Thursday, 23 April 2015

Net Neutrality: Some Economic Issues

A search for “net neutrality” on Google throws up more than 16 million results; “net neutrality in India” yields more than 200,000 hits. Quite clearly, the issue has got people talking. Even Rahul Gandhi spoke about it in Parliament![i] Almost a million emails in support of Net Neutrality (NN) have been sent to the Telecom Regulatory Authority of India (TRAI).[ii] Flipkart, after flirting with Airtel Zero which would have given preferential treatment to certain content providers, backed out of the deal under public pressure.
Whether one knew it or not, we were all so far living in a world of NN. No content provider was blocked, no content provider received preferential treatment; on the users’ side, no user was given preferential treatment or faster access than others who had paid the same subscription to the Internet Service Provider (ISP). This NN environment was not legally ordained; it was, in fact, the default setting of the internet. Of course, since it was not legally protected, it was not immune to attack, as started to happen in the USA with Verizon throttling Netflix but restoring speeds after Netflix paid up.[iii] The TRAI consultation paper also lists violation of NN by Reliance and Airtel.[iv] Hence, if NN is to continue, it would now need the protection of the law. This is where the matter stands and this is what has led to much passionate discussion on protecting NN.[v]
So, what is NN? Economists have made significant contributions to this issue. I strongly recommend the article by Niranjan Rajadhyaksha which provides a wonderful summary of the economics of NN.[vi] NN is understood as a regime that does not distinguish data delivered over the internet in terms of price, in terms of the identity of who is providing these data or who is using the data.[vii] The ISP connects its customer (users like you and me) to the internet (which includes all content providers such as Google, YouTube, Netflix, Skype, Whatsapp and so on) and the ISP gives content providers the “last-mile access” to its customers. Violation of NN would mean that the ISP offering the last mile access would charge a fee to content providers to reach the ISP’s customers. It will also allow the ISP to delay delivery of content from non-paying content providers or expedite delivery of content from content providers who pay a fee.

The TRAI Consultation Paper
The Telecom Regulatory Authority of India (TRAI) has also jumped into the debate with its 118 page long consultation paper. In its urge to cover all aspects of NN, and the internet in general, the paper bites off way more than it can chew and gets into areas well beyond its remit. Consider this statement from the paper: “But, the internet can also be a very dangerous place. Cyber-predators, bullies, stalkers and con artists are all online waiting to find their next victim. Children using the internet often don’t realize the risks they face online”.[viii] And this gem: “Facebook depression and sexual experimentation, that has given rise to problems such as cyber-bullying, privacy issues, and “sexting.” Other problems that merit awareness include internet addiction and concurrent sleep deprivation”.[ix] All that is missing is some sinister music from a horror film and an ominous voice-over which says: “Be afraid, very afraid”.[x] Hopefully, TRAI will soon realize that it is an internet regulator and not an internet nanny.
TRAI defines NN as: “Net neutrality (NN) is generally construed to mean that TSPs [Telecom Service Providers. In India, TSPs are ISPs] must treat all internet traffic on an equal basis, no matter its type or origin of content or means used to transmit packets”.[xi]
With this background, I will now discuss the main issues in the debate.

Issue Number 1: ISPs v. Content Providers
The interests of content providers conflict with those of the TSPs/ISPs. The main grouse of the ISPs is that content-providers free-ride on the investments of the ISPs. This conflict is best captured in the quote of Ed Whitcare, CEO of SBC, a communications company: “How do you think they’re [that is, Google, Microsoft Messenger, etc.] going to get to customers? Through a broadband pipe. Cable companies have them. We have them. Now what they would like to do is use my pipes free, but I ain’t going to let them do that because we have spent this capital and we have to have a return on it”.[xii] The ISPs have the customers, but that is not of much value unless these customers consume something from the internet. Hardly any of the ISPs are content providers and, hence, depend on third-party content providers to provide content to their customers. Right now, ISPs get their revenues from charging only their customers for using the internet, but a change in that business model is what ISPs are looking for.

