## Tuesday, December 27, 2016

On what horizons will the de-monetisation shock play out? by Ajay Shah in the Business Standard, December 26, 2016.

Two litigations and a takeaway by Radhika Pandey and Bhargavi Zaveri in the Business Standard, December 26, 2016.

Open letter to technology companies from the Electronic Frontier Foundation. (You have to click on the link inside this page).

Cashless economy: A distracting mirage by P. Chidambaram in the Indian Express, December 25, 2016.

This government's modus operandi is constant distraction by Pratap Bhanu Mehta in the Indian Express, December 24, 2016.

Where smooth governance is masked failure by Somasekhar Sundaresan in the Business Standard, December 22, 2016.

Demonetisation may have cost banks Rs 3,000 cr per day by Nitin Sethi and Ishan Bakshi in the Business Standard, December 22, 2016.

What India Has Done To Its Money Is Sickening And Immoral by Steve Forbes in Forbes, December 22, 2016.

India's Bizarre War on Cash, editorial in The Wall Street Journal, December 22, 2016.

EU's highest court delivers blow to UK snooper's charter by Owen Bowcott in the Guardian, December 21, 2016.

A new window on Calcutta by Stanley Stewart, Financial Times supplement, December 20, 2016.

Now, police control room catches up with English, by Umesh Yadav in the Economic Times, December 19, 2016.

No one took notes by P Vaidyanathan Iyer in the Indian Express, December 19, 2016.

Kochi Bienalle looks poised to be an integral feature of the Indian culture calendar by T. K. Arun in the Economic Times, December 17, 2016.

Challenges in the Transition to the New Insolvency and Bankruptcy Code by Rajeswari Sengupta and Anjali Sharma in The Wire, December 15, 2016.

First clean up political funding to mount a credible attack on corruption by T K Arun in the Economic Times, December 14, 2016.

Revamping the Income Tax Appellate Tribunal by Pratik Datta, Surya Prakash B.S., Renuka Sane, in Mint, 13 December.

Back to the worst forms of central planning by Srinath Raghavan in Mint, December 12, 2016.

Demonetisation Will Likely Lead to a Protracted Economic Slowdown by Radhika Pandey and Rajeswari Sengupta in The Wire, December 12, 2016.

Modi's Note Ban May Spell Catastrophe for the BJP by Prem Shankar Jha in The Wire, December 11, 2016.

How to Deal With the Lies of Donald Trump: Guidelines for the Media by James Fallows in The Atlantic, November 28, 2016.

The War on Cash by Brett Scott in The Long and Short, August 19, 2016.

Defending Accounts Against Common Attacks by Martin Shelton.

## Monday, December 26, 2016

### What's the meaning of a 250% change, SA annualised?

by Ajay Shah.

My Business Standard article of today has raised questions about the meaning of SAAR percentage changes.

When we deal with time periods of different lengths, the raw percentage change can be confusing. As an example, if I promise to convert Rs.100 into Rs.101 on a one day horizon, this is 1% return on a one-day horizon. The universal quoting convention is to express this on an annualised basis: $1.01^{365}$ is 3678%. So we would say that this investment opportunity offers 3678% returns.

Similar issues apply when dealing with month-on-month ("m-o-m") changes. If 100 becomes 110 within one month, it's confusing to say that this is a 10% change. It is expressed as $1.1^{12}$, i.e. a 213% change on an annualised basis.

When expressed as continuously compounded returns, the month-on-month annualised change is 1200*diff(log(x)) where $x$ is the levels series. This gives time series of changes which have somewhat better statistical properties for downstream use. For small values the two paths are identical, but for large values the continuously compounded values have fewer extreme values.

How much did exports change in the month of November? Here are the steps through this must be computed:

1. The year-on-year ("y-o-y") change compares November 2016 to November 2015. It is the sum of 12 changes, one for each month. It does not tell us what happened in November 2016.
2. We would like to compare October 2016 to November 2016 to know what happened in November 2016.
3. But there are problems of comparison: Seasonality, Diwali.
4. Seasonal adjustment procedures solve these. They yield a time-series of a seasonally adjusted level of exports.
5. With this, we are permitted to compute the percentage change from October 2016 to November 2016.
6. But this is not comparable with all the percentage changes that we are used to seeing, which are on an annualised basis.
7. Hence, the SA levels series $x$ is converted into an annualised rate of change using the formula 1200*diff(log(x)), which is analogous to $(1+r)^{12}$. This is called the "seasonally adjusted annualised rate" (SAAR) of change.

An interesting property of this way of thinking is that the year-on-year change is the trailing 12 month moving average. It's the average of the changes of the last 12 months. It's a slow and sluggish measure of what's going on in the economy. But the units of the two measures -- the y-o-y change and the m-o-m SAAR -- are the same.

#### One concrete example

We take data for heavy commercial vehicle (HCV) sales from January 1999 to November 2016. The raw values in the latest three months are: September: 28,103; October: 29,515 and November: 21,602. This shows a raw month-on-month decline (non-annualised, non-seasonally-adjusted) of 26.8% in November 2016.

We test for the possibility of Diwali effects in this series and find none. Seasonal adjustment gives SA levels for the latest three months: September: 27,028; October 31,845 and November 27,049. This shows a month-on-month decline (non-annualised) of 15.1% in November 2016.

The SAAR is 1200*diff(log(x)) where x is the seasonally adjusted levels. This yields the values of +196.8 in October 2016 and -195.9 in November 2016. Specifically, the latter value, -195.9, is 1200*(log(27049)-log(31845)).

#### Conclusion

When dealing with events like October 2008 and November 2016, this is the essential statistical technology for thinking about what is going on. We don't know of anyone working with Indian data, outside of NIPFP, who has this machinery working. Some people are tossing data into black boxes (e.g. Eviews) for seasonal adjustment, which is better than doing nothing, but not as good as the full thing.

## Friday, December 16, 2016

Black Money Rhetoric And Anti-Profiteering Action by Praveen Chakravarty in Bloomberg Quint, December 12, 2016.

A bad time for a crisis by Ajay Shah in Business Standard, December 12, 2016.

Crossing the chasm by Ila Patnaik in Indian Express, December 9, 2016.

Desperate Attempt To Shut Out Questions in Edit Platter, December 7, 2016. These tactics are not new, they have long been used to ensure favourable media coverage, and are part of The undersupply of criticism.

Open letter to Urjit Patel by Rajeev Malik in Mint, December 6, 2016.

Interview: Demonetisation has hit 80% of small businesses, the sector is staring at apocalypse by Ajaz Ashraf in Scroll.in, December 6, 2016.

Protection of Financial Consumers under the Indian Financial Code by Sharada Krishnamurthy and Gokul Ashok Thampi in IndiaCorpLaw, December 5, 2016.

