The Unknown Education Revolution in India

This is an op-ed piece of mine that appeared in today's issue of Mint. In response to the photo-post Photo-state of schools in an urban slum in Delhi, there were a few comments and emails deploring the state of schooling. I couldnt present the empirical side of the story, that there are improvements happening on ground. That there has been progress made through the regulatory cracks of schooling.So I wrote this article to present the other side of the story.

Unknown Education Revolution

There is a silent and telling revolt against the poor performance of government schools

Naveen Mandava

Walking around the hot summer streets of Sangam Vihar—Delhi’s largest slum colony sprawled over 150 acres and home to 4 lakh people—in 2005, Aditi Bhargava noticed that almost every street had a school.

These schools were often just holes in the wall or a room with a few benches populated by eager children. They were not government funded or subsidized, nor did they have world-class facilities.

These were low-budget schools, where poor parents paid small amounts extracted from their meagre wages in the hope that their children would get a good education, a promise too rarely delivered at the “free” government schools. View photographs in the Photo-state of schools in an urban slum in Delhi post.

Aditi’s discovery piqued my interest in this phenomenon. I realized that Sangam Vihar was not a path-breaking exception but part of a mainstream, silent and telling revolt against the poor performance of government schools.

Independent research continues to report strides both in the quality and quantity across all private schools in urban and rural areas. Most people in urban areas and at least 28% of the rural population already have access to private schools.

The surprise is not in the absolute number of schools, but their proliferation rate. Nearly 50% of the rural private schools accounted for in the study conducted by Harvard economists Michael Kremer and Karthik Muralidharan were established after 2000, and nearly 40% of private school enrolment is in these schools.

This massive expansion of private primary schooling across India is a harbinger of the Unknown Indian Education Revolution. The survey found that more than 80% of government-school teachers send their own children to a private school. When government teachers don’t trust government schools with their own children, it’s time to sit up and take notice.

So what is fuelling this extraordinary surge and what is the quality of education being imparted? The key to understanding this surge lies in the low entry barriers.

Schools need a “recognition” status so that they can issue valid “transfer certificates” to students leaving the school. But what the recognition status primarily ensures is that teachers are paid according to relatively high government salary scales.

In reality, a primary school doesn’t strictly need “recognition” from the state to start business. Also, rural schools don’t read too much into the transfer certificate. So the rural market for primary education is comparatively unregulated vis-à-vis to secondary education. This is similar to the software industry in India. The government’s light regulation of the sector helped it become an engine of growth.

It is not just the rural rich who are moving to private schools. Studies have found that a large mass of parents are shifting because of the low quality of government education, and concern for their children’s future.

Regulatory gaps and dissatisfaction with government schools are the key factors driving the demand for private schooling. There is already evidence of such a surge in Punjab, Haryana, Uttar Pradesh, Andhra Pradesh, West Bengal, Karnataka, Meghalaya and Delhi. In seven districts of Punjab, 86% of the private schools are unrecognized.

A majority of these private unrecognized schools are operating outside the scope of policymakers’ radars. It is a “don’t ask, don’t tell” situation. Officials think of it as a fringe phenomenon. Consequently, these schools do not make it into any of the education statistics compiled by education departments.

Private schools benefit from being “unrecognized” because they save on labour costs. Teacher costs are the largest expense in the schooling sector. State governments easily spend 90% of their total budget on teachers. In contrast, private-school teachers are paid one-fifth to one-tenth of government salary levels and have more flexibility to innovate and improve learning outcomes.

Studies carried out in India all share the common conclusion that private-school students outperform their government-school counterparts. For example, in a 2005 Delhi study, James Tooley found that children in low-budget unrecognized private schools did 246% better than government school children on a standardized English test, with around 80% higher average marks in mathematics and Hindi.

There are important lessons here for education policymakers in India. Education entrepreneurs need to be encouraged by removing rules that hinder the establishment and operation of schools in the primary, secondary and higher secondary areas of education. Competing schools will create choices for parents, improving access and quality for all. The government can then focus its limited education budget on the neediest sections of society.

Inadequate education in India is not only a funding problem but also a result of over-regulation of the school market. The burgeoning market of low-budget private schools has enormous potential to do public good.

Naveen Mandava is a doctoral fellow in Public Policy Analysis at the Pardee RAND Graduate School in the US. The school is part of the RAND Corporation, a non-profit research organization.

Must-reforms for civil aviation in India

Not unexpectedly, airlines are in cut-throat competition and bleeding each other with the government stepping in to set the house in order. Ajay Shah has written a good insightful piece on the need of competitive markets in Indian aviation sector at Revel in Competition. Read other related articles at his blog here.

Ajay Shah has suggested three reforms which I will interpret as follows

1. Disband Ministry of Civil Aviation
2. Open-skies foreign policy
3. Competition (Unlimited) Commission
   

There are two more crucial points that could have been added to the reforms on the basis of market allocation of resources.