Issue Number 2: Externality of Streaming Video
Viewership of streaming videos has grown by leaps and bounds. It is estimated that, worldwide, 70% of bandwidth is consumed for video streaming; in India, the estimate is 36%.[xiii] In economics terminology, a person viewing streaming video imposes an externality (an unintended cost imposed on others by one person’s actions) on others since it reduces the bandwidth available for other customers and slows down the speeds available to them. This is much like congestion on highways where each driver’s individual decision to use the car adds to the congestion and reduces the speed for other drivers. Economics suggests that the person imposing the externality should be made to bear its cost.[xiv] On the other side, providers of video streaming (e.g. Netflix, Youtube) also consume a huge share of the bandwidth: Netflix accounted for 34.2% of all downstream usage during primetime hours, up from 31.6% in the second half of 2013.[xv] With such massive consumption, internet’s version of the Gresham’s law will operate: video streaming could drive out (or, at least, slow down) the content of other providers. Braham Singh makes a strong case for a “video track” which would involve payments from video content providers.[xvi] Can additional payment be extracted from consumers of streaming video?
ISPs already charge different prices for different classes of service.[xvii] For example, Airtel’s plans range from (a) 3GB data transfer quota at 2MBPS download speed at Rs. 799 per month to (b) no quota for data transfer but download speed of 16MBPS till 30 GB download and 512 KBPS after that.[xviii] Economides and Hermalin argue against even such differential tiers of service on the grounds that it violates NN and welfare is reduced due to such differentiation.[xix] The paid-for “video track” mentioned above could be imposed over and above tiered services that are already in place. But, who should make the additional payment for video content: users or providers? In a sense, since both “pollute” the internet by excessive use of bandwidth, the polluter pays principle should apply to both. Of course, being fewer in number, as compared to users, it would be easier to charge video content providers.  Besides, if a fee is imposed on, say Netflix, the content provider would, possibly, pass on these charges to its subscribers, depending on the extent of competition it faces.

Issue Number 3: Stealing ISPs Revenue
The interests of content providers who provide communication services (e.g. Skype and Whatsapp) conflict with those of the TSPs/ISPs. The TSPs provide calling and messaging services which are facing a losing battle with Skype and Whatsapp. With prices of Whatsapp messages and Skype set at zero in India, there has been a tremendous migration of users away from standard text messaging (SMS) and calls over the mobile networks. In India, Whatsapp has 70 million users leading to an 18% fall in SMS traffic over 2013-14.[xx] Likewise, Skype calling is eating into international mobile telephones revenues. Airtel, Idea and Reliance have lost international outgoing calls to Skype and Viber.[xxi] Despite this challenge from internet-based communication services, the revenues of ISPs are expected to grow by 75% by 2020, rising from a level of $28 billion in 2013.[xxii]
The TSPs fear that allowing unregulated communication services like Whatsapp and Skype will disrupt their businesses and “derail their investment capabilities”.[xxiii] The contention of the TSPs is that they have invested in building the infrastructure (capital costs) and incurred other costs associated with operation of the network (cost of spectrum, License Fee, Spectrum Usage Charge, etc.) but with the communication service providers free riding on their networks, the loss of revenues will adversely impact the rates of returns to ISPs.[xxiv] This has, of course, been disputed. Big telecom companies like Vodafone, which operates in Europe and India, have been seen to be quite profitable.[xxv]

Issue Number 4: Recovering from Spectrum Bidding Orgy
The recent auction of spectrum earned for the Government of India Rs. 109,874 crores ($18 billion).[xxvi] There has been much appreciation for this, especially when contrasted with the allocation of spectrum under the UPA. There were two problems with the allocation of spectrum by the UPA. The first problem was the process was opaque and open to manipulation, both of which led to massive corruption. The second problem was the feeling the spectrum was given away cheaply leading to a revenue loss of Rs. 176,000 crore as (over) estimated by the Comptroller and Auditor General of India.[xxvii] Of the two, the real problem was the corruption and manipulation of the allocation process and not the supposed loss in allocating the spectrum because making the spectrum available at a “loss-making” price led to the spectacular explosion of mobile telephony in India.[xxviii] The presumed losses to the exchequer need to be balanced out against the gains from the expansion of mobile telephony. An ICRIER study has shown that mobile phones have improved the productivity of agriculture in India.[xxix] Kathuria and others estimate that every 10% increase in mobile penetration rate raises economic growth rate by 1.2%.[xxx] [xxxi]
In view of the massive expansion witnessed by mobile telephony in India over the last few years, I am not convinced that raising $18 billion in the recent spectrum auction is unambiguously a good thing. The winning bids that were made by the telecom companies are likely to leave them with bloated debts for some time.[xxxii] A winning bid that cripple the winner is often dubbed the “winner’s curse”! It is expected that debt servicing is likely to go up as a consequence of the spectrum auction.[xxxiii] Naturally, the telecom companies would like to raise mobile call rates.[xxxiv] However, the Telecom Minister has warned the telecom companies that they should not raise call rates and that the quality of service should not suffer.[xxxv]
How is all this related to NN? The TSPs/ISPs find themselves in a bind: rising debt levels due to their winning bids for spectrum, the inability to raise call rates and the insistence that the quality of service not suffer. The way out for these companies is to (1) increase internet usage charges paid by its customers or push them to higher tiered service and/or (2) permit last mile connectivity to only those content providers who pay fees to the TSPs/ISPs. I have stated above that additional charges for customers of streaming video are efficient in an economic sense in view of the externalities involved. Charging streaming video providers, such as Netflix, might also have some merit given their excessive use of a scarce resource. However, charging other (non-video) content providers is likely to compromise customer welfare quite significantly as I discuss in the next issue.