Cashless/digital: How Modi changed (and changed) demonetisation narrative by Praveen Chakravarty in Business Standard, December 5, 2016.

Sounds Like Something Pretty Important Happened This Weekend by Christopher Balding in Balding's World, December 5, 2016.

What does the currency ban mean for banks? by Rajeswari Sengupta and Anjali Sharma in Mint, December 1, 2016.

Joseph Mariathasan on India's precarious financial markets by Joseph Mariathasan in Investment & Pensions Europe, November 30, 2016.

Apple Gets Win Against Australia Banks Over Mobile Payments by Emily Cadman in Bloomberg, November 29, 2016.

How the U.S. Could Kill the Corporate Tax by Leonid Bershidsky in Bloomberg, November 29, 2016. Also see Abolishing taxes, from the run up to the 2014 elections.

India's Currency Cancellation: Seigniorage and Cantillon Effects by Larry White in Alt-M, November 28, 2016.

Why trains derail: Explained by former Railways minister by Dinesh Trivedi in The Indian Express, November 22, 2016.

O'Reilly's Mac Slocum speaks with Susan Sons, November 5, 2016.

## Thursday, December 15, 2016

### Positions available

Policy Manager at YLAC in Delhi

Young Leaders for Active Citizenship (YLAC) is a Delhi based start up that develops experiential learning programs for young people to equip them with skills to lead change in society. Their Policy in Action Program provides university students and young professionals an exposure to public policy and advocacy, with the experience of working on a live project for a Member of Parliament. More details are available at ylacindia.com

YLAC is currently looking for a talented and energetic Policy Manager to join their team in Delhi. This is a full-time position that will involve both teaching and research. The Policy Manager will be responsible for the following:

• Developing and delivering YLAC sessions on public policy, advocacy and political philosophy
• Supervising policy research/advocacy projects undertaken by fellows/students enrolled in YLAC programs
• Partnering with leading institutions, civil society organizations and public policy schools to design modules on policy making
• Leading policy research projects to write briefs for YLAC's clients

Candidates should have a degree in Public Policy/Public Administration/Law/Government or Development Studies from a reputed university and must have at least three years of relevant work experience. They should be passionate about interacting and sharing knowledge with students. Excellent communication skills are a must.

Policy Consultant at YLAC in Bengaluru

Young Leaders for Active Citizenship (YLAC) is a Delhi based start up that develops experiential learning programs for young people to equip them with skills to lead change in society. Their Policy in Action Program provides university students and young professionals an exposure to public policy and advocacy, with the experience of working on a live project for a Member of Parliament. More details are available at ylacindia.com

YLAC is currently looking for a talented and energetic person to facilitate their upcoming Policy in Action Program in Bengaluru. This is a part time engagement that can be easily accommodated with regular work commitments. It is ideal for someone who is a policy wonk and has a passion for teaching!

The Policy Consultant will be responsible for the following:

• Teaching and facilitating YLAC sessions on public policy and advocacy
• Supervising policy research/advocacy projects undertaken by students during the program
• Helping the team manage logistics for the Bengaluru Policy in Action program

Candidates should have a degree in Public Policy/Public Administration/Law/Government or Development Studies from a reputed university and must have at least three years of relevant work experience. A good understanding of the policy space in India is highly desirable. The candidate should be passionate about interacting and sharing knowledge with students. Excellent communication skills are a must.

The bulk of the work during this consulting assignment will be concentrated on the weekends between 18th Feb and 19th March. Candidates will be required to commit about 60 hours of their time during this period.

Desirous candidates should drop an email to applications at applications@ylacindia.com with their resume.

## Thursday, December 08, 2016

### Designing the payout phase of the National Pension System

by Renuka Sane.

A pension program must ultimately be judged by the consumption delivered in retirement. In defined contribution (DC) pension systems, such as the NPS, we accumulate wealth over our working life, and draw down this wealth after retirement. When savings are gradually drawn down in order to pay for consumption, there is the possibility of living too long and running out of savings. Buying an annuity eliminates this risk, but it may yield a low consumption per year of life.

In the early years, the focus in pensions policy thinking was on investment. Our task was to get participants going with regular contributions, and sound asset management, so as to build up pension wealth. This thought process has given us the National Pension System (NPS). The prospect of exiting the workforce, and using pension wealth to obtain a stream of consumption, was buried somewhere deep in the future. As a consequence, this part of the pension process has thus far been under-emphasised.

### Why do we care about the draw-down phase of NPS?

In India, the NPS forces individuals to annuitise 40% of their pension wealth, and take the remainder as a lump-sum. The subscriber can delay the annuity purchase or lump-sum withdrawal by 3 years. If the accumulated corpus is less than or equal to Rs.200,000, the subscriber can withdraw the entire amount and forgo the annuity purchase. Phased withdrawals are prohibited.

Now that more than 10 years have passed since the first entrants into the NPS, and we are getting closer to the first full cohort retiring, it is time to evaluate the draw-down policy. If there is more clarity and improved design for the draw-down phase, this may induce increased enrollment into the NPS.

### The questions

There can be many reasons for exit from the NPS - voluntary retirement, untimely death of the subscriber, and exit at the prescribed retirement age. In this article, we focus mostly on the latter i.e. draw down policy on retirement. Two questions are faced here:

What is the optimal level of mandatory annuitisation?
Different countries have approached the question of mandatory annuitisation differently, and are largely influenced by the existence of a state funded pension which offers protection from poverty in retirement. The Chilean approach, for example, has been to restrict lump-sum distributions, and mandate the use of fixed inflation-indexed annuities or lifetime phased withdrawals. The Australians are more flexible in allowing lump sum withdrawals. Most recently, the UK has done away with its rule of mandating the purchase of an annuity by the age of 75, and allows for programmed withdrawals. The US has very little mandatory annuitisation. Is our mandatory 40% annuitisation optimal, and if not, what should be done?
How do we make the market for annuities work?
Life insurance companies are often reluctant to enter into annuity markets because of the lack of availability of good mortality tables as well as instruments for hedging longevity and inflation risk. Customers may like a survivor annuity that includes the spouse, children and dependent parents, but from a pricing perspective, this may not be feasible. Customers may like inflation indexed annuities, but this requires that the insurance company is able to trade in a market for long dated inflation indexed bonds. We need to understand what are the requirements for enabling an annuity market that is able to provide competitive pricing on its products. The problems of the Indian Bond-Currency-Derivatives Nexus inhibit the emergence of an efficient market for annuities.

