A sea change in the knowledge of the young in India

In 1887, roughly 14 million children were born in India, and we got one Ramanujan. It seems reasonable to think that there were 9 others who went undiscovered. We may guess that the Ramanujan rate is roughly one in a million. Applying this to the 28 million newborns per year that we have today, we may guess that there are 28 Ramanujans being born every year. Our challenge is to find them and nurture them.

So far, we are doing a terrible job of this. Pritchett & Viarengo suggest that while 18% of the 15-year olds in South Korea have a strong knowledge of mathematics, in India, this fraction is only 0.8%. Also see. We are doing roughly 20 times worse than we could, in achieving high quality mathematics knowledge among 15 year olds. Education in India is deeply broken and as long as the status quo remains in charge, improvements are unlikely.

India is experiencing a higher education revolution on quantity. Here is the age-specific probability of having graduated from college, drawn from the CMIE Consumer Pyramids database:

On the x axis are age groups such as age 20-25, 25-30 and so on. On the y axis is the fraction of persons who have graduated from college. The oldest available survey (December 2009) and the latest available survey (September 2012) are shown. We see a sharp surge in today's young, when compared with conditions one or two decades ago, when going to college was much more exotic: i.e. the 40 year olds of today are much less likely to have attended college (reflecting conditions 20 years ago) when compared with the 20 year olds of today. The age profile of educational attainment is a cross-sectional picture that expresses the time-series of historical experience, much like the rings in a tree.

What is remarkable is the increase seen from just 2.75 years ago (the oldest available survey) when compared with the latest data: in the overall population, the share of college graduates went up from 6.14% to 6.97% over this period. There is truly a revolution taking place in terms of the young going to college. The bottleneck is that almost all college education in India today is quite faulty.

Consider the software industry, which is believed to employ 3 million persons today. A wonderful story by Harichandan Arakali and Tony Munroe, from Reuters last week, tells us that the labour market is walking up the value chain; low-grade coding skills don't cut it any more. Most of the young people with freshly minted college degrees are not good enough for the firms. Entry level wages in computer technology have dropped; skill premia have gone up. On this subject, see my article Will BPO hit a staffing crisis? from 2005. I have long felt that it is dangerous for a young person to build job-oriented vocational skill: Broad intellectualisation is essential. What a person needs is the ability to think; the mere ability to code is no substitute.

Most young people in India today are not on a journey that gets them to think. As an example, IGIDR is arguably the best economics Ph.D. program in India today. Yet, I have been disappointed at how many students at IGIDR don't read books more broadly, don't read blogs, and don't read the Economist. While these problems afflict economics more broadly, we seem to face a greater danger of  narrowness of knowledge.

How is a young person to break free of mediocrity? For the first time, we now have a concrete set of answers: Plug into Internet-based education offerings, and read the great books of the world, across a diverse array of subjects. Plug into the blogs, and get connected to the great conversation about the world today.

The game changer is access to world class materials over the Internet. The Internet in general, and Internet-based education in particular, makes a significant difference to how we harness our human raw material. As a working approximation, an undergraduate education in Economics in India teaches little, but a student who will persevere and understand this blog will get somewhere. I recently wrote about the enormous gains that are possible for young people in India thanks to the new world of Internet-delivered education.

In this context, I found a fascinating fact about the nationality of the students at Coursera, which is one of the modern Internet-centric education offerings. Coursera has an enrolment of 2.9 million. The biggest single nationality is the US, at 27.7%. The second ranked country is India, at 8.8%. In other words, 255,200 persons in India are users of Coursera today. I would hazard a guess that across all the modern Internet-based education offerings, the enrolment from India might be 4x bigger than this, or a million. These are large numbers compared with the size of the knowledge workforce in India. And, this is only the beginning.