Issue Number 5: Charging Fees for Last Mile Connectivity
Apart from the paid “video track” mentioned above, any further restriction on content providers, in the form of fees and, perhaps, slowing down the speeds of content providers who do not pay these fees, would amount to serious discrimination among content providers. It is possible that the big content providers e.g. Google, Whatsapp and Skype, might well be able to pay fees to all ISPs to be present in their bouquet of content providers, but smaller ones might be priced out completely or they may pick and choose ISPs where they would like to be present. So, you might find, say Flipkart, on one ISP but not another. From a consumer’s point of view this would be an added restriction (apart from the tiered service restriction) on their choices. Consumers would find that while they are able to get their fill of Google and Skype, availability of other content providers would be severely rationed and in some cases arbitrarily set to zero (when a content provider refuses to pay fees to the ISPs). Clearly, this violation of NN will wreak havoc with the choices of users, business plans of smaller content providers and development of new content providers. Fragmentation of the internet is the real danger here.


[v] The AIB group came in for much criticism for its roast of Ranveer Singh and Arjun Kapoor. However, this video on NN is getting welcome attention: https://www.youtube.com/watch?v=vxaFnc-MoVE
[vii] Nicholas Economides and Joacim Tåg: “Network neutrality on the Internet: A two-sided market analysis”, http://www.stern.nyu.edu/networks/Economides_Tag_Net_Neutrality.pdf
[x] A line from the film ‘The Fly’ spoken by Geena Davis’s character; http://www.imdb.com/title/tt0091064/trivia
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Saturday, 7 March 2015

Budget 2015-16: An Evaluation

The budget for 2015-16 paints a wonderful vision for India which, it is hoped, will become a reality by 2022. Some elements of this vision are:
  1. A roof for each family in India. This would require building 6 crore houses in India
  2. Each house in the country should have basic facilities of 24-hour power supply, clean drinking water, a toilet, and be connected to a road
  3. Electrification, by 2020, of the remaining 20,000 villages in the country
  4. Connecting each of the 178,000 unconnected habitations by all-weather roads
  5. Providing medical services in each village and city
  6. Upgrading over 80,000 secondary schools and adding or upgrading 75,000 junior/middle schools to the senior secondary level
  7. Bringing the Eastern and North Eastern regions on par with the rest of the country

Obviously, the items listed above are unexceptionable and there can be no disagreement about the desirability of bringing about these changes. However, unless there is a concrete course of action regarding how this vision is to be realized, it remains a fairy tale of the “Garibi Hatao” kind that we had witnessed during Indira Gandhi’s regime. Arun Jaitley’s strategy for achieving these objectives is enhanced investments leading to high rates of growth. But the Finance Minister is a realist and clearly recognizes the challenges facing the economy. These are spelt out in his Budget Speech (paragraphs 18-22):
  • Reviving agricultural incomes
  • Increasing investment, especially public investment in the short run
  • Boosting the manufacturing sector
  • Maintaining fiscal discipline

Of course, Jaitley is not obsessed with growth alone and pays due respect to social security. In a sense, he straddles the philosophies of both Amartya Sen (with emphasis on social security) and Jagdish Bhagwati (with prior emphasis on growth).

The NDA government has been dealt a wonderful hand in the first year of its rule and it is like manna from heaven: it can claim very little credit for it. But then, to be successful, the government has to make best use of lucky breaks. The Central Statistical Organisation (CSO) has handed the NDA government a miraculously revived economy. The change of base for measuring the GDP has led a sudden increase in the growth rates for the past few years.[i] As per the earlier methodology, the rate of growth of GDP in 2013-14 was 5.1%, which has now been revised upward to 6.9%. We still don’t know what revisions might yet take place for the data in the years prior to 2013-14. But an interesting question remains: Is it possible that the performance of the UPA was not as bad as the old methodology made it out to be? We will not know the answer to this question till the CSO goes back and revises historical data as per the new methodology. This upward revision of 1.8 percentage points in the growth rate of 2013-14 has suddenly offered the NDA government a much higher base to work from. Given this, the rate of growth for 2014-15, at 7.8%, looks very impressive indeed. The other lucky break for the NDA government has been the dramatic decline in world oil prices since June 2014. Alongside this, the various measures that the RBI has been implementing for the last 18 months have begun to yield fruit and inflation has come down dramatically. This now opens up the possibility of interest rate cuts by the RBI[ii] which will further add to the growth momentum. It is important to see how the NDA government builds on these lucky breaks.

Investment Expenditures
To take the tide at the flood, the Budget has pushed hard on the investment front. The following major proposals have been put forward:
  • Rs 5,300 crore support for micro-irrigation, watershed development and the Pradhan Mantri Krishi Sinchai Yojana (Budget Speech, paragraph 29)
  • Bankruptcy law reform (Budget Speech, paragraph 36)
  • Increase in investment for infrastructure (mainly roads and railways) to rise by Rs. 70,000 crore in the year 2015-16, over the year 2014-15 (Budget Speech, paragraph 46)
  • Establishment of a National Investment and Infrastructure Fund (NIIF) with an ensure an annual flow of Rs. 20,000 crore to it (Budget Speech, paragraph 47)
  • Tweaking the PPP mode of infrastructure development (Budget Speech, paragraph 47)
  • Setting up 5 new Ultra Mega Power Projects, each of 4000 MWs (Budget Speech, paragraph 54)

 Many commentators have hailed these investment proposals of the Finance Minister and taken it as proof of his commitment for re-booting the investment activity in the economy. Two of the above proposals have an institutional dimension to it, namely, the bankruptcy law reform and the reform in the PPP mode of infrastructure development. Certainly, these are very important initiatives but only time will tell how crucial they are likely to be in boosting investment. Right now these two proposals should be viewed as showing the right intent. The other items in the list are more concrete and a more tangible evaluation is possible.