### Gaps in our knowledge

In order to arrive at an optimal level of annuitisation, we need to have an understanding of what our objective is from the annuitisation. For example, if our objective is to ensure a minimum consumption in retirement, then annuitisation can be mandatory only to the extent that is required to buy the minimum annuity. This requires us to take a view on what constitutes minimum consumption. A nominal annuity may not be able to buy a minimum consumption basket if inflation surprises occur over the lifetime of the retiree. In this case, annuitisation should mandate the purchase of an inflation indexed annuity instead of a nominal annuity. If, on the other hand, we believe that RBI will deliver on its 4% CPI inflation target, this changes the way we think about this. We have not had a larger policy discussion on this question.

Minimum consumption can be thought of either in terms of a minimum replacement rate relative to the average of the last few years of wage or contributions made, or a value that is linked to some consumption index. It may also vary depending on the age at which draw-downs are expected to begin. While the age of retirement is fixed for salaried employees, this may not be the case for informal sector workers. We, therefore, need to take a view on what will be the retirement age, or access age for informal sector workers.

If insurance companies do not take into account person-specific mortality differences, this is unfair on the poor as they die sooner. Under these conditions, mandatory annuitisation may be problematic for poor people. In this case, it might be more prudent to allow for a policy of programmed withdrawals. The trade-offs between an annuity and programmed withdrawal, and the design features of programmed withdrawals need to be better understood.

Finally we need to understand what impedes the development of annuities products. Why is it that insurance companies are reluctant to offer multiple products? What market and regulatory failures need to be addressed so that this market can take off?

### What is to be done?

Given the gaps in our knowledge the following elements of work are now required:

Design of annuitisation policy and phased withdrawal policy
The level of annuitisation needs to be thought through from the perspective of consumption as well as the ability of the market to provide such an annuity. This includes questions such as the access age, the level of mandatory annuitisation, the type of annuity, as well as the design of the programmed withdrawal product.
Developing annuity markets
Processes for solving market failures that may impede the functioning of annuities markets need to be set up. For example, an important policy measure that might be in the domain of the PFRDA is the development of mortality tables. PFRDA needs to establish a position on the requirements that the BCD Nexus has to satisfy in order to achieve PFRDA's objectives, and advocate this position with the Ministry of Finance. This includes dealing with questions about long dated bonds, inflation indexed bonds, interest rate derivatives, and instruments to hedge longevity risk.
Procurement procedure for annuity providers
The provision of annuities also depends on the competition in the annuity market, and the price at which the annuity is offered to the subscriber. A focus on low-cost annuity provision needs to be developed. For example, the procurement of annuity service providers should be done via auction, which leads to the lowest prices. This was the approach taken for the appointment of pension fund managers and has led to some of the lowest fund management costs in the world.

The author is a researcher at the Indian Statistical Institute, Delhi.

## Monday, December 05, 2016

### How will IBC 2016 deal with existing bank NPAs?

The Insolvency and Bankruptcy Code, 2016 (IBC) is an important reform for India. It is also one that has witnessed one of the fastest legislative and implementation processes. The report of Bankruptcy Law Reforms Committee (BLRC), set up to design and propose the law, was submitted in November 2015. By May 2016, the law was passed by Parliament and received Presidential assent. October and November 2016, saw a lot of action from the government on implementation and finally on 30th November 2016, the sections of the law dealing with the corporate Insolvency Resolution Process (IRP) were notified.

All along, the public and policy discourse on IBC has been intertwined with the non-performing asset (NPA) problem of the banking sector, specially on account of loans to firms (link, link, link). NPAs of banks, specially the public sector banks (PSBs), have been a cause of concern. In a statement to the Rajya Sabha in May, 2016, the government reported that bad loans to firms accounted for 56% of the NPAs of PSBs.

Since the RBI initiated the asset quality review' at banks, reported NPAs have reached alarming levels. In June, 2016, gross NPAs of listed banks stood at Rs. 6.7 trillion or 9.1% of their advances, a jump from 4.3% of advances in March 2015. This increase is mainly on account of reclassification of corporate loans, that were hitherto classified as standard, to NPAs. The proximity of a banking crisis has helped hasten the processes that led up to the IBC. In this case, now that IBC is in motion, we should ask how much of a difference this will make to the banking crisis.

### Impact of IBC on bank NPAs

The overall question about the impact of IBC for the banking crisis contains two related issues:

1. Are existing corporate NPA cases eligible to come under IBC?

2. How will the IBC solve the existing NPA cases in terms of recovering value?

### Are the existing corporate NPA cases eligible to come under IBC?

Banks' corporate NPA cases are of three types:

1. Those where banks have initiated legal action against the debtor for recovery of dues, under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI).

2. Those where banks, or some non-bank lenders, or the corporate debtor itself has sought legal action for collective resolution of insolvency, either under the Sick Industrial Companies Act, 1985 (SICA) or under the winding-up provisions of the Companies Act, 1956 (CA 56).

3. Those where banks have chosen to restructure corporate debt under RBI's Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR) or similar mechanisms.

For the cases under SICA pending at the Board for Industrial and Financial Reconstruction (BIFR) and Appellate Authority for Industrial and Financial Reconstruction (AAIFR), the Eighth Schedule of IBC explicitly provides for an abatement of the existing cases with an option to re-initiate them as new cases under IBC, within a period of 180 days.

For cases on all other forums, legal or regulatory, the IBC is silent on their status. We believe that there is no legal impediment to DRT cases being initiated as new cases under the IBC. Similarly, even winding-up cases pending in High Courts admitted under the Companies Act, 1956 (the winding-up sections of Companies Act, 2013 were not notified and are now replaced by the IBC provisions) are eligible to be initiated as fresh IBC cases. CDR and SDR cases are also eligible as possible cases under the IBC, given that IBC as a law will prevail over CDR and SDR, which are regulatory mechanisms.

Only one type of winding-up case is ineligible for IBC: where a High Court has granted a stay on other legal proceedings being initiated while the winding-up petition is being heard.

This means that most of the 4,500 winding-up by Court cases, the 1,200 BIFR/AAIFR cases, the corporate loan recovery cases under DRT and the 430 failed and pending CDR cases, can effectively now come to the National Company Law Tribunal (NCLT), which is the adjudicating authority for corporate insolvency cases under section 60 of IBC.

This has major implications for the implementation of the IBC. If NCLT is built like a conventional Indian tribunal, within a few weeks, it can develop a multi-year backlog. It is important to bring sound project planning into implementing NCLT.

Will eligible cases come to IBC?

After the notification of IBC, two scenarios are possible:

Scenario 1: Status quo continues and the existing cases, despite being eligible under IBC, stay where they are. This could be because the incentives of banks may not be aligned with the time bound resolution that IBC offers. If errors in bank regulation allow a bank to weakly provision for a case that lingers in court for years, while the recovery rate expected through IRP is low, banks have an incentive to postpone bad news and not initiate the IRP.