Dismantle route dispersal guidelines
Commercialize aviation infrastructure

Allow private airports to be set up or speed up the process of airport siting and private financing. Let the rule of law handle the issues of environment and noise. Next, commercialize the Air Traffic Control Systems. As of now, both airports and ATCs are managed and funded by the government. Let them move into the private sector. In the short term, opt for peak-load pricing at congested airports.

A lesson from the deregulation of the airline industry has been that airlines followed the hub-and-spoke model. Development of satellite airports in India can hugely increase airline performance by facilitating this model.

For further understanding of the problems affecting the civil aviation sector in India read the Road Map for the Civil Aviation Sector which does come across as illuminating.

Microeconomic policy reforms needed in India

Much policy reform debate in India is often focused on the BIG issues like macro-stability, privatization and capital markets. These are only the tip of the iceberg of desirable policy reforms. The real action of enabling markets is often at the microeconomic policy level.

The report Industry level analysis: the way to identify the binding constraints to economic growth by Vincent Palmade captures this succintly. Their abstract runs as below.

There are many economic diagnostic tools available which are trying to identify the constraints to economic growth in a given country. Unfortunately these tools tend to provide inconclusive and often conflicting answers as to what the most important constraints are. Even more worrisome, they tend to overlook the many industry specific policy and enforcement issues which, collectively, have been found to be the most important constraints to economic growth. This is the key finding from more than ten years of economic research by the McKinsey Global Institute (MGI). The MGI country studies have been uniquely based on the in-depth analysis of a representative sample of industries where clear causality links could be established between factors in the firms’ external environment and their behavior, in particular through the analysis of competitive dynamics. They showed in details how industry specific policy and enforcement issues were the main constraints to private investment and fair competition – the two drivers of productivity and thus economic growth. This finding implies that governments and international financial institutions should rely much more on in-depth industry level analysis to uncover product market competition issues and set reform priorities. These analyses should include the often overlooked but critically important domestic service sectors such as retail and housing construction.

They point out much-needed reforms in these arenas in order to jumpstart product market competition. Non-tariff trade barriers; Licensing restrictions; Price/ Product restrictions; Inadequate regulations of quasi-natural monopolicies and social sectors; Land market issues and the Unequal enforcement/informality trap. The last one is especially relevant for the distortions it introduces in markets to the disadvantage of both informal and formal enterprises: underdeveloped informal enterprises and absence of fair competitive field.

Once you start talking of microeconomic policy reforms, you cannot ignore legal reforms in the economic arena. There are studies in selected sectors in India which show that 20% of the selling price is incurred as additional transaction costs imposed by legal and infrastructural ones. Of course the true cost is what they deter in the long-term. For a rare study of much-needed legal reforms in India do read Bibek Debroy's Reforming the Legal System. He argues that market-oriented reforms cannot succeed without legal reforms and points out glaring loopholes in a host of laws. His analysis clearly brings out a paradox afflicting India: over-legislation and under-governance. The last 16 pages in fact are a list of laws that show how over-regulated is India. For a more fundamental understanding of legal reforms this post of mine may be helpful.

Both studies are recommended for their high IP (Insight/Pages) ratio!

Cross-posted on the Indian Economy blog.

Understanding Gawker and regulations much better

The legal system of India can be too daunting and leave you gawking but I shall try and unravel it. A legal system exists to decrease transaction costs and provide incentives for appropriate behaviour. The legal system has two parts: the law and judiciary.

Laws are often a mix of government-based legislation (civil law or legislative regulation) and the decisions made by judges over a long period of time (common law). India has a predominance of of civil law compared to common law. In addition to the civil law in India, you have the criminal law.

Salman Khan running over homeless victims is an example of criminal law. If you are a victim of clinical drug trials with mis-information, that is an example of civil law, especially tort law. A tort law is best exemplified by the famous McDonald's coffee case.

Again, laws in addition to a statutory component have an administrative one. Administrative law (or bureaucratic regulation) consists of government orders, regulations and rules. These, though not part of statutory law, are sanctified and allowed under some statutory law or the other. These gave rise to the much criticised inspector-raj and licence-raj. The statutory component is presided over by the judges. Finally, we have the procedural component of law which is concerned with the facilitation of the movement of a lawsuit through the legal system. This is the functional aspect of the judiciary. Accused languishing in prisons without trials are examples of a poor criminal procedural sytem in action. Cases pending in courts are due to the procedural laws.

Now a few first principles.

My car gets damaged because of your carelessnes. You should pay the damage incurred. This is a liability rule. But then you have the compensation only if a damage happens. What if the car runs into you and you die? For that there is the property rule. This rule tries to set the damages sufficiently high so that there is a reason enough to always deter.