Let us consider the budgeted additional Rs. 70,000 crore to be spent 2015-16 as compared to 2014-15 for infrastructure investment in roads and railways. The Finance Minister has made it clear that this would come from budgetary outlays. As far as the Ministry of Road Transport and Highway is concerned, the budget allocation for 2013-14 on the capital account was Rs. 16,770 crore while for 2015-16 it is Rs. 33,049, which is an increase of Rs. 16,279. The allocation on the capital account for railways in 2013-14 was Rs. 30,100 and, in 2015-16, it is Rs. 40,000, an increase of Rs. 9,900. Hence, for roads and railways, the combined additional capital expenditure for 2015-16 is Rs. 26,179 crores which is only 37% of the additional Rs. 70,000 crores mentioned by the Finance Minister. This implies that the remaining 63% will have to be funded from additional Internal and External Budgetary Resources (IEBR) which is made up of profits, loans or equity of PSUs. How likely is it that the required IEBR will be forthcoming? Considering the budgets from 2010-11 to 2014-15, actual IEBR have been about 74% of the budgeted amount. Given this uncertainty associated with respect to IEBR, one cannot be confident that the target for additional infrastructure investment will be met.

As far as the National Investment and Infrastructure Fund is concerned, no allocations have been made for it. In fact, the FM quite honestly states that he will now go about finding the required funds. The 5 Ultra Mega Power Projects are at the moment mere wishful thinking. As the FM states, there is no government involvement here, and neither is any time frame stated regarding when these power projects will start nor when they will be completed. Rs. 5,300 crores have been allocated to minor irrigation, watershed development and Pradhan Mantri Krishi Sinchai Yojana (PMKSY). Very little of this is towards capital expenditure: Demands for grants numbers 1, 85 and 107 (Expenditure Budget Vol. 2) which deal with these items have allocated less than Rs. 200 crores towards capital expenditure. While some allocation for expenditure on the revenue account is required to run these schemes, the distribution between revenue and capital expenditures seems particularly adversely skewed.

Also consider the FM’s promise of building 6 crore houses by 2022 so as to put a roof over the head of each Indian family (Budget Speech, paragraph 16). No doubt the objective is laudable but it is necessary to get some idea about the magnitude of the task. Just to put matters in perspective, during the decade 2001-2011, India added 6.5 crore residential units to its housing stock.[iii] As per the vision of FM, almost the same number of units is to be added in the next 7 years. It is not clear where the funding for this is to come from. Apparently, ‘Team India’ led by the States and guided by the Central Government (Budget Speech, paragraph 16) is supposed to be in charge of this. The guidance of the Central government, at the moment, seems perfunctory. The allocation to the Ministry of Housing (Demand for Grant No. 58, Expenditure Budget Vol. II) for 2015-16 is Rs. 5634.47 crores but surprisingly all of it is on the revenue account. I would have expected at least some allocation on the capital account of the Budget. Leave alone a credible commitment, this is not even a signaling of credible intent.

Social Security Expenditures
For a government that was supposed to be the anti-thesis of what Amartya Sen stood, the Budget has given a lot of attention to social security.  Almost Rs. 35,000 crore has been allocated to Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) which is more or less on par with what was allocated during the UPA regime. The FM has stated that “Our government is committed to supporting employment through MGNREGA. We will ensure that no one who is poor is left without employment” (Budget Scheme, paragraph 32). This is an amazing turnaround from the earlier views which had called MGNREGA a glorious failure.[iv] In fact, the Economic Survey 2014-15 is even more effusive in its endorsement of the employment guarantee scheme “The MGNREGA program has the virtue of being reasonably well-targeted” (Volume 1, p. 18). Critics of the programme had blamed it for the rise in rural wages which had made it expensive not only to hire labour in rural areas but also created a shortage of labour for industry since labour, “pampered” by high rural wages, had turned “lazy”. Incidentally, this is so reminiscent of Mitt Romney contemptuous comment about the "lazy" 47% Americans during the last US Presidential elections! In any case, Raghuram Rajan has rubbished these claims stating that MGNREGA contributed only about 10% of the rise in rural wages.[v]   

Three schemes for insurance and pension have been announced. The Pradhan Mantri Suraksha Bima Yojna will cover accidental death risk of Rs. 2 lakh for a premium of just Rs. 12 per year. How realistic is this? A quick check on the Life Insurance of India premium calculator[vi]  is quite instructive. The Jeevan Rakshak product covers accidental death. For an adult aged 27 years (this is the median age in India), for a term of 10 years and to receive a cover of Rs. 2 lakh, the yearly premium is Rs. 16,275. Sure, the product that will be offered by the government will be quite different from the example I have used, but the difference in the two premiums indicates the subsidy component that is implied by this proposal. The situation with respect to the other two products - Atal Pension Yojana  and Pradhan Mantri Jeevan Jyoti Bima Yojana  - is similar.

