taxes have gone down, but that
#
And most people are still confused about whether they will be paying more or less.
#
So basically, you know, the government wants you to understand the income tax act and it
#
also wants you to know how to use an Excel sheet and figure out as to which is the better
#
But largely, you know, if you are the kind who uses the deductions and exemptions that
#
are available, you are better off on the present system.
#
And from what I have been told, I mean, I haven't read the finance bill, from what I
#
have been told, if you move to the new system, you cannot go back to the old one.
#
Now, I mean, so I think, you know, if the idea was to simplify, there was no point in
#
I mean, you could have had even lower rates so as to ensure that the actual tax comes
#
I mean, I think as of now, and this obviously is a short-term solution, people, there has
#
to be more money in the hands of people.
#
You know, this is not the time to tax.
#
Now, the problem here is, one is that, you know, whether there is more money or not in
#
the hands of people, that in itself is a question.
#
And a lot of it is psychological, you know, when as a nation, we are obsessed with the
#
That is because finance ministers have a proclivity of changing, you know, income tax rates or
#
introducing new exemptions, new deductions, so on and so forth.
#
So our obsession with the budget is not because we want to know that what happened in custom
#
duty or whether we've become protectionist or not.
#
It is because all of us want to know whether our take home is growing or we'll have to
#
So at the end of the day, it's very, very psychological.
#
Now, if you had actually cut taxes and if you had clearly told people that, yes, the
#
money in your hands is going to go up, they were more likely to spend or, you know, essentially
#
And that would have sort of helped the economy in a very small sort of way.
#
But here, what we ended up doing was creating this confusion and you have now all the CAs
#
badgering their heads and I think this government just wants to make sure that CAs make more
#
You regret not being a CA, Vibhakt?
#
You regret not being a CA?
#
And I regret a lot of things in life.
#
That can be an episode in itself.
#
No, so I found that very, very, this was a low lying, low hanging fruit, which could
#
have been also the interesting thing is that in the budget speech, the finance minister
#
said that the government will lose 40,000 crore because of this new system.
#
But if you check the receipts of the government, the assumption is personal income tax collections
#
So how is that possible that here 40,000 crore will be lost and there is an increase of 14%.
#
I mean, this is a little bizarre.
#
In an environment where they have assumed that the nominal GDP growth will be 10%.
#
If you look at the gross tax numbers for this year, the increase assumed is 4%, whereas
#
if you look at the gross tax numbers for the first nine months, they are 3% lower than
#
So in this environment, how can you assume a 14% growth?
#
So there are a lot of, in fact, the budget math is very, very shaky this time around.
#
Not only is the math shaky, the shaky math is based on dubious data.
#
And therefore, is it fair to say that to some extent these guys are winging it too?
#
In fact, yesterday, late night, I saw this beautiful video where two old men, aka Bhattacharya,
#
who's the editorial director of NTN 9 and who's the chairman, and they were talking
#
and it's an 18 minute video, which everyone should watch.
#
And 9N kept making this point over and over again as to, you know, should we take these
#
So, and you know, nobody has seen more budgets in India than 9N has.
#
I mean, there are people who've seen more budgets than him, but no one has analyzed
#
I want to locate this in a larger problem of the Republic.
#
Okay, so let's take one step back and say, why do we have a budget?
#
Okay, we have a budget because the legislature wants to have oversight on the executive.
#
The legislature wants to say to the executive, show me what taxes you will collect.
#
Show me how you will spend it.
#
I must be satisfied that your spending plans are consistent with my political values and
#
Okay, so that's the concept of the budget.
#
We have a budget because the board mistrusts the management, and that is why a budget is
#
established whereby the management is on a tight leash.
#
And through the year, the legislature has to hold the executive accountable for what
#
it has done in terms of the actual operationalization of the taxation side and of the spending side.
#
Okay, so for example, all of us reading about news in the United States, it is so interesting
#
and fascinating to discover that when Congress voted for money to be given as aid to Ukraine,
#
it was illegal for Donald Trump to withhold that money.
#
Because when the legislature votes on a certain spending, you have to do it.
#
That is the meaning of being a representative democracy where political power ultimately
#
rests with the legislature.
#
I feel that what we're getting in India today is a part of that larger problem, which is
#
the collapse of the legislature as an institution, where we go through a show of some tax proposals
#
and some spending proposals, and the year unfolds in very different ways.