Example. For car accidents you hang the perpetrator. Pretty soon nobody would be driving. And for rapes if you impose a fine of Rs 250, I dare not look at such a society. The difference is crucial. In case of liability rule we are trying to provide compensation. But in the property rule we are trying to provide punishment.

Liability rules function best in a situation of common law (even civil law will do); insurance companies and where tort lawyers have incentives to "prey" on negligence causing harm. Entities soon have incentives to cause least damage (externality) to others, or if they do, then they have to pay the compensation.

When I am asking for a reform in administrative law for clinical trials and that let it be subject to tort law, that is asking for a legal reform in civil law. That is subject to the liability rule. In the case of clinical trials, the insurance company would not "allow" a drug company to carry on such drug-trials. Or the company would have every incentive to try and lower the probability of an adverse result in the drug-trial. It is here that information comes into play for the company will try and make a defense that it gave every possible info to the person. That is why you see doctors in US inundated with info from drug companies. Because the doctors suffer in case of a malpractice, the drug company suffers and the insurance companies involved.

When you are trying to set up a system of deterrence for criminals (criminal law) then you are using the property rule. The government arguably has a role here. This is an application of the liability rule to a criminal activity. I agree. It is not enough to make it work! Unless you have a property rule in implementation in tandem.

There are scenarios where insurance companies can fulfill the role of providing security in a completely free market but that is not crucial to our discussion here. The important part is that there are much efficient ways (example What should be the punishment for rape?) of providing deterrence to criminals then the present methods, and there can be market-based mechanisms for having the right incentives for liability rule. Part of this efficiency will arise from legal and judiciary reforms: less administrative law; better-designed statutory law and a better procedural law. A more elaborate version is provided in Reforming the Legal System and Judicial reforms - Law and Contract enforcement. I would recommend the latter considering its high IP (Insight/ Pages) ratio. If you are really interested in criminal justice reforms you should read the Malimath report.

Fundamentally, the question is how does the government get to a scenario where it concentrates on the efficient provision of the most important public goods, namely law and order, and defense. The answer is by shedding activities that it is neither efficient nor equitable. And that is where markets help to shed the inefficient economic engagement of the government. We need less inspectors closing shops, destroying cycle rickshaws and muzzling entrepreneurial activity. We need more police personnel, courts and lawyers out there to be a deterrence to the more sinister crimes of murder and violence.

Note: No malice included. Hopefully this will give rise to a better understanding of regulations or atleast a worthwhile debate! For a conceptual overview one can read Law as a Constraint. For judicial reforms read Delays, Costs and Glorious Uncertainity-How Judicial Procedure Hurts the Poor. For understanding the application of liability rule to the state, (yes, why not?) read Tort Law in India.

Understanding regulation in markets better

I alluded to costs in the previous post because there is a dramatic way it relates to the understanding of markets and well, libertarianism. I have my operational reservations against libertarianism but there is need for a better understanding of this animal.

A simple rule often works dramatically well when you apply it consistently. Let who does a damage pay for the damage. There are complexities which go beyond the scope of this post but that should suffice a starting point to think more. The idea is based on the cost incurred in a market setting. So if a market does not involve the payment or consideration of externalities than it is a poorly designed market. All that talk about freedom and choice of libertarianism is first-level knowledge. When you understand who is incurring the cost and who should pay for it, you are one level deeper into the complexity of it. The next part is in designing the incentives to make sure that the party who does the damage pays for it or takes into account the costs of his activity that may cause damage.

For the context of what follows read A Nation of Guinea Pigs, but it is not necessary.

The difference between bureaucratic regulation and legislative regulations should be pointed out. Having a government board to clear a clinical trial is bureaucratic regulation. Having a regulation that allows a legal argument between two parties for deciding the costs incurred, in case of a faulty trial, is a legislative regulation.

India has an oversupply of the former and an undersupply of the latter, in quality and quantity.

In fact, there is a crying need for regulation. Free-markets need more regulations and litigation. But to equate demand of regulation with government supply of regulation is an usual jump in logic and can be faulted as this argument When regulations are necessary. Today the government does bureaucratic regulation which we know doesn't work and well, won't work. If something goes wrong, you cannot point to the government and ask them for compensation. If the legislative regulation had allowed for litigation and mechanisms like civil tort, you would have a host of lawyers scavenging the grounds of Sevagram. Ultimately the true costs and benefits of guinea-pig treatment would be taken into account by both parties.

In finality, you need more legislative supply of regulations that allow litigation between the parties directly, not bureaucratic ones that distort the market of costs.

Addendum: You find the same search for this understanding echoed at AICTE: Waking up from 61 years of slumber.

Regulation reality in India!

Most pro-market people are against regulations and indeed it is fashionable in this day and age to be against regulations. But what do regulations mean in an operational context? Here is a short note to illuminate more on it.