Fiscal Consolidation
Fiscal consolidation has been the Achilles’ Heel of Indian public finances. These finances took a big hit especially after the onset of the worldwide recession in 2008. The Economic Survey notes “failure to control expenditure, … combined with excessive counter-cyclical policies in the second phase (2009-12) led to a loss of fiscal control that contributed to the near-crisis of 2013” (Economic Survey Vol. 1, p. 20). Even though fiscal policy is supposed to be counter-cyclical (i.e. lower budget deficits or even budget surpluses when the economy is doing well), there is general criticism that Indian fiscal policy has been pro-cyclical (higher budget deficits when the economy is doing well). The Economic Survey seems to suggest that the fiscal policy after 2008 was correctly counter-cyclical even though excessively so. This is similar to the position I had put forward in an earlier post.[vii]

The Fiscal Responsibility and Budget Management (FRBM) Act was passed in 2004-05 with a target for Gross Fiscal Deficit (GFD) of 3% of GDP and a target for Revenue Deficit (RD) of 0%. The laudable objective behind these targets was that, if the RD were confined to 0% of GDP, then any borrowing arising due to the presence of GFD would be only for capital expenditures leading to increase in investments.[viii] Of course, any value of RD which raised its ratio to GDP above 0%, would imply that borrowings would be used for financing RD and that much less would be available for capital expenditures. The chart below gives the pattern of deficits over the last few years:


The gap between the GFD line and the RD line shows the quantum of borrowings required to bridge the gap which should ideally be used for capital expenditures. However, since RD is not at 0%, at least some part of the borrowings goes towards funding the revenue deficits.

The Finance Minister has stated that he has relaxed the schedule for achieving the targeted GFD of 3% of GDP and that instead of the ratio being 3.6% of GDP for 2015-16, as announced in the previous budget, it will now be 3.9% of GDP. This implies a budgeted GFD of Rs. 555,649 crore instead of the planned GFD of Rs. 512,907 crore (i.e. 3.6% of the predicted GDP for 2015-16). Thus, the FM has a leeway of Rs. 42,742 crore which, it is hoped, will be used for capital expenditure. Many of these estimates will have to be amended if the projected growth rate of GDP for 2015-16 is not realized. In nominal terms, the rate of growth for 2015-16 is projected to be almost 14% (Rs. 14,247,410 crore in 2015-16 as compared to Rs. 12,503,122 crore in 2014-15). Assuming a rate of inflation of between 5% and 6%, the rate of growth of real GDP would be between 8% and 9%. Is this growth rate realistic? Given the 7.4% rate of growth estimated for 2014-15, a rate of around 8.5% seems within reach. The only concern that I have is the recent change in methodology for measuring GDP, which as stated earlier, led to a sudden jump in the growth rate of 2013-14. It is still not clear why that jump took place but I do hope it is not a statistical anomaly which might have an impact of the growth rate being projected.

The focus on cutting and/or targeting subsidies is a major step that has been taken in the budget. Once again, a programme that was much reviled has made this targeting possible. I refer to the Aadhar project which was in the process of being wound up by the NDA government but better sense prevailed. The FM has stated that Rs. 6,335 crore have so far been transferred directly, as LPG subsidy, to 11.5 crore LPG consumers. For 2015-16, the total LPG subsidy amounts to Rs. 22,000 crore (Demand No. 75, Expenditure Vol. 2) of which Rs. 21,140 will now be under Direct Benefit Transfer for LPG (DBTL) scheme.[ix] Assuming that these subsidies are well-targeted, this represents only about 8.5% of the total subsidies bill of Rs. 243,811 crore. Plugging leakages and targeting the remaining 91% of subsidies is going to be a daunting challenge given that interests of major groups/lobbies are involved in the continuance of fertilizer subsidy, food subsidy inclusive of support prices for farmers and interest subsidies.

