Anticipating the Unintended #34: East is East, and West is West

This newsletter is really a weekly public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

India Policy Watch: Decoding the Economic Package

Insights on burning policy issues in India

— Raghu Sanjaylal Jaitley

Over the past five days, the FM has unveiled details of the ₹20 lakh crores economic package announced by the PM. The measures rolled out so far include long-term structural reforms, a promise of government investments in several infrastructure sectors, increase in FDI or removal of state monopoly in areas like coal, minerals, defence and airspace, and a slew of measures to improve liquidity for industries and individuals including credit guarantees and sovereign backstops.

The critique of the package rolled out so far has centred on four areas. First, there is almost nothing for the immediate relief of those most affected by the crisis — the over 120 million unorganised workforce who have lost jobs and the 40-50 million SMEs that have seen a collapse of demand. Second, the liquidity measures are aimed at supply-side issues while the real challenge is about demand revival. Third, there’s a lot of window dressing that’s used to inflate the package even going by the standards of this government. Current or already announced schemes, planned loans and advances (entire amounts) and even tax and PF deductions have been included to reach the target. The real fiscal stimulus might not exceed Rs. 2 lakh crores, and that’s being generous. Lastly, there’s a lot of good intent in the various structural reforms announced but they will require legislative changes, the concurrence of states and an improved investment climate globally to come to fruition.

There isn’t much wrong with this criticism except a quibble. These analyses suggest the government has got it wrong because it hasn’t diagnosed the problem correctly. Now, it’s difficult to believe those running the government machinery are clueless while the rest (especially, the armchair analysts like us) have been blessed with all the wisdom of the world. If it were so, we should have been controlling the levers of the state than writing newsletters on weekends. It is prudent to assume the policymakers have the evidence and the experience to grasp the exact nature of the problem. Yet, they arrive at remarkably ineffective formulations like these.

The underlying incentives, trade-offs and political calculus lead them down this path. It isn’t the government doesn’t know better. Instead, despite knowing better, the government has chosen this package as their most favoured option.

What does that tell us?

Kalank of junk

We went into this crisis with an already slowing economy and a badly stressed financial sector. Things have gotten worse progressively and the government knows it. There is limited fiscal room to support direct transfer of funds to distressed people and companies. An increase in government borrowing or direct funding of deficit by RBI will have repercussions. There’s a real concern of a sovereign rating downgrade to ‘junk’ with rising fiscal deficit and debt to GDP figures. This gets accentuated with a PM who has constructed a narrative about India’s position on the world stage rising meteorically because of him. To a regime that feeds off nationalism and harbours vision of being a ‘vishwaguru’, the notion of the world branding you ‘junk’ is an anathema. It is likely the other side would have been represented as well – that only focusing on supply-side liquidity issues without a direct fiscal stimulus could lead to a precipitous decline in consumption. A big drop in GDP might equally send you down the junk alley.

This was the trade-off.

It isn’t a surprise the government chose the supply-side solution with a raft of structural reforms thrown in. It gives it a fighting chance to convince rating agencies about its fiscal discipline and its long-term reform roadmap. The inflated loan schemes further added to the allure of this choice. The experts could then give it the intellectual heft of supply-side economics. This choice came with the downside of unemployment and economic hardship for millions of ordinary workers and small businesses. The government hopes a quick V-shaped recovery, apportioning blame to the states, and the relatively low COVID-19 death toll will see them through this. The reality is the government had only difficult choices. It chose its pride over its people – that would be a harsh and somewhat unfair summary of this.

Quantum of solace

The absence of a specific relief plan for the migrant and unorganised workforce has dismayed many who see the human tragedy unfolding daily on the highways of India. The general reportage on this has painted a picture of an insensitive government run by a PM removed from reality. This is difficult to believe of a PM who is seen to have his ear to the ground and who understands electoral arithmetic better than any other politician today. For PM Modi, like other populists with a strong ideologically driven base, you can’t be seen as weak. Acknowledging a mistake is a sign of weakness. PM Modi has maintained a studious silence on multiple occasions (demonetisation, lynchings, economic slowdown) where the mistakes and its consequences were apparent. This time is no different. In the PM’s mind, a decision isn’t a mistake by itself. It exists in a kind of quantum superposition that collapses into being a mistake only on observation or acknowledgement. So, while it might be a tad late now, expect the government and the BJP-run states to double down on migrant relief soon. Of course, without publicly acknowledging the problem at all.