There is another angle through which the Indian labour market is getting connected up into the world, and thereby global skills, which is through Internet-based systems where the end-customer directly connects to the worker. These can be deployed for all problems where the task definition is unambiguous and payments can be done on a piece rate. While a lot of this is low end work, this is not necessarily the case. E.g. it is possible to pose pretty high skill challenges while retaining the idea of machine-driven verification that the work is done. I wrote a blog post about the fact that roughly a third of the persons working for Amazon's `mechanical turk' are in India. Ghani, Kerr and Stanton have a similar fact from a competitor to Amazon, oDesk. While the bulk of this work is low end, there is also high skill work here.

The overall picture that I see is one of enormous change in education and work in India, with four big themes:

1. There is a surge of young people studying for the IIT JEE (and thus getting up to world class knowledge at age 17), and attending college.
2. They are facing opportunities such as the mechanical turk and oDesk for low end work, and also some high skill work.
3. Indian firms that engage with globalisation are pushing in favour of higher skills; there is a substantial mismatch between what college/university is doing and what the firms want.
4. Internet-based offerings such as blogs and courses are giving access to the world of knowledge that go beyond what colleges and universities in India offer. 

In all four areas, the numbers are big. These are not fringe phenomena; they are of first order importance. World class knowledge is being demanded of the young, and for the first time, they have opportunities to build this knowledge on their own, without waiting for education policy makers to reboot the Indian education system. I feel that this phenomenon -- millions of young people bulking up with knowledge that is qualitatively superior to the knowledge of the old -- is the ultimate growth fundamental for India.

Capacity constraints in public policy

India's failures in defence and international relations

The Economist has a great article about Indian strategic / defence thinking, in which they say:

Strategic defence reviews like those that take place in America, Britain and France, informed by serving officers and civil servants but led by politicians, are unknown in India. The armed forces regard the Ministry of Defence as woefully ignorant on military matters, with few of the skills needed to provide support in areas such as logistics and procurement (they also resent its control over senior promotions). Civil servants pass through the ministry rather than making careers there. The Ministry of External Affairs, which should be crucial to informing the country’s strategic vision, is puny. Singapore, with a population of 5m, has a foreign service about the same size as India’s. China’s is eight times larger.
...
With the army training for a blitzkrieg against Pakistan and the navy preparing to confront Chinese blue-water adventurism, it is easy to get the impression that each service is planning for its own war without much thought to the requirements of the other two. Lip-service is paid to co-operation in planning, doctrine and operations, but this “jointness” is mostly aspirational. India lacks a chief of the defence staff of the kind most countries have. The government, ever-suspicious of the armed forces, appears not to want a single point of military advice. Nor do the service chiefs, jealous of their own autonomy.
...
Instead of clear strategic thinking, India shuffles along, impeded by its caution and bureaucratic inertia. The symbol of these failings is India’s reluctance to reform a defence-industrial base that wastes huge amounts of money, supplies the armed forces with substandard kit and leaves the country dependent on foreigners for military modernisation.
Since independence India has got away with having a weak strategic culture. Its undersized military ambitions have kept it out of most scrapes and allowed it to concentrate on other things instead. But as China bulks up, India’s strategic shortcomings are becoming a liability. And they are an obstacle to India’s dreams of becoming a true 21st-century power.

The malaise is deeper

I think the malaise that is described here is a reflection of something deeper: a failure of capacity in the public policy process, across the board. This is not just about defence or international relations; it's a gross mismatch between what is required of the government, and the capability of the government, across the board.

In the field of economic policy, we have much the same story. We have multiple squabbling government agencies, all of which are less than capable, and failures of coordination are the norm. We know that the old statist policies are broken, but there is a vacuum in its place. Most persons in the policy process do not have an instinctive ability to focus on the market failure and thus the intervention, when faced with new situations.

India is now a $2 trillion GDP. Macro policy should now be about business cycle stabilisation. The old focus on agriculture and monsoon shocks is a useless way to think about the economy. However, we have simply not reconstructed our economic policy apparatus to reflect these new issues. The Ministry of Finance is not organised as a Treasury should be, and the RBI is not organised as a central bank should be.

Examples of this malaise are plentiful. We made great progress on the political challenges of pension reform, but we have fared poorly on the institutional capacity within government to follow through, to convert the courage of the political leadership into gains on the ground.