Conclusion
The expectation from the 2015-16 Budget was that it would usher in Big-Bang reforms and that it would be as path-breaking as the 1991 Manmohan Singh budget that brought in economic reforms. That budget did change the direction that the Indian economy had followed up until 1991 and hence it was, indeed, path-breaking. There was no need for such a radical budget at the present time. True, the budget needed to show a sense of purpose; and it needed to halt the drift in policy making that had set in; also true that it needed to give growth an impetus; and yes, it needed to signal to the Indian economy and to the world that there was a strong and sure hand in charge at the government. I would say that the Finance Minister’s Budget Speech has done all that. The importance of investment and growth has been brought to centre-stage but, despite this, the commitment to social security has not been abandoned. Both, the Budget Speech and the Economic Survey, have recognized the benign environment facing the Indian economy and both documents have emphasized the importance of taking advantage of this. My critique of the budget has been that the actual actions (in the form of allocation of funds) had not matched the words. This is a trend that I have observed over the last few budgets: impressive announcements have been made in the budget, huge sums of money have been dangled before the public, but the fine print in the other budget documents has not matched up to these grandiose announcements. This raises doubts whether budgets have become elaborate smoke and mirrors exercises which do not follow up with credible commitments in the form of assured funding. I have similar doubts about Arun Jaitley’s 2015-16 budget as well.

[viii] This is an approximation. Capital expenditures could be more than the level of borrowings since other receipts such as recovery of loans and disinvestment proceeds could also be used for capital expenditures.













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Friday, 13 February 2015

Delhi Elections: A Rap on the Knuckles for the BJP

The Delhi Assembly elections have thrown up a result that was surely beyond the expectation of even the most optimistic Aam Aadmi Party (AAP) supporter. Likewise, not even the most pessimistic BJP supporter would have expected such annihilation by an upstart party that had shot itself in the foot barely a year back and had come a cropper in the Parliamentary elections of May 2014. Before the event, the battle seemed so stacked against AAP that David versus Goliath might have seemed like a battle among equals! There already are and there will be reams of analyses in the coming days on this battle for Delhi. Let me add my bit here.

I am going to use some elements of the median-voter theorem (MVT) of Public Choice to analyse the Delhi elections. The MVT works best in the context of a two party system where the vote-shares are divided between the two parties. The median voter (located at the half-way mark, point m, in Figure 1 below) has 50% of voters to the left and 50% to the right. If either political party is able to capture the median voter, it will have 50% of the votes plus one more vote (that of the median voter) giving it a simple majority, while the losing party will have just 50% of the votes. The party which captures the median voter just wins the election by one vote.[i] [ii]



In Figure 1, we contextualize the MVT to the contest between the AAP and the Bhartiya Janata Party (BJP), ignoring the other parties for the moment. To capture the median voter’s vote, both AAP and BJP would be expected devise appropriate policies (or make promises, as is the wont of political parties). Figure 1, in addition to the position of the median voter (m), also marks out an area to the left of the vertical line at point a and to the right of the vertical line at point b. The area created to the left of line at a represents the committed voters of AAP while the area to the right of the vertical line at b represents the committed voters of BJP. Committed voters will vote for the party of their choice irrespective of policies proposed or promises made. These are assured or guaranteed votes as far as the parties are concerned. The area between the vertical lines at a and b represents swing voters. Such voters are swayed by policies proposed by the parties: the party that offers more credible policies/promises will attract more of the swing voters. Elections, therefore, are finally decided by swing voters. There is, of course, interplay between the committed voters and swing voters. The larger the number of committed voters that a party has, the less would be its dependence on swing voters.[iii]

We need to, of course, remember that there was an important third party in the fray as well, namely, the Indian National Congress (INC). The vote shares of these three political parties – AAP, BJP and INC – in the 2013 and 2015 elections were as follows (Table 1):


Table 1: Vote Shares in Delhi Elections
PARTY
2013 ELECTIONS[iv]
2015 ELECTIONS[v]
AAP
29.5 (28)
54.3 (67)
BJP
33.1 (31)
32.2 (3)
INC
24.6(8)
9.7(0)
OTHERS
12.8 (3)
3.8 (0)
Note: Numbers in brackets are seats won

For the 2015 elections, it was clear that there were two major players, the AAP and BJP and that the INC and OTHERS would struggle to keep their share of votes intact. The vote shares of the INC and OTHERS from the 2013 elections were, in a sense, thrown into the pool of swing votes. Consequently, a significant part of the combined vote share of INC plus OTHERS from the 2013 elections was up for grabs between the AAP and BJP. As it transpired, INC and OTHERS were able to protect only 13.5% (9.7% + 3.8%) of their 2013 vote share, while almost 24% was captured by AAP. None of this went to the BJP. The vote share of AAP rose to as high as 54.3% which was more than enough to capture the median voter in terms of Figure 1 (please see caveat in endnote ii).