Scenario 2: Section 6 of the IBC empowers all kinds of creditors -- financial and operational, bank and non-bank -- to initiate corporate insolvency cases. It prescribes a simple test for a creditor seeking to initiate a case: Has the corporate debtor defaulted on an undisputed debt? If this test is met, any creditor can initiate an IRP under Sections 7 to 9. This is different from the earlier laws that only empowered some classes of creditors (mainly banks and financial institutions) to trigger a recovery or a resolution action. Once an IRP is initiated, its outcome will affect all creditors of the defaulting firm.

Under Section 12(1) of IBC, the corporate IRP must be completed within a period of 180 days, with only the one-time 90 day extension. So even if banks themselves may not initiate corporate IRP cases under the IBC, non-bank creditors, who earlier did not have recourse to a resolution mechanism or whose cases are facing long pendency at other forums without any resolution in sight, will most likely initiate an IRP. Once an IRP is initiated, banks will have no choice but to participate in the process. Hence, we believe that even though the regulation of banks may be faulty, initiation of IRP will take place on a large scale for existing NPAs. This is one of the gains of shifting the legal and institutional machinery of insolvency out of the banking regulator to the Ministry of Company Affairs.

What happens to existing cases when IRP is initiated under IBC?

Once an IRP for a corporate debtor is admitted by the NCLT, according to Section 14 of IBC, an automatic moratorium comes into force for the duration of the IRP which is 180 days. During this period, all pending cases against the corporate debtor, whether at DRTs, Civil Courts, or High Courts, are stayed. Under section 21 of IBC, a Committee of Creditors (CoC) will be formed, comprising all the financial creditors of the company. Under section 30 of IBC, the CoC can approve a resolution plan for the company by a 75% super-majority vote by value. If a resolution plan gets approved by the CoC and the NCLT, all cases pending at other forums will have to abate and the resolution plan will get implemented.

If however, no resolution plan emerges or the CoC is unable to agree on a resolution plan within 180 days, the NCLT will pass a liquidation order under section 33(1) of IBC. Once a corporate debtor goes into liquidation, the only recovery possible will be through the liquidation process and all other recovery, rehabilitation or restructuring proceedings will abate. Under section 52 of IBC, secured creditors will be given a choice of pursuing liquidation on their own or as part of the collective liquidation proceedings.

### Will the IBC solve NPAs in terms of recovering value?

This depends on what is meant by solve'. If `solve' means somehow find the capital which will stave off the Indian banking crisis, the answer is No. The losses that have taken place in the past are money that banks have lost. Nothing can undo the loss. All that can be done is to rapidly recognise those losses and work out their implications for banks, which can be done through a combination of (a) IBC (b) Resolution Corporation and (c) Improvements in banking regulation.

The role of IBC in this is to remove delays in the bankruptcy process. The existing corporate resolution mechanisms have been plagued by delays. If and when these cases come to IBC, at least 3-4 years would have elapsed from the original event of default. In a recent article, Ghei and Roy, 2016 show evidence of a 4 year delay in the legal system in recognising corporate insolvency and a further 5 year delay in giving a final winding-up decision. This delay induces value destruction. Even if the IBC proceedings for such cases are completed within the stipulated 180 days, the recovered amount will only be a fraction of the original value of assets.

The World Bank Doing Business Report, 2017 (WBDB 2017) points out that a higher time to resolution is associated with a lower recovery rate. India takes an average of 4.3 years to resolve insolvency and has a recovery rate of 26 cents to the dollar. In comparison, South Asian economies take only 2.1 years to resolve cases and have a better recovery rate of 32.6 cents, despite having a lower score on the strength of the insolvency framework. Given that most existing NPA cases may have been pending at various forums for 3-4 years, the recoveries from their resolution within the IBC framework may not yield much more than the 25-30 cents to the dollar that the WBDB 2017 reports. In this case, the balance sheet of the bank has to bear the loss of 70-75 cents to the dollar.

Under section 33(1) of IBC, failure to reach a resolution in 180 days results in liquidation. This is a hard budget constraint, that brings pressure on banks to vote on possible resolution plans quickly. The track record of PSBs on jointly taking key decisions with respect to NPAs has been poor. Even in the RBI regulated forums such as CDR and the Joint Lenders Forum (JLF), the lack of coordination and delayed responses by banks have led to delays in approving restructuring plans. If these problems persist for cases that come to IBC, i.e. if banks do not change their behaviour when faced with IBC, the outcome will be liquidation. In general, liquidation induces larger value destruction as the organisational capital of a going concern is destroyed. This has been witnessed in cases like Kingfisher Airlines where lenders are unable to sell even real estate assets.

The IBC will only recover what value remains, either through resolution or through liquidation, and distribute it to creditors in a finite time frame, albeit a lot quicker than the existing forums. This by itself is a positive outcome for the credit markets because the value that is recovered can then be deployed more productively in the economy. However, this will disrupt the cover-up that has been going on in Indian banking.

Currently, the listed banks' reported NPAs are Rs. 6.7 trillion and 80% or Rs. 5.4 trillion of these are in the books of PSBs. The aggregate provision cover ratio of PSBs against these NPAs is around 45% (Source: Banking sector analyst's estimates). As an illustration, let us assume that 60% of these cases are corporate insolvency cases, let's assume that all of them come to the IBC for resolution and the recovery under the IBC is 30 cents to the dollar. Under these assumptions, the PSBs would have loan values of Rs. 1.8 trillion against which no provision is made, while their recovery would only be Rs. 1 trillion. This would mean an additional provision of Rs. 0.8 trillion for these banks.

For making these provisions PSBs will need additional capital. Already in 15 of the 27 PSBs, gross NPAs as a percentage of assets are close to or in excess of the capital to risk-weighted assets ratio (CRAR). Even if the IBC framework delivers a 180 day resolution of the existing NPA cases, it does not solve the capital adequacy problem of the banking system. This lack of capital is the reason why banks may not want to bring existing corporate NPAs to IBC to begin with. Keeping existing cases at forums such as CDR or SDR or the other RBI restructuring forums has, till now by design, given banks the ability to hide problems. Often, these mechanisms have been referred to as extend and pretend schemes.

One possibility is that when the existing NPA cases come to IBC, banks as financial creditors in the CoC will approve the CDR or the SDR plan as part of the resolution plan. For this they need to have the 75% voting power in the CoC. In cases where they fall short of the threshold vote, banks may not be able to agree on a resolution plan and in such cases, a liquidation becomes more imminent. Once liquidation is ordered, banks will have no choice but to make full provisions for the un-recovered dues from these firms.