Underperformance is writ large across the landscape of the government. The school teachers are missing in action in schools; the police in Bombay was missing in action when the shooting started on 26/11; the central bank was missing in action in the inflation crisis. Consider a mundane problem like surveying the country, i.e. the Survey of India. How hard can it be, to walk around the country with GPS handsets, make map datasets, and release them on a website for download? We in India do a terrible job of this.

How would we make these things work properly? How do we construct agencies that have punch in execution, that are held accountable for delivering results? This public administration question is our problem #1 in India.

Why does the private sector renew itself, but the government does not?

In the private sector, as a thumb-rule, across every doubling of firm revenues, a ground-up rethinking of the organisation is required. The firm has to be re-organised, and brand-new process manuals have to be written. In my intuition, this thumb rule applies in public administration also. Across each doubling of GDP, we need to rethink the block diagram of how government is organised, and write fresh process manuals. At roughly 7% growth, this means we have to do such an exercise roughly every decade. But we in India find it phenomenally difficult to modify the process manuals and boundaries of agencies. This inability to change is a serious bottleneck to achieving competence.

The HR function has just not kept up with the demands. The sheer number of skilled professionals that we have, manning important functions in economic policy, is abysmally small. As an example, you may have heard a lot about the Financial Stability and Development Council (FSDC). It will come as a surprise to you to know that for all the sound and fury surrounding FSDC, at present it has no IT systems and no staff.

Suppose a private firm grew by 2x, 4x and 8x, and it was fossilised and did not re-org. Suppose it clung on to the old organisation chart, old staffing and old process manuals. The mismatch between the organisation structure and the requirements of growth would worsen through time, and exert a negative impact upon the success of the firm. In similar fashion, I believe that every day, as India becomes bigger and more complex, the mismatch (between the requirements of public goods versus the organisation of government) worsens, with increasingly harsh consequences for growth.

Re-organising a firm, rejuvenating the workforce, rewriting process manuals: none of this is fun. It is very comfortable for any group of humans to put off this hard work, to perpetuate the past into the future. Why do private firms not suffer such organisational death? What keeps them moving forward? The external impetus of competition! Private firms do not reinvent themselves because it's fun: the market economy kicks them into shape. Those that won't reinvent themselves tend to fade away.

In similar fashion, left to themselves, government agencies will wallow in the warmth of the past. Strong accountability mechanisms are required in order to make every arm of government uncomfortable in the mere perpetuation of the past. Every time we see a fossilised government agency, we should go to the root cause: A failure of accountability.

Fixing one area: Finance

FSLRC is unique in constituting a full rethink of the landscape of law and agencies in one field (finance). Reasonable men can disagree about what is the ideal legal framework for finance. But all of us can agree that the Indian Financial Code is a quantum leap compared with the present arrangement.  It is the much-needed reorganisation of government agencies that gets them going with sensible role definitions.

It is one thing to make a nice block diagram, but it is another matter to make each agency perform. This requires two elements: empowerment of the board, and enough pressure on the board to perform. For each of the seven agencies, the Code has empowered boards who would control their own organisation design and HR policy. The Code embeds strong accountability mechanisms, which would push the board and the chairperson to improve organisation design and HR policies. These accountability mechanisms would make it costly for the chairperson and the board of any agency to limp on under present conditions of performance.

FSLRC gives the draft Indian Financial Code

The Financial Sector Legislative Reforms Commission closed its journey yesterday with the delivery of a report and the draft Indian Financial Code (IFC). Here is the report and here is the draft law. Here is commentary in the press on the subject:

• Interviews with Justice Srikrishna: Business Standard, Indian Express, Outlook magazine.
• K. P. Krishnan in the Economic Times.
• Turf war in the offing in the Financial Express, and Selling it right in the Indian Express, both by Ila Patnaik.
• Mobis Philipose in Mint.
• New financial code provides for ponzi-killer, by N. Sundaresha Subramanian, in the Business Standard.
• Sunshine in the court room, by Pratik Datta on this blog.
• The cast of 146 on this blog.
• Falls short on banks, by Dhirendra Kumar in the Economic Times.
• K. P. Krishnan on financial regulatory governance in the Hindu Business Line.
• Financial code provides compounding provisions by N. Sundaresha Subramanian in the Business Standard.
• Will government get a greater say in fixing monetary policy? by Niranjan Rajadhyaksha in Mint. Editorials on monetary policy in Mint and the Hindu Business Line. Parnika Sokhi talks with me in DNA. Errol D'Souza in Mint.
• Anand Sahasraman has a series of posts on the IFMR Blog: The FSLRC approach; FSLRC moots shift in onus of consumer protection from consumer to provider.
• Sandeep Parekh in the Financial Express.
• Will FSLRC recommendations be a game changer? by Shaji Vikraman in the Economic Times.
• Is a unified financial regulator a good idea? Yes, by Biswa Swarup Misra and No by Ashoak Upadhyay, both in the Hindu Business Line.
• SEBI brass feels delay is inevitable, by Samie Modak in the Business Standard.
• Gautam Chikermane on his blog.
• Remya Nair and Kirthi V. Rao in Mint.
• Super regulator pushed back by Megha Mandavia in DNA.
• Surabhi in the Indian Express.
• Editorial in the Business Standard.
• Editorial in the Economic Times.
• Editorial in the Indian Express.
• Editorial in the Business Standard.
• Editorial in the Financial Express.
• Surabhi in the Indian Express.
• Reportage by K. R. Srivats in the Hindu Business Line.
• Remya Nair in Mint.
• Hema Ramakrishnan on the ET blogs.
• Reporting in the Business Standard.
• Aswathy Varughese in DNA.
• Reporting in the Hindu.
• Anindita Rey in the Business Standard.
• K. A. Badarinath and K. R. Sudhaman in the Financial Chronicle.
• Super cop idea spares RBI in the Telegraph.
• Treatment on CNBC-TV18.

The signing:

And a subset of the team that did it:

Important work by cobrapost that illuminates high-powered incentives

The investigative journalism by cobrapost, their videos, and Monika Halan in Mint add up to an important story.

Most of us have enormous respect for the achievements of Axis Bank, HDFC Bank and ICICI Bank. But as Monika emphasises, there are also genuine problems there. We saw it first with the hard-driving mis-selling in recent years, particularly with ULIPs, and now we see it here, with staffpersons supporting illegal activities.

Ordinarily, a media outlet in India bringing such information out has to worry about brazen strong-arm tactics being deployed against them, such as filing of criminal cases. In this case, luckily, there is a certain decency about these three organisations which precludes such concerns. It is ironic that the Indian media vigorously reports on the misdeeds of civilised people, and tends to be silent about uncivilised people.

In India, most of us are reverential about the power of incentives. To make people work, we think, you have to have high powered incentives. We revere incentive packages, stock options, stock grants, which whip the staffperson into a frenzy of hard work.

Economists led this charge, starting with Jensen and Murphy, 1990. The notion that high powered incentives are a good thing came out of academia and went into the real world. But increasingly, it has become clear that there are problems. By 2004, Jensen and Murphy themselves were saying that we should be more circumspect about using high powered incentives.

A person facing high powered incentives tends to focus on one thing. There is an excessive pursuit of that one thing, and all other considerations tend to evaporate. Similarly, when there are quantitative goals alongside qualitative goals, high-powered incentives will generate a focus on quantitative goals and tend to crowd out qualitative goals. Employees of a bank that are given powerful incentives to hit targets for deposit growth (sacked if you don't, given a 100% bonus if you do) are more likely to try to pull in that deposit growth by hook or by crook. If the internal controls of an organisation are weak, then employees are likely to achieve their targets by dubious means.

For all of us in India, coming from a backdrop of socialism and State, it is natural to have extreme hostility to the absence of incentive for a civil servant to do his job. We have seen how private organisations have triumphed by giving employees more incentive. But it's easy for us to overdo this message. In many situations, I feel it's better to go from no incentive to low-powered incentives, but not all the way to high powered incentives.