Acts are framed in the Parliament. Each Act (usually) denotes a particular agency to have certain power to make rules to enforce the Act. The Act could also be enforced through the court. Violation of contracts would involve the court (these are legislations) whereas the requirement to open a shop usually involves rules framed by a government department (executive rules). So while one is speaking against regulations, one should be clear what kind of regulations is one against.

I understand that to most of us the Parliament is a black-box that churns out Acts. Let me recap the process of framing an Act in its entirety, based on my on-field experience. Comments are welcome for any egregious errors.

• First, you have the crafting of bill by the legal department supposedly based on department expertise, political will, and discussions with stakeholders. Involvement of stakeholders is a recent and not-too-often phenomenon.
• Second, they are discussed (that is an exaggeration) in the parliament.
• Once it is passed, it becomes an Act but is still not enforceable unless the rules (basically the rules framed by the government department concerned with the Act, an example is amount of fine) are framed and published in the Gazette of India.

My problems with this process are threefold.

The policies and bills are done in a knowledge vacuum. There is no consideration of research (and by research, I do not mean newspaper reports) regarding the state of reality. Bureaucratic ideas and political determination (interest groups have a stake through the political candidate) are the key drivers of the bill. There are sordid stories of the bills being rehashed with just changes in keywords, but let me save those inside stories for later. There is no cost-benefit analysis of the regulations framed. There are no clear standards by which you can measure the efficacy or "implementability" of an Act. Moreover, there is no feedback mechanism for knowing how the Acts have fared.

The Acts are way too abstruse for analysis by journalists or serious media professionals or even educated citizens. Moreover, they are not easily available.

The executive rules are not subject to public discussion which I believe substantially add to the sting of legislations. Often this happens because unilateral powers are granted to an agency head which look reasonable in the Bill but look devastating once the executive rules are framed.

There are other sophisticated considerations like sunset laws (expiry date for some regulations); risk-assessment tests for Acts like the Prevention of Food Adulteration Act; etc.

In short, legislation-crafting in India is a botched-up process, save a few exceptional departments. That only implies there is an unexploited market in the future for developing legislations based on sound research and sophisticated analysis.

A personal note on school boards and schooling monopolies!

Most of our lives is occupied by these four factors in various proportions: pride, money, love and the skill of learning. Each is further framed by the context of people and issues that it addresses. As much as lack of money and love hamper our life, an absence of pride/ achievement/ self-satisfation can lead us to an unfulfilled life. And today, it is not only what you learn but how good are you at learning that could set you apart. Here is my take. How much of the education doled out in schools leads to an increment in the contribution of those factors to our lives? I am afraid little and there is huge room for improvement. A privileged few do have access to them but not the majority. But more on it later.

Let me concretise my take through an example of each.

Money is my favourite unschooled subject so let me start with it. Financial literacy or more concretely concepts like compound interest can be far valuable than the exact location of Ganges on the map of India. Pride - the pride of building something or even teamwork with complementary skills of people. Love - an idea of it starting from why to love or how to love and the different kinds and no, sex education is not all about love. The skill of learning! There are good and bad ways of learning and more importantly, individual learning styles. How does one acquire knowledge of them? Ultimately what you may retain from your schooling is the art of learning. My guess and challenge is that the essence of what is taught in schools in India can be taught faster and better, and you don't need all of it. This leads to a Pandora's Box about competitive examinations, parents' aspirations and etc. But let me keep the message simple.

The very subject of education will elicit a different operational concept in your mind. And what I have elaborated may be proved wrong or unsuitable! But there is only one way to test it. It is unjust to subject students to your belief of schooling. You need choices of schooling to evaluate your option of schooling.

What does that imply for public policy?

For me, school boards are one of the worst forms of territorial and state-mandated monopolists in India. Each has a well-defined territory, near-exclusive rights to customers and high entry barriers for competitors. Most schools are hugely constrained by the state and lack of options to affilate to a school board. No wonder there is no competition among school boards to better their schooling services like curricula and pedagogy, and set benchmarks of performance. Neither will you have heard of them testing their own tests and using feedback from past tests to improve the design further. As far as I know, you cannot set up a private board for schooling in India. The ISC board gets away with it because of their minority-status. All grant-in-aid schools except of minority status have to affilate to the state board. If you set up a private school and refuse to follow any of the school boards, you will not be granted recognition. Which implies that your transfer certificate will not be valid. There are a few exceptions but they are far and between.

There will be bleeding-heart concerns for the poor. I agree they matter. But you cannot always solve a problem at its point of location. One should think of indirect ways of addressing the problem and which though invisible matter hugely. Schooling quality because of competiton among boards would be an important factor in decreasing the drop-out rate in government schools.

The point is simple. Deregulate schooling board sector in India.

Maps in India!