### Conclusion

Existing bank NPA cases pending at other forums are eligible to get initiated as new cases under the IBC. While IBC can solve an existing NPA case by providing a resolution outcome within a definitive time frame, recoveries are likely to reflect reality, i.e. yield large losses. The most that IBC can do is enable the reality to come out into the open; it cannot undo losses that have taken place in the past. This will lead to a new stage in the Indian banking crisis.

Rajeswari Sengupta is a researcher at the Indira Gandhi Institute of Development Research. Anjali Sharma is a researcher at the Finance Research Group at IGIDR.

## Sunday, December 04, 2016

### Watching markets work: The dramatic events of 8 November 2016

by Anurag Dutt, Sargam Jain, Ajay Shah, Susan Thomas.

On November 9th, 2016, Indian financial markets were asked to digest two major events. At 8:30 PM on 8th evening, the announcement had come out about de-monetisation of the 500/1000 rupee notes. And, by late night on the 8th, there was news of Donald Trump's early gains in the U.S. presidential elections. At 9:28 a.m. IST on the 9th, Donald Trump won Florida. At this point in time, for Hillary Clinton to win, she had to win the states of Wisconsin and Michigan, where Trump was already leading. At 1:00 p.m. IST, Clinton conceded.

The two events contain an interesting contrast. With the US presidential election, the betting markets were reporting a 20% chance of a Trump win. But de-monetisation was on nobody's radar. It was not part of our distribution.

In this article, we go back to those events and look at how the Indian financial markets responded to the major events.

### Prices

 Figure 1: Prices

All the graphs in this article show physical time from the morning of 7 November to the end of 11 November. The top panel shows the equity market, with Nifty spot in blue and Nifty futures in grey. On 8th evening, Nifty rose slightly, which suggests that there was no insider trading based on the de-monetisation, and nobody had a sense that Trump would win. On 9th morning, Nifty opened sharply down, reflecting both elements of news. By the time Nifty trading stopped, Nifty had remarkably come back to 8,432. With the benefit of hindsight, we know that the market was too quick in reconciling itself to the news. By the end of the week, Nifty had fallen further. On 2 December, Nifty closed at 8086, showing that the de-monetisation news had not been fully understood even by 11 November.

We may speculate that in the Indian equity market, there is a lot of focus on information production about individual stocks, but low capabilities in macroeconomics. In many previous events also, we have seen the market being relatively slow in understanding far-reaching macroeconomic developments.

The middle panel is the USD/INR. The blue line is USD/INR futures (which trade 09:00 a.m. to 05:00 p.m.) and the grey line is the spot market, which can trade for 24 hours a day. Let's think about the evening of 8th. At 8:30 PM, there was the de-monetisation announcement. Remarkably, the spot market showed an appreciation of 40 paisa. This shows that the currency traders of 8th evening did not understand the de-monetisation. In the late night, news of Trump's success started trickling in. In the morning of 9th, INR depreciated reflecting both elements of news. In the Indian afternoon, the USD moved sharply when Clinton conceded, which gave an appreciation.

For the rest of the week, INR depreciated as the bad news sank in. One element that was at work was the huge demand in India to convert 500/1000 rupee notes into US dollars. Anecdotal reports suggest that by 10th, the entire inventory of US dollars in the Indian black market had been exhausted. This would have triggered off demand for dollars, and fueled the depreciation. To the credit of RBI, they let the market do its job; they did not interfere with a large INR depreciation.

The bottom panel is gold. The blue line is MCX gold futures and the grey line is the CME gold futures. MCX gold trading enjoys long hours: from 10:00 a.m. to 11:30 p.m. In the late hours of 8th November, gold prices became very volatile when the de-monetisation announcement came in. Trump's lead in the U.S elections inflated gold prices when the market opened on 9th.

There were two distinct things going on. Worldwide, buying gold is a vote of no-confidence in civilisation and paper money. The Trump win would have encouraged many people worldwide to shift their holdings in favour of more gold. In India, the de-monetisation announcement had an abstract implication (mistrust of the Indian rupee, mistrust of the Indian State) which would have encouraged a higher weightage of gold in the portfolio, but there was also an immediate and practical dimension. Thousands of people flocked to Sarafa bazaars to exchange their high denomination notes for gold in the morning of 9th November.

These extremes were somewhat unwound in the rest of the week. Perhaps there was a premium on physical gold available in India on the 9th. Within a few hours, gold bars could be flown in from Dubai and Singapore, through which the Indian spot price would come back to the world price. But on the day of the 9th, there was extreme demand for gold and the Indian price deviated from the world price.

### Turnover

 Figure 2: Turnover

Turnover on equity derivatives -- Nifty futures and Nifty ATM options -- is a critical element of Indian price discovery. On the 9th, markets opened with very high trading intensity in both Nifty futures and options. The turnover in near month at-the-money options surged again when Trump's victory was confirmed. There is an interesting pattern thereafter: On 10th and 11th, the futures activity was larger. This runs against the normal pattern in India, where options trading is favoured owing to the high securities transaction tax (STT) on futures trading. This is worth exploring further. Perhaps this odd behaviour is being induced by errors in the rules for initial margin calculation.

In the currency market, futures trading dominates as there is no STT-related distortion. Here, we see we got a big surge of trading on 9th morning, a smaller surge in the afternoon when Clinton conceded, and then a fading away of excess turnover through the rest of the week.

MCX was open for business when the de-monetisation announcement came out, and reaped a bonanza with a massive increase in turnover on 8th evening. For most financial traders in India, on 8th evening, MCX was the only game in town as NSE and BSE were closed. From 9th onwards, the patterns in turnover are similar to those seen with the other two markets: a surge on 9th morning, a surge when Clinton conceded, and a gradual phaseout of extraordinary turnover through the week.

### Market efficiency

 Figure 3: Violations of no-arbitrage on the futures market

On 9th morning, when NSE opened for trading, there was a huge mispricing between the Nifty spot and the Nifty futures. Once that was corrected, for the rest of the week, pricing errors were comparable to those seen before the news, but the basis risk was higher.

The pricing errors on USD/INR futures are surprisingly small when compared with those seen on the equity market. This suggests there is ample capital in currency futures arbitrage, relative to the small size of the market.

With gold, what we are reporting is the pricing error between the MCX gold futures and the CME gold futures. As emphasised earlier, there was a large dislocation on the Indian gold spot market on 9th, as many people were buying gold. The Indian gold spot price fell out of sync with the world gold price. This is showing up as large pricing errors in the bottom panel, and normalcy is attained as enough planes land in India bearing physical gold.

 Figure 4: Violations of put-call parity on the options market

Put-call parity held up pretty well through these events, for both Nifty and USD/INR. A brief large error was found on the morning of the 9th, on the Nifty options market. Apart from that, the deviations on both markets are small. The readings of deviation from put-call parity on the USD/INR options market are relatively sketchy as this market is often illiquid.