Astounding as the ability of the AAP was in capturing everything that the INC lost, even more shocking was the complete inability of the BJP to attract any of these votes. This was in complete contrast to the BJP’s performance in the 2014 Parliamentary elections. The BJP had then managed to capture the entire reduction in vote share of the INC (28.6% in 2009 down to 19.5% in 2014) at the all India level and had increased its vote share from 18.8% (2009) to 31.3% (2014).[vi] [vii] What went so horribly wrong for the BJP in Delhi? The party that had won so spectacularly in May 2014 as well as in the subsequent state elections had not just been defeated, it had been annihilated. Is it mere disappointment with the BJP that we are seeing among the voters of Delhi or are we seeing anger? This is a legitimate question to ask since the same Delhi voters had given the BJP an overwhelming victory in the Parliamentary elections barely a few months ago. The party had then won all 7 parliamentary constituencies in Delhi and had polled 46.63% of votes.[viii]

The BJP’s winning platform in May 2014 was its secular, development agenda. The vision of a well-governed, corruption-free India that Modi painted had attracted large numbers of swing voters – voters who may have voted for the INC in the 2009 elections. By the time the 2014 elections approached, these swing voters had become disgusted with the scam-tainted INC and its directionless policy-making. In the circumstances, such voters were willing to give Modi a chance. Swing voters, by their very definition, did not subscribe to the religious agenda of the BJP nor were they moved by calls for building the Ram temple. That was the domain of the committed voters who would have voted for the BJP regardless of Modi’s development agenda. The sharply focused campaign that Modi ran was good enough to convince the swing voters that the destructive riots of 2002 were a distant memory and the religious fundamentalists who had instigated these riots would be held in check.

To be fair, during the entire rule of the BJP so far, Modi and his team have remained true to the development agenda that was promised even though there are no concrete achievements to speak of as yet.[ix] However, the support groups of the BJP, notably the RSS, have begun to run a religious campaign that is deeply divisive. I have discussed this at length in an earlier post.[x] The earlier feeling that these acts were the handiwork of fringe groups has given way to the apprehension that the fringe has moved centre-stage. Is it possible to call the RSS a fringe group when every member of the BJP’s top leadership has apprenticed with it and continue to have deep relationship with it? Programmes like ghar-wapasi (reconversion of Muslims or Christians back to Hinduism), provocative statements by elected members of the BJP, riots in parts of Delhi and desecration of churches in Delhi have created unease among the swing electorate who migrated to the BJP in the 2014 Parliamentary elections. This has been coupled with deafening silence from the BJP leadership, notably Modi. It may still be true that Modi has tried to curb such behavior away from the public gaze. But how is the general public supposed to know that? Or, even worse, how is the public to believe that Modi has cracked the whip in private, when the irresponsible Sakshi Maharaj periodically suffers from verbal diarrhea.[xi] It could well be argued that there is no need for Modi to “wash dirty linen in public” but complete silence from a normally twitter-happy Prime Minister must seem jarring.

Significant events, such as riots in Trilokpuri and desecration of churches in different parts of Delhi, did not, as far as I know, elicit a single tweet from the Prime Minister. The minorities might well wonder if their hurt and insecurity is not even worth 140 characters on the PM’s Twitter account. The message going out by these silences was that, either Modi agreed with the religious agenda of the RSS and other yahoos, or he considered it a small price to pay to advance his development agenda, or that he was not strong enough to hold in check these attacks on his autonomy. Was it not exactly this same helplessness that led to the lampooning and finally booting out of Manmohan Singh’s government? The problem then was not a communalizing agenda as now, but acquiescing to corruption that swirled around the then Prime Minister. Was it not also felt that there was a remote control – Sonia and Rahul Gandhi[xii] – that was setting the agenda for the Manmohan Singh government? Remember the various claims made by Sanjaya Baru[xiii] and Natwar Singh?[xiv] How is the current situation, with RSS as the new remote control, any different?

There must have been reasons within the BJP which would have also contributed to the Delhi debacle. The most obvious would be the imposition of Kiran Bedi as the chief ministerial candidate. It is common knowledge that other aspirants to Delhi’s chief ministerial position – Harshvardhan[xv] and Satish Upadhyay[xvi] – were peeved by this development. Perhaps the supporters of these worthies were even more devastated at being denied the opportunity of getting on to the gravy train once their leaders assumed chief ministership. Would these disgruntled elements have actively worked against the BJP and Kiran Bedi? Bedi’s husband certainly seems to think so.[xvii] What seems certain is that enthusiasm of BJP cadres aligned with Bedi’s rivals would definitely have waned. The lackluster campaigning by these cadres would have made it much easier for AAP to capture the votes that were formerly aligned with the INC. The AAP had also cleverly positioned itself as the more reliable alternative to the INC as far as the minorities were concerned. Importantly, the minorities found this positioning credible enough to switch their votes from the INC to AAP and give the party victory in 67 out of the 70 assembly constituencies. As an aside to this stunning victory, I would like to note that I am uncomfortable with such domination by any single party in a parliamentary system. With no worthwhile opposition in sight in the Delhi assembly, there will be no checks on the functioning of the AAP – something that is critical in a democracy.