Many of us are in the knowhow about the sheer absence of map-based information in India. Here is an analytical process for the Indian government to ask themselves about their rationale for with-holding crucial information that can be used to make maps and other information like weather reports accessible to the private sector. This is part of a larger report that RAND Corporation produced for their study America's Publicly Available Geospatial Information: Does It Pose a Homeland Security Risk?

Filter	Key Questions
Usefulness	Is information useful for target selection or location purposes? Is information useful for attack planning purposes?
Uniqueness	Is information readily available from other geospatial information sources? Is information available from direct observation or other nongeospatial information types?
Societal benefits/costs	What are the expected security benefits of restricting public access to this geospatial information? What are the expected societal costs of restricting public access to this geospatial information?

Their study concluded that "although publicly accessible geospatial information has the potential to be generally helpful in selecting and locating a target, potential attackers, such as terrorists, are likely to need more reliable, more detailed, and more up-to-date information to plan and carry out a strike than is typically publicly accessible. There is abundant geospatial and nongeospatial information on U.S. critical sites that adversaries can obtain to select and locate targets. In comparison, planning an attack requires detailed and timely information, such as information on the target’s internal features (e.g., control centers), potential vulnerabilities, and current security practices. Here, attackers confront a situation of relative “information scarcity” because such details are not normally made publicly accessible. Thus, attackers are more likely to turn to nongeospatial sources — including direct observation, academic textbooks, trade journals, and individuals familiar with the operations of a particular type of facility — to satisfy their information needs." In fact, less than 1% of the federal datasets surveyed appeared to be both potentially useful and unique.

The conclusion is not important for us but the process used to reach the conclusions. Any lessons for the Indian government?

Addendum: About the "How do you stop a rape?" post, how about claiming that you have AIDS or youn rog to the attackers? Would that substantially decrease the chances of a rape if not abuse?

Rule of Law in India and its Economic Implications

If one were to look at the factors of production (land, labour, capital and enterprise) and look at the corresponding cases pending in Indian courts, one can have a very good understanding of the performance of the institutions arranged around these factors. It is no wonder that any task of economic reforms will have to take cognizance of the improvement of the legal institutions. But it is sadly under-rated. As of now, there are no standards for determining the quality of judgments passed by courts. Case pendency itself is taken as a sign of performance though I would argue that it is not a good enough indicator.

Read Wolfgang Koehling’s study on Economic Consequences of a Weak Judiciary: Insights from India for an elaborate study. An user-friendly abstract is stated below.

This paper examines the empirical relationship between the quality of the Indian judiciary and the economic development of the Indian States and Union Territories…The data indicate that a weak judiciary has a negative effect on economic and social development, which leads to: (i) lower per capita income; (ii) higher poverty rates; (iii) lower private economic activity, (iv) poorer public infrastructure; and, (v) higher crime rates and more industrial riots. The results are robust and the correlations are strong and negative.

You can also read Matthieu Chemin’s study Does the quality of the judiciary shape economic activity? Evidence from India.

There were 3.1 million cases pending in India’s 21 High Courts and 20 million in its subordinate courts in 2000. This paper examines the consequences of a slow judiciary on the contracting behaviour of firms in India…I [then] examine how the case pendency rate in state courts in India affects the contracting behaviour of 170,000 small non-agricultural informal firms. … My estimates suggest that a slow judiciary implies more breaches of contract, discourages firms from undertaking relationship-specific investments, impedes the access of firms to formal financial institutions, and favours inefficient dynasties. The negative implications of having an inefficient judiciary are large - moving a firm from the highest to the lowest pendency state would result in a 10% improvement in firm performance.

According to Amir Ullah Khan of the India Development Foundation, “the Government is a litigant in most of the cases. In a study carried out by the National Law School in 1993, it was found that the Government is the single largest litigant in Indian civil courts. The Government is plaintiff, defendant, appellant or respondent to appeals in 60% of the suits. Bulk of the civil litigation pertains to just five areas - taxation, credit, rent control, urban land ceiling and labour relations. … Government here includes central, state and Government owned institutions. That there is confusion on the definition of the State is another story for another study to tackle. … In any case the success rate of Government appeals is said to be as low as 5%. And cases that involve Governments on both sides of the table are by and large futile and time wasting exercises. The incentive to Government appointed lawyers to prolong cases and earn a bit more leads to further delay.”

Need more be said?

Cross-posted on the Indian Economy blog.

Reality of Indian Realty!

Shekhar Gupta in his article Who’s afraid of the bulldozer does point out to one true bottleneck affecting India.

Have you sometimes wondered why reform in some areas of our infrastructure proceeds much faster than in others? You will see a clear pattern there. Anything that does not involve real estate, moves much faster. Telecom is a good example. Anything that involves land takes much longer.

However his diagnosis is faulty. It indicts politicians instead of the regulations that provide those powers to politicians. Politicans are people like you and me and react no differently to their incentives. And land planning and regulations by governments in India provide huge incentives for a status-quo.