#### Realised volatility

 Figure 5: Realised volatility

By 8th evening, realised vol on the Nifty futures market was showing some large values. Extreme realised volatility was found on the morning of the 9th: rvol was 6 times larger the pre-event mean value, as the market digested the two events. The price discovery was largely completed by 9th evening, and then realised vol was only slightly higher than the values seen in peacetime.

On the USD/INR futures, realised vol on the morning of the 9th was roughly 11 times larger than the normal values. The morning of 10th also shows a significant spike in realised vol.  While large price fluctuations were not evident on 10th, we observe a significant rise in variations on 11th.

#### Ruminating on methodology

Ordinarily, economists obsess on the question of identification. How do you know that event $x$ caused the outcome $y$? Could it be that there were other things going on which were impacting upon the observed change? We normally struggle to find plausible control units which can be juxtaposed against treatment units where both kinds of units are alike. The game is about rising beyond simple comparisons of means (or regressions), and look for plausible quasi-experimental designs. There are two tricks through which we are allowed to read the world and learn about how it works, without requiring the discipline of a matched sample of treatments and controls.

The first trick is when there are very big events. Ordinarily, we'd be worrying about whether the observed change in the treatment unit was caused by the event; what about other things that might be going on? But when big events happen, they dominate everything else. In the week under examination, we don't need to think about macroeconomic or firm news. The market was absorbed in doing price discovery in figuring out these two events; they drowned out all the other news flow.

The second trick is high frequency data. When we zoom into high frequency data, we have an opportunity to see the impact of the event alone, as it is unlikely that other confounding events have unfolded in that very short time.

### Definitions

• Prices: These are traded prices of a security reported at minute-level frequency.
• Traded volumes: These are number of units of underlying security traded at five-minute frequency.
• No arbitrage violations: These are measured in terms of difference between the price of underlying security and price of near-month futures contract based on it. We do this for Nifty and for USD/INR but for gold, we just focus on the gap between MCX Gold futures and CME Gold futures.
• Violations in put-call parity: According to put-call parity, S + P = C + X(1+r)-T i.e. a spot investment that is risk-managed using an at-the-money put option is tantamount to a combination of a bond and an at-the-money call option. Thus, violations in put-call parity are measured as the difference between the two investments.
• Realised volatility: It is constructed by computing intra-day returns at 5-second frequency. Thus, for every 5 minute-interval, realised volatility is computed as standard deviation across 60 readings of returns in the interval. We have very high frequency data and there are ample transactions within 5s, thus permitting differencing at such a high frequency.

Anurag Dutt, Sargam Jain and Susan Thomas are researchers at the IGIDR Finance Research Group. Ajay Shah is a researcher at the National Institute for Public Finance and Policy.

## Friday, December 02, 2016

### The Demonetisation Decision: Event, Impact, Narrative and Meaning

by Suyash Rai .

.... those who torment us for our own good
will torment us without end
for they do so
with the approval of their own conscience.

- C. S. Lewis

On November 8th, government announced the decision to discontinue the legal tender status of Rs. 500 and Rs. 1000 notes. The original objectives were stated as: eliminating fake currency; inflicting losses on those with black money; and disrupting terror and criminal activities. Later, new objectives were tacked on: enabling growth in bank credit, turning India into a cashless economy. A cost benefit analysis suggests that the benefits were relatively small when compared with the costs:

Expected impact on fake currency

A study by the National Investigation Agency and the Indian Statistical Institute, in 2016, estimated that fake Indian currency notes in circulation have a face value of Rs. 400 crore. This is an incidence of fake currency of 0.022%. The scale of counterfeiting of the Indian rupee is not out of line with what is seen in other countries, and the procedures adopted worldwide to address this include investigative actions against counterfeiters, phased replacement of old series of notes with new notes that have better security features, etc. De-monetisation is generally not seen as a tool for dealing with counterfeiting. We must also not forget that the counterfeiters will now get to work on the new 500/2000 rupee notes, while India will likely never do a de-monetisation again.

Expected impact on unaccounted wealth a.k.a. "black money"

The analysis presented in the Finance Ministry's White Paper on Black Money, 2012, shows (on page 47) that, on an average, the amount of cash seized during raids by income tax authorities is 4.88 percent of total undisclosed income admitted in those cases. This data is from more than 23 thousand warrants executed. Even if this decision inflicted a 100% loss upon holders of unaccounted cash, this would imply a loss of 4.88% of their total unaccounted wealth, which is not much of a shock for those with such wealth. If, as is more likely, the demonetisation has imposed a 40% loss upon holders of unaccounted wealth (who suffer a 40% discount when laundering the money), this implies a loss of about 2% of unaccounted wealth.

Expected costs

Cash is a store of value (white or black), but it is also a medium of exchange. Most people in India only transact with cash. More than 90 percent of shops accept only cash or very short-term credit. Large number of laborers and small value suppliers are paid in cash. While these facts may change over time, they mean that this sudden ban may be leading to disruptions in consumption and production. Compared to the 10,000 yen note (USD 137 in Purchasing Power Parity), the 1000 swiss franc note (USD 775), the USD 100 note, or the 500 Euro (USD 530) note, the Rs. 1000 (USD 31 in Purchasing Power Parity) and Rs 500 (USD 15.5) are practical notes that are used for transactions. Hence, de-monetisation of these notes is a large adverse monetary shock, perhaps the largest ever such shock in world history. The constraints of ATM recalibration and currency printing are leading to a long transition period. Even ensuring 50 percent re-monetisation in cash form, about Rs. 7.5 lakh crore, appears hard by December-end. The Centre for Monitoring of Indian Economy has estimated that a few elements of the first-round impact give a reduction of GDP of around Rs. 1.3 lakh crore; the total impact will be higher owing to the multiplier effect, the hysteresis associated with the monetary shock, the impact upon expectations, etc.

Who bears the costs?

While there is much talk about the GDP impact of this decision, a unique feature of this episode is that there may considerable other costs that fall disproportionately upon the poor. The rich have access to electronic payments, employees who will stand in queues to obtain cash, and savings that are used to cope with a decline in income. The poor lack all these. If a poor person suffers an income shock, or is not able to get medical treatment, the consequences are enormous for the individual, but the GDP impact may be negligible. In terms of welfare implications, these costs matter a lot more than the impact on GDP.