#
And the legislature frankly exerts no force on the executive to create accountability.
#
And the executive comes from the legislature, which is not the case in the US where you
#
have a separate election for the presidency.
#
In fact, I'll just give an example on what Ajay said.
#
So in 2018-19, the government expected to earn a total GST of 6,26,000 crore.
#
It was revised to 5,26,000 crore.
#
Finally they managed to collect 4,58,000 crore, which is 25% lower.
#
What is the point of making these projections if they're going to be so widely off the thing?
#
Does that then merit a deeper look at the electoral system?
#
If you're saying that the legislator and the executive are too much in lockstep, unlike
#
the US, for example, where there's a separate election for the president and the Congress
#
and the Senate are separate, and they can act as a check on each other, that's not the
#
Would it also be fair to say that the legislature has...
#
The anti-defection law plays a part, one of the unintended consequences is that you cannot
#
speak against your party, for example, and therefore you could run parliament from an
#
You don't need people to even show up.
#
I've had an episode on this in the past.
#
I do think that of the three branches of government in India, the legislature has shaped up as
#
It is not pulling its weight.
#
Because of the anti-defection bill, the legislative negotiation now only takes place between the
#
heads of the political parties, but not the average parliamentarian.
#
Parliamentarians have switched off.
#
Frankly, they don't care about legislation.
#
When is the last time there was a private member bill?
#
Bills are drafted by joint secretaries.
#
This is really a travesty that the legislative function is now being taken over by the executive.
#
And I think this is an important failure of Indian democracy.
#
I do not understand the problem enough to be able to think about how to solve it.
#
But I think it's important to recognize that the weakest piece of our constitutional system
#
today is the legislature.
#
On the same note, you may remember in the Kelkar and Shah book, when we talk about decentralization,
#
the only important caveat that we have is the unchecked power of a chief minister at
#
That we simply don't have enough check and balance surrounding a chief minister.
#
And a chief minister can easily become a bit despotic and then that is no foundation for
#
We need to think more carefully about how these institutions can evolve so that there
#
is an everyday check and balance between legislature and executive at the state level as well.
#
No, very wise words and I mean an example of a despotic chief minister who then became
#
prime minister and tried to be as despotic is coming to mind, but I won't say it here.
#
So you know, let's kind of, I'll obviously link all your respective pieces from the show
#
notes so people can dive into them for the details, Vivek has many entertaining things
#
to say about Nirmala Tai's budget speech.
#
So let's kind of wind up now and sort of, I'll ask both of you, you know, are you hopeful
#
of the system changing where the budget is this big media tamasha, but it is actually
#
just people winging it and it really doesn't mean anything.
#
You know, I mean, barring a crisis, you've been an inside of, you know, in policy circles
#
for decades, if that doesn't make you feel too old.
#
You know, is there also an impetus besides the standard impetus of, oh, we may have a
#
crisis or, oh, there may be something political besides that.
#
Is there also an incentive from elite intellectual circles to a recognition of this problem or
#
everyone's just sort of improvising with the moment?
#
I think that inside the BJP also, like everywhere else, there is a perception of difficulties
#
in the economy and I think that every politician in India is sincerely incentivized to understand
#
these events and to think of what to do different.
#
So in that sense, I think Indian democracy is working.
#
No politician wants to go into elections, maybe a state election, with one hand tied
#
behind their back owing to poor performance.
#
So let's not think that elections in India have degenerated to a point where performance
#
Performance always counts.
#
And a few state elections have shown that now.
#
Yeah, so I think every politician in India sees that we had a 20 year run of high growth
#
from 91 to 2011 and that something has gone wrong.
#
I mean, you can cherry pick evidence, but you can also come to the opposite conclusion
#
For example, 2019, you know, this government did win after five years of disastrous economic
#
management and similarly they had a landslide win in the UP elections after D1.
#
So I'm not here to say that performance is the only thing.
#
The limited question that I would ask you is that if you could have a one-on-one private
#
conversation with anybody in Indian politics and you would pose this question that as the
#
incumbent would you have rather walked into the 2019 election holding good performance?
#
I think the answer will be loud and clear.
#
Yes, that the leadership of Modi and Amit Shah pulled off a victory against all odds.