These issues are widely discussed in the global debate. When we transplant these ideas into India, a big difference lies in the weak governance environment. Super-charged employees in private firms seem to be willing to break laws in their pursuit of profit. Since CEOs weigh the costs and benefits of unethical behaviour, we may argue that when, in a weak governance environment, the expected punishment is small, an increase in the gains from unethical behaviour (through high-powered incentives) results in reduced fairplay. 

This suggests two things. First, HR managers needs to be more sophisticated in how the objectives of an employee are defined. If we could be more nuanced in clarifying what the employee is to maximise, this could yield better results. The second issue is about internal controls. When internal controls are strong, they become a non-negotiable constraint within which growing sales or profit has to be done. Unfortunately, once the top managers of an organisation are really hard-driving, chasing growth and profitability, these kinds of niceties (of both kinds) tend to fall by the wayside.

One of the most important mechanisms through which we get high powered incentives is : an entrepreneur who manages a company with family members, and who has dominant shareholding. The one area where this gets us into the most trouble is: Finance. A series of papers that have analysed the Great Recession have found that financial firms where CEOs had more high powered incentives got into more trouble. I am a great advocate of less public sector and more private sector in finance, but we have to be cautious about high powered incentives e.g. those that go with dominant entrepreneurs in a family business.

A prominent example of this debate has been `financial market infrastructure institutions' (FMIIs), a category that comprises organisations like exchanges, depositories, clearing corporations, all of which produce public goods for the financial system. In all these areas, the organisation is unique in that, alongside the goal of maximising profit, there is a regulatory function. This tiny handful of firms is unique, when compared with essentially any other part of capitalism, in that some government functions of regulation and supervision are placed in private, profit-maximising hands. High powered incentives to produce profit or valuation will lead to a dilution or worse of regulatory and supervisory functions. If profit-seeking owners/managers of these organisations under-emphasise or abuse the regulatory and supervisory functions in the quest for profit, this has far-ranging externalities. Failures of regulation and supervision at exchanges have given macroeconomic crises in India in 1992 and 2001. Hence, even though the revenues and profits of these firms is truly tiny on the scale of the economy, this conflict of interest is an important issue for policy makers.

Similarly, there has been a vigorous debate about entry by private banks. As a working approximation, we have to assume that RBI supervision is less than perfect. In this case, I feel that we should be quite circumspect about banks led by entrepreneurs.

Unanticipated consequences of Finance Bill provisions on securitisation

by Bindu Ananth and Kshama Fernandes

Over 2006-12, RBI and SEBI have created a strong and conducive regulatory environment for securitisation, listing of securitised debt instruments, and standards of transparency and reporting. Securitisation volumes have picked up and we recently witnessed the first listed transaction.

In October 2011, the income tax authorities issued a claim on certain securitisation special purpose vehicles (SPVs), stating that the gross income of such SPVs was liable to tax. The matter is presently under sub judice with the Bombay High Court. Several industry participants approached the Ministry of Finance (MoF) to seek clarity and reinforce the "pass through" status of a securitisation SPV.

The Finance Bill, 2013, has sought to clarify the tax position by stating that securitisation SPVs are not liable to pay income tax. However, the Bill also states that trustees of such SPVs must pay tax on distributed income.

The above amendment has an unintentional and significantly negative implication, on account of which taxable investors would be disincentivised from participating in securitisations.

This memo explains the issues and the unintended implications caused by the present draft of the Finance Bill in relation to securitisation SPVs, and provides a possible solution for addressing these issues.

Objectives of the MoF with respect to taxation of Securitisation SPVs

The Finance Minister (FM) in his speech presenting the Budget for the year 2013-14, set out his intent in presenting the proposed changes to the taxation of Securitisation SPVs: "In order to facilitate financial institutions to securitise their assets through a special purpose vehicle".

The depth and vibrancy of the asset securitisation market is an essential building block in transfer of risk and transmission of capital from well capitalised investors to high quality originators. The framework for a well-functioning securitisation market has been laid down in considerable detail by the Reserve Bank of India (in 2006, further strengthened in 2012) and the Securities and Exchange Board of India (detailed guidelines in 2008 and listing guidelines in 2011).