Throw ’em up against the wall and see what sticks

The Noah’s ark of the reforms included in the package can be difficult to analyse. There’s everything in there: from swadeshi, videshi, opening up and closing down sectors, new regulations, deregulation, inter-state movements and inter-planetary travel. Many of these are a rehash of past announcements or have limited relevance to the crisis we are in currently. Their implementation will require forging consensus among states and other stakeholders. There’s a lot that’s good in there but it will take time. The Modi coalition, as we have discussed, has constituents of all stripes – social conservatives, swadeshi diehards, anti-state libertarians, self-styled technocrats and nationalists. There’s something for everyone in the package for the believers to keep the faith. The package in itself is a giant Rorschach inkblot test. What you make of the package reveals more about you than about the package itself.

Where do we go from here? The general consensus among analysts worldwide is a slow ‘swoosh’ shaped recovery. The steady rise in the number of cases in India suggests a peak about a month or more away. The concentration of the hotspots in economic hubs and the lack of a demand stimulus will further delay our recovery. This will mean we will see the familiar tools of this government being employed – celebrating every scrap of good economic news as a sign of recovery, showcasing the low pandemic death toll, blaming the opposition-led states and even the victims for their plight, endless discussion on the eventual benefits of structural reforms, pushing the banks to transmit liquidity, a few more ‘big bang’ announcements and, maybe, taking advantage of social distractions that always uncannily present themselves in India. This will hold till either the real recovery begins to take shape, or the Modi coalition starts to unravel because the economic distress starts singeing it; whichever is earlier. The latter seems more likely at this moment. That moment of reckoning will force the government to throw caution to the winds and go for a real fiscal stimulus. We may be a couple of months away from it.

A Framework a Week: We Hate Cognitive Dissonance

Tools for thinking public policy

— Pranay Kotasthane

Public policy and politics both involve making moral judgments. But how do we reach a conclusion about what is “good” and what is “bad”? Most rationalists claim that we make a moral judgment through conscious reasoning.

There’s an alternative model which proposes that multiple pathways are used to make such judgments and that reason is not the primary one. Instead, the argument is that most moral decision-making is either social (based on the views of others) or intuitive (based on gut feelings). It’s an uncomfortable thought, hang on.

This model, proposed by Jonathan Haidt, is called the Social Intuitionist Model (SIM): it’s a descriptive model proposing six pathways to moral judgment:

  1. Intuitive judgment: this is our System 1 response — a quick call made on the basis of our and with little conscious effort.
  2. Post-hoc reasoning: After a judgment has been passed as to the morality of an action, a person will employ more effortful reasoning as a means of justifying a decision they have already made intuitively.
  3. Reasoned persuasion: this is where judgements start becoming social. The third pathway is about reaffirming your own reasoning by presenting your post-hoc reasoning to another person.
  4. social persuasion: this is the most controversial link. It says that we can form intuitions based merely on the judgments of other members in our social group, bypassing even the post-hoc reasoning underlying that view. This is the most extreme version of groupthink — once someone we respect has made a morally charged call on an issue, we intuitively consider as the “truth”.

It’s not all that bad. Haidt goes on to say that there are two other rarely used modes of private reasoning where people change their minds independent of what their groups think:

  1. reasoned judgment: when a person overcomes, without social help and through logic, their initial intuitive moral judgment.
  2. private reflection: when a person changes their intuition overriding the old way of thinking.

The utility of this model lies in the assertion that reasoning is a tough skill. Emotions and our social groups have an overwhelming effect on our moral decisions. By default, we tend to avoid cognitive dissonance at personal and social levels. Overcoming this tendency requires conscious effort.

PS: To be sure, this model has come under a lot of criticism from the rationalist school of thought for downplaying reason as a tool for moral decisionmaking. Nevertheless, as a descriptive tool, it still gives us a useful framework. For a balanced critique, read this paper.

Read the full edition here.