#
But if they could dream of a different world, they would have loved to go into that election
#
with better performance.
#
In fact, the counterfactual therefore is that had they actually delivered on a lot of their
#
rhetoric from 2014, they could have won an even more landslide win in 2019.
#
So I don't think that any politician would like to go back to elections holding bad performance.
#
And I think we are increasingly getting the point all over India that there was great
#
GDP growth from 1991 to 2011 and from 2011 till today, something has gone wrong.
#
And we are at the early stages of this cogitation of developing the third paradigm of Indian
#
And I'm optimistic that things will change, that we are a remarkable country.
#
We are a precocious country where at a very low level of per capita GDP, at a time when
#
female literacy was 6%, we enacted a remarkable constitution.
#
We are a country that is a child of Gandhiji, Tagore and Nehru and we'll get better.
#
Vivek, so next year when the budget rolls around, you see yourself writing pretty much
#
the same kind of pieces, at which point even Sidin cannot bemoan it on Twitter because
#
he will be repeating himself.
#
Difficult thing to say, but yeah, I mean, on past evidence one would say the same.
#
Bad news will sort of continue.
#
No, I mean, see, the thing is this, so until a few days back, the nominal GDP growth for
#
this year was supposed to be at a 43 year low.
#
But then since we revised last year's data, so this year's data is suddenly now looking
#
So now we are at a 17 year low.
#
So the point is if the GDP growth is at a 40 year low, and if that does not give you
#
incentive enough to do the right things, what else will, right?
#
I mean, 40 year low is like as bad as it could get.
#
I mean, okay, let's even, I mean, this is nominal, but even when you look at real GDP,
#
we were at a 10 year low.
#
So that 10 year low is like, and that 10 year low was also because of the financial crisis,
#
So if that does not give our government and our politicians the incentive to do, carry
#
out the major reforms and do the right things, then, I mean, see, I'm not even, I mean,
#
you know, people talk about these big philosophical reforms, and I mean, I'm saying a simple thing,
#
take something like a goods and services tax, okay?
#
It's been two and a half years since it's been in place.
#
And every month there is some change, this change, that change.
#
I'm willing to accept that as well.
#
But when I upload my return, let that return get uploaded in one time.
#
Let the OTP come to me, you know, when it has to.
#
I mean, these things, these are like, you know, the minutest, the simplest of things
#
Or the entire GST system has been made with the assumption that people will not make mistakes,
#
Everyone will file everything and they'll do it correctly.
#
So recently I had this experience, one of the media houses I write for raised a query.
#
And this was regarding a query on an invoice I had generated in 2018-19.
#
So the date of the invoice did not match with the date I had registered against that invoice
#
So obviously they wanted it corrected.
#
So it seems the law is such that you can only correct a mistake that you make during the
#
course of that financial year.
#
I mean, and these are not huge amounts.
#
I mean, people, you know, it's a 20,000 rupee, 25,000 rupee bill.
#
So I mean, if people, you know, if you sort of make even changes to these simple things
#
and make life simpler for people who follow the GST, that in itself will be a huge thing.
#
So that is also not happening.
#
It's been an awesome experience talking to both of you guys, addressing high philosophical
#
concerns like the structure of government, as well as, you know, everyday granular problems
#
like where is the OTP for my GST filing?
#
Ajay, thanks a lot for coming on the show.
#
Thanks for having me, Amit.
#
If you enjoyed listening to this episode, hop on over to your nearest bookstore online
#
or offline and buy In Service of the Republic by Vijay Kelkar and Ajay Shah, outstanding
#
I can't praise it enough.
#
Also check out the many, many books written by Vivek Kaul, including the Easy Money Trilogy
#
and India's Big Government.
#
Do not search for my name.
#
If you want to follow Vivek on Twitter, you can follow him at kaul underscore Vivek.
#
If you want to follow me on Twitter, you can follow me at Amit Verma, A-M-I-T-V-A-R-M-A.
#
If you want to follow Ajay Shah on Twitter, too bad, you can't, he's not there.
#
You can browse past episodes of The Seen and the Unseen at seenunseen.in and thinkpragati.com.
#
The Seen and the Unseen is supported by the Takshashila Institution.
#
To learn more about their public policy courses, head on over to takshashila.org.in.
#
Thank you for listening.