It is our understanding that the objective of the Ministry of Finance in providing the basis of taxation of securitisation SPVs, is to clarify and establish the pass-through status of securitisation.

Changes proposed by the Finance Bill, 2013

Given below is the text proposed to be introduced into the Income Tax Act, 1961 by the Finance Bill, 2013:

CHAPTER XII-EA

SPECIAL PROVISIONS RELATING TO TAX ON DISTRIBUTED INCOME BY SECURITISATION TRUSTS

115TA

1. Notwithstanding anything contained in any other provisions of the Act, any amount of income distributed by the securitisation trust to its investors shall be chargeable to tax and such securitisation trust shall be liable to pay additional income-tax on such distributed income at the rate of--
   1. twenty-five per cent. on income distributed to any person being an individual or a Hindu undivided family;
   2. thirty per cent. on income distributed to any other person:
   Provided that nothing contained in this sub-section shall apply in respect of any income distributed by the securitisation trust to any person in whose case income, irrespective of its nature and source, is not chargeable to tax under the Act.
2. The person responsible for making payment of the income distributed by the securitisation trust shall be liable to pay tax to the credit of the Central Government within fourteen days from the date of distribution or payment of such income, whichever is earlier.
3. The person responsible for making payment of the income distributed by the securitisation trust shall, on or before the 15th day of September in each year, furnish to the prescribed income-tax authority, a statement in the prescribed form and verified in the prescribed manner, giving the details of the amount of income distributed to investors during the previous year, the tax paid thereon and such other relevant details, as may be prescribed.
4. No deduction under any other provisions of this Act shall be allowed to the securitisation trust in respect of the income which has been charged to tax under sub-section (1).

115TB.

Where the person responsible for making payment of the income distributed by the securitisation trust and the securitisation trust fails to pay the whole or any part of the tax referred to in sub-section (1) of section 115TA, within the time allowed under sub-section (2) of that section, he or it shall be liable to pay simple interest at the rate of one per cent. every month or part thereof on the amount of such tax for the period beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the tax is actually paid.

115TC.

If any person responsible for making payment of the income distributed by the securitisation trust and the securitisation trust does not pay tax, as referred to in sub-section (1) of section 115TA, then, he or it shall be deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the provisions of this Act for the collection and recovery of income-tax shall apply.

Explanation. -- For the purposes of this Chapter,--

1. "investor" means a person who is holder of any securitised debt instrument or securities issued by the securitisation trust;
2. "securities" means debt securities issued by a Special Purpose Vehicle as referred to in the guidelines on securitisation of standard assets issued by the Reserve Bank of India;
3. "securitised debt instrument" shall have the same meaning as assigned to it in clause (s) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992 and the Securities Contracts (Regulation) Act, 1956;
4. "securitisation trust" means a trust, being a-
   1. "special purpose distinct entity" as defined in clause (u) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992 and the Securities Contracts (Regulation) Act, 1956, and regulated under the said regulations; or
   2. "Special Purpose Vehicle" as defined in, and regulated by, the guidelines on securitisation of standard assets issued by the Reserve Bank of India, which fulfils such conditions, as may be prescribed."

The following additions of Section 10 (23DA) and Section 10(35A) are also proposed to exempt from income tax certain income related to Securitisation SPVs:

(23DA) any income of a securitisation trust from the activity of securitisation.

Explanation."For the purposes of this clause,"

1. "securitisation" shall have the same meaning as assigned to it -
   1. in clause (r) of sub-regulation (1) of regulation 2 of the Securities an<>d Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992 and the Securities Contracts (Regulation) Act, 1956; or
   2. under the guidelines on securitisation of standard assets issued by the Reserve Bank of India;
2. "securitisation trust" shall have the meaning assigned to it in the Explanation below section 115TC;"
   And
   "(35A) any income by way of distributed income referred to in section 115TA received from a securitisation trust by any person being an investor of the said trust"

Unanticipated implications of the proposed text

Securitisation of assets by financial institutions requires the existence of a wide range of investors for whom investment in Securitisation SPVs is a viable option. Currently, predominant investors in the securitisation market in India (particularly in the securitisation related to financial inclusion) are banks. Banks are sophisticated investors and sit on large pools of capital that they must deploy appropriately. Securitisation has been an important way for banks to efficiently and effectively deploy capital where it is needed.