In Delhi, the archaic property rules and Master Plans do not take into account "natural markets" like the locations of office spaces and shopping destinations. It is easy to blame offices for encroaching onto residential space but not easy to see that property regulations and Plans by constricting supply of legal real estate (I mean land with infrastructure for commerical usage), push rates artificially higher. The Master Plan of Delhi in a self-diagnosis in the 1960s acknowledged its faulty foresight regarding the demand for office space and consequent transportation issues. However the powers granted to legislators and bureaucracies in Delhi regarding land mean that reforms will not happen soon. Incidentally the Master Plans and the Delhi Development Act serve as models for the other urban centres in India.

The demand for commercial space has also been magnified by the up-trend in the Indian economy.That only means more money for those willing to supply commercial property. Andy Mukherjee in his article Missed India's Software Boom? Try Real Estate writes on this.

The entire country has a little more than 70-million-square feet of A-grade office space, less than Shanghai and Beijing put together. Technology services account for as much as 85 percent of India's office space demand ... An undersupplied market means that the net yield on office property in India is 11 percent ... That yield is among the highest in Asia. Add to that a 20 percent to 40 percent price appreciation in the past 15 months, and office space in Mumbai, New Delhi and Bangalore starts to look like a very attractive asset class. Supply is expanding, though demand is rising at a faster pace.

A few caveats are in order. There are more than hundred (yes, 100!) 19th century rules and regulations governing various aspects of land in India.

A few Central laws governing real estate are

• Indian Contract Act, 1872
• Transfer of Property Act, 1882
• Registration Act, 1908
• Special Relief Act, 1963
• Urban Land (Ceiling And Regulation) Act (ULCRA), 1976
• Land Acquisition Act, 1894
• The Indian Evidence Act, 1872
• Rent Control Act (state law)

Taxes and Stamp Duty Rates

• Stamp Duty
• Property Tax
• Entertainment Tax

These and other issues are covered here in the Planning Commission document on real estate in India, an unusually useful document, I must admit, given the scarcity of such information. Another useful article is here.

Deregulation of real estate will increase supply of housing as well. However this depends on the government's initiatives in the supply of roads. This artificial scarcity of land is the prime reason for our problem of overcrowding. Again, our problem is not population but overcrowding. But that is fodder for another blog note.

Cross-posted on the Indian Economy blog.

Rice, Roads and Regulations

A key factor that can make markets work better is integration of various sub-markets. And it doesn't happen simply by constructing tarred roads (even that is needed) but by demolishing regulations. Roading is the technical part of integrating markets, the political and more onerous part is the regulatory part. But why integration? Because deregulated common markets will remove transaction costs and foster competition; provide better signals for optimal generation and consumption decisions; and improve security of supply.

So if I sell rice in UP and you sell rice in AP, the Berlin walls of regulations would not easily allow us to trade rice with each other. Consumers at both these places would have to pay higher prices, and a section of the traders are denied opportunity of profits. In fact, I bet there are hundreds of these micro-markets in India that are affected by a labyrinth of regulations. I would be glad to know more about them than the beaten-to-death GDP issue. Here are a few findings from the research paper Market Integration in Wholesale Rice Markets in India authored by Raghbendra Jha, KVB Murthy and Anurag Sharma.

Any given centre in any state is more likely to be integrated on a bilateral basis with other centres within the state than with those outside it. This indicates that there are barriers to market integration across states. ... internal trade is amongst the most repressed sectors of the economy, even today.
...
There are controls and restrictions exercised by multiple authorities, at various levels. This results in serious barriers to trade at the inter-state and inter-district levels. There are differences in taxes and standards across the country. As a result of these restrictions and differentials the all-India market is fragmented. Traders are obliged to obtain licenses for trading and there are different authorities for issuing licenses for different goods. The process is highly time consuming, cumbersome, costly, variable and invariably corrupt. After obtaining a license the trader is faced with over 400 laws that govern trading. This plethora of restrictions and inherent differentials across the country prevent rational and uniform pricing strategies. The price differentials, in turn, do not reflect inherent market conditions and allow local scarcities to remain. The restrictions on trade prevent arbitrage possibilities, which could possibly help remove short-term price differentials.

Some of the most important trade restrictive laws are:
1. The Essential Commodities Act, 1955.
2. Standard of Weights and Measures Act, 1976.
3. Agricultural Produce Marketing Acts.
4. Various Agricultural Commodity Control Orders.
5. Prevention of Food Adulteration Act, 1955.
6. State Levy Control Orders.