Approach to comparing benefits and costs

The benefits are primarily in the form of losses inflicted upon those with black money, while costs are imposed on legitimate economic and social activities. Ordinary people, going about their lives, have suddenly been asked to bear a burden associated with the project of imposing costs upon people who have unaccounted wealth. Some of the costs are incurred by poor people, whose welfare loss might be much more for a given level of Rupee cost incurred. Given this difference in the nature and incidence of benefits and costs, before comparing costs and benefits, each rupee of cost should be given a much higher weight than each rupee of benefit.

It seems that the economic costs of this decision are likely to outweigh its economic benefits. Some have compared this decision with a surgical strike, but it is more like a nuclear strike. The nuclear option has been exercised before exhausting other options. Although measures to help people disclose their undisclosed incomes have concluded, the efforts to directly or indirectly curb illegality have barely begun. This raises concerns about the wisdom of using this lever of de-monetisation.

The mainstream media narrative around the decision is not as pessimistic as the analysis presented above. There is a disconnect between the mainstream narrative and the facts emanating from the ground [example]. In this essay, I look at the discourse, analyse the arguments which are being presented, and peer into the long term consequences.

Four key arguments are being forwarded in support of the decision:

1. It is claimed that the decision is likely to have a smaller impact on the poor than what many, mostly anecdotal, reports suggest.
2. The monetary shock can be, and will be, quickly overcome by the use of monetary policy instruments to restore liquidity.
3. This decision will expedite the process of making India a "cashless economy", with benefits that will make short-term costs worthwhile.
4. Since the decision is popular, it must be good. This raises an interesting question: in a democracy, can there be a better measure of goodness of a policy than its popularity?

### Small impact on the poor?

Two ideas have been offered in the claim that the adverse impact upon the poor will be small:

• Cash savings as predictors of impact on the poor: Estimates based on national surveys show that cash earnings of the poor are small, and they usually lack cash savings. So, it is argued, they are likely to seldom visit a bank branch or post office, and they are not particularly inconvenienced.
• Credit as a mitigant of the impact on the poor: It has been argued that since the rural economy is significantly credit-driven, the impact on rural poor will be small. If transacting parties know each other, they would be willing to extend credit, which would make short-term non-availability of cash less costly. Given the practices in rural markets, many commercial relationships are indeed credit-driven, and cash calls are only made periodically.

I fear that a broader understanding of the financial and economic lives of the poor yields an understanding of the impact of de-monetisation that is quite harsh.

The financial lives of poor households are very different from those of middle class and the rich in one crucial aspect - intensity and frequency of financial transactions involving cash. The ratio of financial turnover to assets held, during a given period, is much higher for poor households. Financial turnover is the total value of all financial transactions, i.e. putting money in or pulling money out from any informal or formal financial instrument.

Think of a middle class household with one salaried person earning Rs. 600,000 a year, with total financial investments worth Rs. 10,00,000. From the bank account, money is withdrawn and spent, or drawn down through card/online payments, or transferred into an investment instrument. If this person has a credit card, each purchase on the card would create two financial transactions of equal value - drawing credit, and repaying credit. Other than this, there may not be much "push and pull" in the person's financial life; only simple drawing down or investing up. She may occasionally take loans or switch across investment instruments. Financial turnover during a year is likely to be much lower than the total value of the financial assets owned. The cash portion of the transaction value may be smaller yet.

Research on the financial lives of the poor was presented in a landmark book, Portfolios of the Poor: How the World's Poor Live on 2 dollars a day, Collins et. al., 2009. It found that the ratio of total transaction value to asset value for poor households is quite large. For the median rural poor household in India, financial turnover was about 33 times the year-end asset value. This shows that even though, at a given time, a poor household has only a small asset base and small savings, they are intensively transacting. They are using a range of informal (e.g. loan to or from friends) and formal instruments (e.g. microfinance loans) - to frequently put in and take out money.

Why do they do this? Most poor households have small, irregular and unpredictable incomes. This forces them to do high frequency financial transactions in order to smooth their consumption. They are transacting intensively in the process of cash-flow management, to transform irregular income flows into a stable flow of consumption from day to day. When the poor flounder in this high wire act, they may go hungry. These are not the concerns of the middle class: their income is much more stable, and they can use their savings as a buffer. I fear that much of the commentary on de-monetisation lacks an appreciation of this distinction.

Here is a table, from the book, summarising a year in the financial life of a tailor's household in Eastern Uttar Pradesh:

 Start Amount End Amount Turnover Assets Formal Banking savings 152.72 10.46 167.36 Informal Saved with a deposit collector 33.47 71.13 37.66 Saved with a moneyguard 62.76 0.00 62.76 Goods supplied on credit 9.41 16.32 18.41 Total 258.36 97.91 286.19 Liabilities Informal Wage advance 0.00 13.60 97.28 Shop credit 20.92 39.54 207.95 Services taken on credit 0.00 0.00 125.52 Total 20.92 53.14 430.75 Financial Net Worth 237.44 44.77 Total flows 716.94

The numbers are in USD. The total transaction value is more than 7 times the end-of-year value of assets, and about 16 times the end-of-year financial net worth. Instruments have low end-period values but are intensely transacted, as shown in the "Turnover" column. For instance, even though the credit balance is small, there is a large turnover, which means frequent repayments. This household needs to do high frequency cash-intensive transactions just to make timing of consumption match the timing of money availability.

It is wrong to think of poor households as accumulating incomes and then going to bank branch to exchange or deposit/withdraw it. Most poor households cannot afford to do that, as their savings are small. They must actively manage incomes and consumption, using high frequency financial transactions. To the extent these transactions involved Rs.500 and Rs.1000 notes, the demonetisation decision has temporarily restricted the ability of poor households to engage in their consumption smoothing.

The argument about credit relationships holds true for some time and for certain contexts. All poor people are consumers, and many are also producers (eg. wage laborers, artisans, etc). Most of the credit relationships of poor households as consumers are for the short term, as evidenced by the high turnover in credit relationships. Further, as producers, their ability to work on credit is limited by their small or non-existent savings. There are about 14.5 crore casual laborers in India, who may not be able to work on credit for long. As the remonetisation is dragging on, credit relationships are coming under stress.

It is true that credit is integral to the high frequency financial transactions of the poor. This does not mean that there is depth to cope with much larger requirements of credit on a sustained basis. Lenders might sense problems of solvency, start demanding deleveraging, and choke off credit access.

These questions, about the financial activities of the poor, must be seen in the context of the large monetary shock which has become a large negative GDP shock. The poor who work as casual laborers, especially in cash-intensive businesses, may see their employment opportunities drying up. There are reports of informal labor markets failing to generate work for many laborers who rely on such markets. There is anecdotal evidence about many small and medium scale industries and construction sites temporarily closing down. Similarly, for farmers, this is the time when crop is brought to the market and new sowing is done. Although farmers with small holdings usually do not have marketable surplus, they need cash during the sowing season. Landless laborers may be affected because farmers with medium to large landholdings are not able to get cash to pay them for sowing work.