Other investors in securitisation, such as Mutual Funds and private investors currently provide significant but far less capital through securitisation. Yet other investors, such as insurance companies and pension funds, are yet to join the market.

However, it appears that the proposed changes would make the investment in Securitisation SPVs unviable for all but a certain class of income tax exempt investors (such as Mutual Funds). To elaborate on this, given below is a brief synopsis of the tax position of an investor in such SPVs, along with that of the SPVs themselves, as well as the issues arising out of the proposed amendments in the Finance Bill:

• The current language of the proposed provision states that "any amount of income distributed by the securitisation trust to its investors shall be chargeable to tax and such securitisation trust shall be liable to pay additional income-tax on such distributed income" but as SPVs are designed to be mere mechanisms to route payments. It is not clear how its "income distributed" will be determined for the purpose of Section 115TA.
• The language used in Section 115TA clearly indicates that the liability to pay "additional" income tax is placed upon the SPVs. It is not clear what this tax is in addition to.
• Howsoever its income may be determined, as a result of Section 14A, no deduction will be permitted for expenses out of its total income.
• Income under Section 10 (23DA) or under Section 10 (35A) is income not includable in total income.
• In terms of Section 14A, no deduction is permitted with respect of income described in Section 10 (23DA) or Section 10 (35A).
• Investors, other than "any person in whose case income, irrespective of its nature and source, is not chargeable to tax under the Act", however, often do have incomes and incur expenses in raising money to invest in securitisation transactions.

Illustration:

• A bank uses Rs. 1,000 of money it has accepted as deposits at the rate of 7.5% to invest in PTCs with a principal amount of Rs. 1,000 with a term of one year.
• The PTC offers a yield of 13%, translating into a sum of Rs. 1,130 of which (assuming the taxable "income distributed" is Rs. 130) Rs. 39 will be deducted as tax in terms of Section 115TA leaving Rs. 1,091
• But the bank has to return INR 1,075 to the depositors. Under Section 14A, the interest cost of Rs 75 is not deductible
• For a pre-tax profit of Rs 55, the post-tax profit of the bank is Rs. 16 i.e. a profit of 1.6 percent. The tax paid in this transaction is Rs. 39. Effectively, the rate of taxation relative to income in the hands of the investor is over 70%.

For the investor, Section 10(23DA), Section 10 (35A) and Section 14A have an effect similar to the taxation of revenue rather than taxation of income.

On the other hand, if the investment in the SPVs was treated, as it was traditionally, as pass-through, the bank would treat the income from investment as any other income and pay tax on its net income (in the example above: Rs 130 - Rs 75 = Rs 55), with an effective rate determined by the net income of the bank, which would be far less than the 70 percent indicated by the proposed language of the Finance Bill, 2013.

Therefore, the unanticipated consequences of the present draft of the Finance Bill are:

Higher effective rate of taxation of income from securitisation, when compared to other sources of income of an investor

Tax paying investors will stay away. Banks, NBFCs etc. may not be willing to invest in securitised debt instruments, unless compensated for the higher tax payable

Severe impact on market depth and liquidity. Banks are presently the largest investors in securitisations and their absence would severely inhibit the growth of the market

No incentive for new investor classes to participate. Investors such as private wealth, corporate treasuries, AIFs etc. may find securitisation an unviable investment option

An alternative draft

It may be noted that the taxation of private trusts is well understood and has been relatively stable for a significant period of time. If we wish to avoid the unanticipated consequences as outlined above, we would require reinforcement and restatement the existing position of law.