The first Act controls production, storage, transport, distribution, use or consumption of a wide range of commodities. It authorizes the Central Government to issue Orders for “increasing cultivation of foodgrains”, “controlling prices”, “regulating or prohibiting any commercial or financial transactions in food items” and “collecting any information”, amongst other things. The State Levy Orders make it compulsory for private rice mills to supply 7 to 75 percent of their production to the Food Corporation of India and the State Government, for the Public Distribution System. The important point with such Orders is that the price received by the millers is ‘pan-territorial and pan-seasonal’. It is based on the Minimum Support Price for paddy plus average milling cost. Thus, for a major part of their output mills are not free to fix their price in accordance with economic considerations.
...
There are three factors originating in government policy and impinging upon the market:
a. Quantitative interventions
b. Price distortions, at various levels — farm, wholesale and retail.
c. Heavy subsidies.

Their conclusion sums it all.

Much has been written about state discretion and autonomy in some matters of economic policy in India. This is not the place to debate this point but it should be pointed out that this latitude should not extend to placing restrictions on internal trade. Furthermore, this has nothing to do with decentralization of decision-making. An economy such as the US, which is considerably more decentralized than India’s, still bans most, if not all, impediments to inter-state trade.

Thus there is an urgent need to reform the rules governing interstate commerce in foodgrains and to overhaul the attendant state government tax policies and regulations. There is an urgent need to reform price policy at the levels of producer, wholesaler and consumer. In addition, it is crucial to privatize wholesale grain in free trade and thus improve the efficiency of market signals. These policy measures are long overdue.

Cross-posted on the Indian Economy blog

We don't want heroes like Manjunath!

I am your average Joe. The kind of person who wouldn't mind giving a lookover at a beautiful woman, and also the kind of person who would risk his hand (mind you, not my life, that is for my girlfriend or sister or mother, and not in that order, please) for a damsel in distress.

The average person thinks he is braver than the average person. On that count, I am below average! I hate being in situations where I have to compromise my integrity between the repair of a telephone connection and the payment of an extra baksheesh. And I would be paranoid of being in a situation where I had to take on a goon who threates the quality of my job with my life. However, there are a few men among us who would risk their life for what they believe to be the true worth of their duty. But why should they risk their life? I repeat the question to myself because it holds the key to the worth of a man, a noble man's valuable life. This world needs heroes alive and not dead.

During my graduation years in engineering, an apparently simple question tormented me a lot. Why don't people kill each other for their ends? And it is not as difficult as it is made out, most murders are on-the-spot decisions than pre-planned ones. You may shudder at the question but do believe my naivete in pursuing its answer. And it turns out that the average person's life was far more risky in the past than it is today.

Does our tacit knowledge of ethics answer our accordance to the value of life? Definitely to a great extent. Perhaps more importantly, the answer lies in the rise of institutions, especially of law and order and protection of contractual rights. Random killing of people breeds high insecurity and very costly for a society. And moreover, ascribing equal value to people's lives and punishing them for a transgression made murder less likely. And finally the fact that even if you did murder a person, you couldn't take away his rights. To give a crude analogy, in the past, Kingdom A could invade Kingdom B and subjugate the residents of B and it wouldn't be considered a human rights violation. Today that is not the case any longer.

A more sophisticated analogy would be this. If Corporation A invades the "customer territory" of Corporation B, and asks the customers of B to mandatorily be customers of Corporation A, we would laugh off it off. Now reverse the logic. If Corporation B does not allow Corporation A to enter its "customer territory" and makes its customers implicitly a captive customer base for itself, we begin to doubt. But then, this keeps happening all around us. From limiting certain kind of businesses to only preferentially granting allotments for particular businesses. Like petrol pump licences.

If you have not realised who am I talking about, read it here. The economics of the tragedy runs like this. You have oil much in demand. And it costs a bang. What you can do is add a cheap adulterant (kerosene) which costs one-third (approx.) of the price of oil, and sell it thus making a neat profit. There is a 53 paise profit per litre sold. A typical service station sells about 1 lakh litres of diesel every month. That makes for a profit of Rs 53,000 per month per service outlet. Maybe worth targeting a honest officer who treatens to ruin your adulteration process!

Two questions: Does kerosene really come so cheap? And if oil is being adulterated, why do not customers switch the diesel-providers?

Well, kerosene doesn't really come cheap. What makes it cheap is a government subsidy at Rs 10-11 per litre. And more importantly, every 1 of 3 litres Kerosene distribution intended for household consumption through PDS outlets flows back to industry in one form or the other.

The second question is more simple. Petrol pump allotment is a political process (remember the analogy of Corporation B "protecting" its customers from Corporation A) so you need a licence for it. On top of that you have a state-run corporation granting them, little wonder there is so much susceptibility to political machination and insulation from market discipline.

What does "market discipline" mean! Think of it as the relationship with your doodhwala. If he gives too much water in the milk, you threaten to go off to another doodhwala, or well, switch to packaged milk. Now imagine if the state decreed that you couldn't threaten or switch your doodhwala, what would be the outcome?

