Policies & the public interest

The public interest calls for real reforms for equitable growth

Everyone understands that users need high-speed broadband links for a countrywide transformation, through access to education, healthcare, and much else including opportunity. The lofty aspirations of the New Digital Communications Policy 2018 (NDCP) are 50 Mbps “to every citizen”, 5G, and so on, whereas the reality is a plan for two Wi-Fi hotspots per village. Surely, mere aspirational statements after inordinate delays cannot help attain high-speed “broadband for all”. Nor can a gutted market bereft of policies to induce the required capital for connectivity and network efficiencies. The NDCP epitomises overstatement juxtaposed with the realities of poor services. Key reforms have been consigned to a future imperfect limbo: reducing additional taxes (from an exorbitant 32 per cent), achieving more efficient spectrum use, and the like. Our needs are staggering, but what we have so far are statements of intent without real policy changes in the public interest.

A similar approach has played out in the manufacture of electronics and solar power. India’s mobile revolution depended entirely on imports of network equipment, software, and handsets.1 Likewise for solar power, India has relied on imports. Recent efforts to elicit interest in manufacturing solar equipment locally received lacklustre response, because of perceived inadequacies in policies and incentives.

The crux of the matter is how public interest, which many of our politicians, administrators and analysts claim as their motivation, is construed. An additional wrinkle is of being “pro-poor”. What does the “public interest” mean, and how does “pro-poor” fit in other than by perpetuating poverty? Some proponents regard the “aam aadmi” as being synonymous with the public interest, and others “the masses”, or “the poor”, or farmers. There is also segmentation by exclusion, such as “not those who own vehicles”. Exclusions also apply to manufacturing, such as cars or two-wheelers, because they add to pollution and congestion on roads. So also to air conditioners, refrigerators, and so on, perhaps from the confusion of conflating market principles with socialist ideas of “luxury goods” having a pejorative taint, whereas our need is for engines of growth, except in sin goods and services. In fact, the automotive sector provides a model for coordinated policies (except for fuel pricing).2

Our fuel pricing is puzzling, because while it affects the majority, it is treated as affecting only the affluent (many of whom are also likely to be very productive). Affluent consumers comprised around 27 per cent of India’s population in 2016, and may grow to 40 per cent by 2025.3 Constraining productivity and output is surely not beneficial except in containing imports, especially when productivity is declining (Chart). Yet, this is the effect of high taxes on inputs. This is why there’s a genuine need for the evaluation of alternatives to demand compression and high taxes.

What, indeed, is the definition of public interest? Here is a version:

It is the welfare or well-being of the general public, by which the whole society has a stake that warrants recognition, promotion and protection of the government and its agencies.

The overall public interest is about society as a whole, unalloyed by divisive or fractious special interests. It is not the welfare of any individual, group or company. In seeking to maximise overall welfare, however, there need to be trade-offs and selective regulations for justifiable subsets, such as the underprivileged, or in spatial planning for town and country, or sectoral regulations for energy, exports, or automotive products. Yet, while the criterion should be public welfare, the arguments we encounter are mostly for special interest groups. Rarely is there a consideration for the welfare of society as a whole.

How might a holistic approach to public interest alter the stance to policy making, administration, analysis and advocacy? Consider this example from Brazil after the global financial crisis of 2008.

Brazil suffered decreasing exports, lower investment, and a credit crunch with deleveraging, resulting in lower incomes and tax collections, and higher unemployment. The government’s response in 2008-09 was a selective reduction in taxes, together with increased liquidity, and reduced interest rates to the most affected sectors.4

These policy changes reduced a tax component, initially in the automotive sector for a quarter, later continued for about a year. This was extended to consumer durables/electrical appliances, and to building materials, the latter for about 15 months. For some products such as stoves and small washing machines, this tax was reduced to zero. Meanwhile, taxes on cigarettes were increased. The result was an increase in tax revenues from higher production and consumption, after an initial fall in tax collections. 

Simulation is a useful way of evaluating alternative scenarios. Converted to cash flows, these inputs can be used to shape policies, because cash flows are an essential measure of reality.

A compelling reason for scenario planning is that coordinated policies could yield higher growth than foreign borrowings without systematic policy support. A policy framework with lower interest rates and good infrastructure (energy, logistics and communications) could accelerate growth, thereby attracting capital despite current account imbalances. Such alternatives deserve to be evaluated against the approach of higher interest rates to attract, then struggle to retain foreign capital (when there is a flight to quality, raising interest rates in emerging markets is usually ineffective), with lower growth. Lower rates would also facilitate redeeming NPAs, as banks could profit from rising bond prices.

It is in the public interest to analyse alternative approaches, including input costs and taxes. Areas such as the allocation and management of coal, automotive fuel pricing and automotive manufacturing, and spectrum allocation and management need such analyses. In finance, the alternatives are of inflation targeting, taxes to reduce the fiscal deficit, high interest rates to attract/retain foreign capital, and managing imports, against scenarios with lower taxes, interest rates, and coordinated policies as in the automotive sector for manufacturing and logistics in sectors such as electronics and solar power equipment.

shyamponappa@gmail.com

1: Sanjib Purohit, NCAER, March 14, 2018
 

2: http://www.siamindia.com/uploads/filemanager/47AUTOMOTIVEMISSIONPLAN.pdf
 

3: https://www.bcg.com/en-in/publications/2017/marketing-sales-globalization-new-indian-changing-consumer.aspx
 

4: [Input-Output Matrix study of tax reductions-Brazil-2014]