Attention may also be drawn to the provisions of Section 160, relating to representative assessees, which would also apply to trustees of private trusts, including Securitisation SPVs. The proposed addition of Section 10 (23DA) and Section 10 (35A) should be removed and no changes must be made to Section 10 in this regard.

It may be beneficial if the proposed Section 115TA read (in a restatement of the existing law) as follows:

CHAPTER XII-EA

PROVISIONS RELATING TO INCOME FROM INVESTMENT IN SECURITISATION TRUSTS

115TA.

(1) Any amount of income received by an investor from a securitisation trust shall be chargeable to tax as part of the total income of such investor.

Provided that nothing contained in this sub-section shall apply in respect of any income distributed by the securitisation trust to any person in whose case income, irrespective of its nature and source, is not chargeable to tax under the Act.

Explanation.--For the purposes of this Chapter, --

1. "investor" means a person who is holder of any securitised debt instrument or securities issued by the securitisation trust;
2. "securities" means debt securities issued by a Special Purpose Vehicle as referred to in the guidelines on securitisation of standard assets issued by the Reserve Bank of India;
3. "securitised debt instrument" shall have the same meaning as assigned to it in clause (s) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992 and the Securities Contracts (Regulation) Act, 1956;
4. "securitisation trust" means a trust, being a-
   1. "special purpose distinct entity" as defined in clause (u) of sub-regulation (1) of regulation 2 of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008 made under the Securities and Exchange Board of India Act, 1992 and the Securities Contracts (Regulation) Act, 1956, and regulated under the said regulations; or
   2. "Special Purpose Vehicle" as defined in, and regulated by, the guidelines on securitisation of standard assets issued by the Reserve Bank of India, which fulfils such conditions, as may be prescribed."

The Internet changes everything: Indian higher education edition

The old triusm `never let school interfere with your education' is particularly relevant in India, where most schools, colleges and universities are pretty bad. For almost every young person in India, the option of being institutionalised and on auto-pilot, of letting the curriculum and examinations define you, is a bad one.

The contours of a better world are increasingly clear. Over the web, the person can plug into the likes of Udacity, edUx, Coursera, and M.I.T. Open Courseware, and get a world class education. The trouble is, there are no examinations and no degrees.

I get a lot of resumes of people who ask me for a job. In most cases, a glance at the resume shows me that the person is underskilled. A viable path for young people and for employers lies in the following steps:

• The student must envision what life he wants to lead and construct a set of classes and books that take him in this direction. This requires analysing websites of courses in top 10 universities to get a sense of what would happen there. 
• It would help greatly if the student is able to find persons around her or him who can play a mentoring role in this stage. What are the available lifestyle choices? What knowledge is important? E.g. I would always encourage the construction of broad intellectual capabilities and not narrow job-specific knowledge. E.g. an economics undergraduate should learn enough to understand this blog.
• The student should then turn to the web course offerings and construct a program for self-study. Every few months, this program needs to be re-evaluated because the life plan can change and because the offerings available on the web are changing quite rapidly. Here also, mentoring would help greatly in constructing these plans.
• This process should be continued until the person has done courses and mastered books that yield rough parity with a person who graduates from one of the global top 10 universities.
• The resume of the student should show a specific checklist of courses with URLs which have been done, and books that have been mastered. This is just a claim by the student, because there is no diploma.
• The student would say to the employer: I am willing to face an interview where you test my knowledge of these things.
• Employers should welcome students who have resumes which exhibit this approach of choosing a way of life, and of connecting into the best educational resources in the world.
• Employers should run video interviews through which they test the capabilities of the student.

From the viewpoint of students, this is a great thing because it is an opportunity to escape the low quality of colleges and universities immediately available. For employers, this is a great thing because it is an opportunity to do better than the low quality of students that can be recruited through conventional channels.

This approach requires more work for students and more work for employers. It was easy for a student to say "I have started a Bachelor's in English Literature and now I'm on autopilot". It was easy for an employer to say "I only take in IIT grads; apart from that I am on autopilot". The new world is absolutely wonderful, but it requires that both students and employers need to think more about what they're doing. Read Meeta Sengupta on this.