Transplant the same relationship to the oil company and the service outlet. In this case, the company cannot cancel the contract of the service outlet because the outlet has been selected through a political process and not a market process. If it were a market process, there wouldn't be licences with political strings, the oil company could easily disband the service outlets for null enforcement of quality standards. Again, under a market process there would be lots of oil companies and lots of service outlets, with the unadulterated outlets gaining customers and reputation and the guilty ones being discharged from the process. Again, the key is that political decisons regarding production (subsidised price of kerosene) and distribution (granting of licences for outlets) be in the institutional realm of competitive markets as much as possible. In a market it is more difficult to bully your employer or customer into submission, whereas in a political process one often finds that force works. The market process won't be so smooth, but the oil will be of better quality, those who deserve thrive and there wouldn't be need of a death like Manjunath.

When heroes are emerging, it implies that we need better institutions, NOT more heroes!

Educationalization!

We were given this problem recently as part of an Operations Research assignment. Given a number of students; distance between schools in a neighbourhood, and an objective to maintain a certain level of racial balance, work out the optimal distances to be travelled by the students. Seems a decent problem only that it starts on a completely wrong note.

I had often wondered about the idea-divide between me and government officials in course of my policy research in Delhi, ostensibly when both of us want to do good. In reflection, the government (atleast the honest bureaucrat) tries to achieve welfare by the rules of optimisation. Given x money and y people, how do I fulfill z demands? If it employs rules it is only to achieve further fair division of the pie.

So when we had landline telephones being provided, the government thought of optimising the pie according to various factors: urban-rural; rich-poor; i knowu-idon'tknowu and the ilk. And then wireless came...an unforeseen market process, and the results are for everybody to see. I remember waiting for the virgin ring of the landline phone in my home on the 21st November 1992. Now none of us remember when we bought our cellphones last!

And you see the same optimisation game being tried out in the Right to Education Bill. This time the factors are: how to have a system of neighbourhood schools; the right salary for teachers; how to screen "bad" schools (licence permits); does food matter for students or does transport matter; does quality of teaching matter or is it schooling articles like blackboards; should I teach English or the mother language; is the curriculum overburdening and many more.

Governments ignore a powerful resource at their behest for increasing the size of the pie which is regulations. Instead, they concentrate on the actual production of goods because they see only the visible resources like money and people. So that makes them notch up a bill of 6 percent GDP for schooling India. If they could use rules which are usually not part of an optimisation process, they will find that they can generate so much more pie. Today there are rules galore that suppress the explosion of schooling. Number of schools in Delhi are decided 5 years in advance and you need a very expensive permit to open a school. There are minimum requirements for teacher salaries. You cannot make profit from a school and cannot plough funds from one school branch to another. Private boards cannot offer exams in India, ICSE is the only one which survived because of its minority status (am willing to be corrected if I am wrong on this). So if you are not part of a state or a national curriculum you cannot have your school affiliated, and hence cannot offer a valid Transfer Certificate.

And yet, you have a situation where for every increase of 100 children enrolled in urban India, 61 of them have been by private schools. In case of rural India, it is about 18.5. And these data are for the period 1986-1993, so the trend is arguably much higher now. Read the paper by Geeta Gandhi Kingdon here for a detailed analysis. Better, ask a government teacher where his/her children are studying!

The point is clear. The market process of private schoooling is rapidly gaining ground. However, the government, as usual, is blind to it and is still trying to optimise government resources and not incentivise private resources. Sooner or later this is what will happen. We will have private schooling for the rich only (if the government makes rules like 25% seat reservation for the poor and many other inhibiting rules) or private schools for all if the government deregulates the market for private schooling.

The government can do a decent job of rating these schools, ideas for which are provided here. Pratap Bhanu Mehta gives a good analysis of the Right to Education bill here but I guess he pulls punches to criticise it because he is trying too hard to think through all the various factors associated with schooling. Optimisation at the individual or organisation level doesn't work at the societal level. Ask Hayek!

Is road expansion in busy cities a good solution?

If you lowered the entry ticket cost of an India-Pakistan match at the Wankhade stadium, what would you expect? Obviously, lots of queues at the ticket counters!

Now suppose there is a congested road, and you expand it. There will be an initial decrease in congestion, but then quite soon you will find that the density of traffic becomes comparable to the time before the road was expanded. This can happen due to a variety of factors. The most significant being latent demand. Everybody finds it easier to undertake more trips so there are more vehicles on the road; some people will switch from a previously used road to the present one because of the promise of speed; some will find it worthwhile to invest in cars given the apparent presence of road space, and the like.

This induced traffic as it is called is supposedly the single most important result in road planning. This is referred to as the Pigou-Knight-Downs paradox, or the Downs-Thomson paradox, or even the Braess paradox, and its basic premise is that "expanding a road system as a remedy to congestion is not only ineffective, but often counterproductive."

For more on the topic, read The Economics of Trafic Congestion