The results of the Delhi elections are being projected as a referendum on the Modi government at the Centre. I believe that is stretching the message of the Delhi results too far. Of course, the way BJP acolytes are trying to protect their leader from the stigma of defeat is amusing and shows that the more things change, the more they remain the same![xviii] This was exactly how servile INC members had tried to shield Rahul and Sonia Gandhi from the stigma of defeat in election after election. Be that as it may, it is true that Modi and Amit Shah gave far too much importance to these elections – after all what other message is conveyed by the rallies that Modi addressed, by all Cabinet ministers being co-opted for campaigning and by mobilizing more than a 100 MPs for election duty? Modi himself targeted Kejriwal and, very distastefully, called him an anarchist and a Naxalite.[xix] Given the blood on Naxalite hands, this was almost like calling Kejriwal a mass murderer. For a person who was incensed when Sonia Gandhi used the phrase “maut ka saudagar (merchant of death)”[xx] using the Naxalite appellation for Kejriwal was as despicable.

Many analysts are perhaps reading rather too much into the results of Delhi. I do not believe that the message from Delhi suggests that people are tired of Modi’s government at the Centre. The message is more like a rap on the knuckles, a sharp reminder from the electorate that the BJP government needs to begin delivering on its promises; that it needs to remain focused on the secular agenda of economic development and governance; that it needs to shake off the religious vestiges that always seem to cling to the party; and that it needs to hold in check the rabid Hindutva elements as represented by the RSS and other obscurantist groups. The question is whether the BJP government will heed this call and confine itself to the straight and narrow path of development for all Indian without discrimination or will it rush straight back into the welcoming embrace of the religious fundamentalists? The BJP has a little over four years to deliver before it faces the national electorate which may well pick up some lessons from the voters in Delhi.

[i] https://www.cornellcollege.edu/politics/Reading%20-%20The%20Median%20Voter%20Theorem%20and%20its%20Applications%20-%20J.%20Poulette.pdf
[ii] Note that the MVT applies to each election/constituency separately and not for a group of constituencies as, say, in the Delhi assembly.
[iii] Of course, in a multi-party situation, the situation is more complicated. For a party to win the elections, all it needs a plurality – the largest percentage of votes polled which need not cross 50%. Besides this in a first-past-the-post type of elections, as in India, percentage of votes won has only an imperfect relation with number of seats or constituencies won.
[iv] http://eci.nic.in/eci_main/StatisticalReports/AE2013/DelhiAE_2013_stat_report.pdf
[v] http://eci.nic.in/eci/eci.html
[vi] http://eci.nic.in/eci_main/archiveofge2009/Stats/VOLI/12_PerformanceOfNationalParties.pdf
[vii] http://eci.nic.in/eci_main/archiveofge2014/20%20-%20Performance%20of%20National%20Parties.pdf
[viii] http://eci.nic.in/eci_main/archiveofge2014/17%20-%20State%20wise%20seat%20won%20and%20valid%20votes%20polled%20by%20political%20party.pdf
[ix] It is true that inflation has been tamed but that is the success of monetary policy of the RBI initiated way back during the UPA rule. Monetary policy is characterized by notoriously long lags: see Kapur and Behera, 2012 (http://www.rbi.org.in/scripts/PublicationsView.aspx?id=14303). Softening world crude oil prices have also helped lower inflation but, again, the government can take no credit for it. As far as growth is concerned, the picture is not yet clear and it has been made more confusing by the revised data for GDP (http://www.livemint.com/Politics/xziKtmtOxBJntZb41p2hDL/India-GDP-seen-surging-74-in-data-that-has-puzzled-economi.html).
[x] “The Art of Scoring Own Goals”, http://ajitkarnik.blogspot.ae/2015/01/the-art-of-scoring-own-goals.html
[xi] http://www.ndtv.com/india-news/pm-modi-will-have-to-be-a-boatman-warns-bjps-sakshi-maharaj-736673
[xii] http://archive.indianexpress.com/news/rahul-tears-ordinance--and-the-pm/1175119/
[xiii] http://www.ndtv.com/elections-news/narendra-modi-uses-sanjaya-baru-book-to-target-sonia-gandhi-rahul-gandhi-557987
[xiv] http://www.indiatvnews.com/politics/national/natwar-singh-book-no-files-sent-to-sonia-gandhi-manmohan-singh-19218.html
[xv] http://www.ndtv.com/delhi-news/amid-reports-of-rift-harsh-vardhan-kiran-bedi-present-united-front-730032
[xvi] http://zeenews.india.com/news/delhi/dissent-in-bjp-over-parachute-cm-kiran-bedi-widens-satish-upadhyay-heckled_1533498.html
[xvii] http://www.ndtv.com/elections-news/bjp-cadre-failed-to-support-kiran-bedi-says-her-husband-738515
[xviii] http://www.dnaindia.com/india/report-maharashtra-cm-devendra-fadnavis-says-delhi-debacle-not-pm-narendra-modi-s-loss-2060106
[xix] See the following for a very good discussion of these issues: http://www.livemint.com/Opinion/vKiSC1MsJSYEakFVgT9pGN/Modi-Kejriwal-Naxals-and-Vedic-anarchism.html
[xx] http://www.firstpost.com/politics/modi-slams-sonia-gandhi-for-inciting-people-of-gujarat-550665.html
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