India has a shadow economy. Many poor people work in enterprises outside the official, tax-paying economy. Many of these enterprises are doing legal activities without paying taxes. So, in that sense although they are breaking tax laws, they are not criminal enterprises as such. Consider a small brick manufacturing unit that is totally outside the tax purview. The business is cash-intensive. It is doing something illegal - not paying taxes. However, it is a a productive enterprise employing people. It is in the shadow economy, and must be brought into the official economy. This means that it must be made to pay taxes and penalties, but it need not be shut down. The note ban may have pushed this cash-intensive enterprise into failure. The outcome is that the production and employment are lost, and nothing accrues to the taxpayer. This is not beneficial in any way, and may be particularly harmful to poor people working in such enterprises.

The poor are also more vulnerable to frauds and swindles that are thriving in the present environment of enormous uncertainty. The unbanked are likely to be mainly the poor, and the unexpected ban on exchange of notes has created a desperate situation for them. It is easy to say that they should open bank accounts. But in the present situation of uncertainty, we are hearing reports of people resorting to desperate measures even to protect a part of their savings. There are many reports of this happening in remote areas.

India being a vast, multi-terrain country, with uneven presence of banking facilities, there are many regions with poor access to banking facilities. The transaction cost of having to make the trek to a bank branch multiple times to exchange or withdraw cash even once is quite high as percentage of a household's income. We have heard stories about people living in remote villages in hilly areas having to rely on others to get notes exchanged, and taking losses in the process. So, for a subset of the poor living in remote locations, the costs may be even larger.

It is quite likely that the costs of this decision on the poor will be significant, and some poor people might suffer disproportionally. Poor households have no black money and did nothing to deserve this.

### Use of monetary policy instruments to restore liquidity

Some commentators have argued that although the note ban has created a shock to money supply, the central bank could soon restore money supply through use of monetary policy instruments, such as open market operations, rate cuts, etc. It is argued that the Monetary Policy Committee will, in some weeks, see the adverse shock to GDP, and vote in favour of large cuts in interest rates, which will solve the problem.

However, it is important to keep in mind the distinction between India's money supply in banks and India's money supply in cash. On 8 November, there was Rs.10.5 trillion of demand deposits, and over Rs.96 trillion of time deposits, which are vastly greater values than the Rs.14.2 trillion of 500/1000 rupee notes which was disrupted. The electronic money supply was not disrupted; it was the cash money supply that was disrupted. This matters because cash is a preferred medium of exchange ("money") for most transactions. The constraint today is the shortage of cash. To overcome the disruption, cash must be restored into the hands of people. None of the instruments of monetary policy do that. They only enhance liquidity in the banking system. Cash still needs to be printed and dispensed through bank and postal networks.

### Cashless economy

An additional objective has been appended: make India a cashless society. It reflects poorly on the government's policymaking process to add such a big objective after beginning implementation of such a momentous decision. If this was indeed an objective, much preparation should have gone in before the decision was announced. There is no evidence of such preparation.

Cash is expensive as a store of value - it gives negative returns and is amenable to loss and theft. Many households are forced to save in cash or other similar assets, because they do not have convenient and reliable access to the modern financial system. It would be beneficial for many households and enterprises to move most of their store of value to financial instruments, but only if considerable comfort around security, convenience and reliability of these instruments is created.

The evidence on superiority of electronic payments over cash as a medium of exchange is limited and context-specific. There is evidence to support making government-to-citizen payments cashless, but even there, the last mile problems of helping the recipients access and use this money has yet to be solved. Several research studies show the poor quality of the last mile banking network in India.

For transactions involving only private parties, the case for going cashless for payments depends on the context. It would be nice to have more cashlessness, but not in all situations, not for all persons, and not for all purposes. Cash has many inherent advantages, and in many contexts, cashless instruments are not superior to cash. For example, in an area with poor telecom connectivity, cash is more convenient. People should have the freedom to choose, depending on their context.

This government push to make Indians go cashless looks like a large, centrally planned effort in mission mode. This high modernist approach is ill suited for this objective. Going from cash to cashless is a vague and complex problem with unclear pathways. Storing money in financial instruments and using it to make day-to-day payments requires regular, reliable and secure access to these instruments. This is not a simple product that can be launched across the country overnight, but a sophisticated service that needs to take into account the infinite variety of needs of households and enterprises. At its core, it is a personal choice that each one should make in their own time. If this choice, and immature systems, are forced down their throats, many persons would recoil from electronic payments.

Government is inherently bad at seeing the complexity of such issues. It is likely to unleash a badly designed mission mode programme, without understanding the package of services required to actually make cashless store of value and payments work. The programme would also be hampered by the persistent capacity constraints of Government of India. When the objective is so complex, it is better for the government to be modest, and only play an enabling role.

The way most societies have gone to less-cash is through slow, careful, detailed policy work. The willingness to use coercion at an early stage of India's journey is troubling. As an example, consider shops accepting card payments. There are about 1.5 crore retail shops, but only about 14.6 lakh card devices. Should more shops accept cards? No one can decide this from the vantage point of policy-making in Delhi or Mumbai. There is no ideal number of card-enabled shops. If there are impediments preventing this, government and RBI should remove those impediments. If the right conditions exist, and if both consumers and shopkeepers feel the need, this number will increase.

We in India have a relevant experience from an episode that began in mid-1990s - the dematerialisation of shares. If government had forced households to immediately turn all their share certificates to demat shares, many may have turned their backs on the share market. They enjoyed the comfort of holding those certificates, and were not sure about the new system. Since they were given a choice, over a period of time, most of them opted for demat shares. They saw the advantages, and made their choice. This happened in a context where the numbers were quite small (the number of shareholders), but it still took about ten years. In that example, luckily, the new system worked out fine. But it could have failed to deliver. There were many risks of things going wrong. In such a situation, coercing households to switch to demat would have been unfair. The same holds true of the idea to go cashless, and at much larger scale.

An optimal shift from cash to electronic store of value and payments will happen if enabling conditions are created, within which people can make their choices. Government's primary role in this transition should be to unleash competition and innovation, while addressing problems through regulations and grievance redress. Government also has a role in ensuring provision of enabling infrastructure, which includes Aadhaar, telecom network, broadband network, etc.

There is an enormous mismatch between expectation and reality on this issue. Some people seem to assume that India could quickly go cashless during this period of remonetisation of cash. This premature use of coercion, in an under-developed payments ecosystem which has suffered from major errors of policy for decades, speaks poorly of the policy process. It is problematic to cite this complex, long-term aspiration to reduce use of cash as some kind of mitigant for this sudden note ban.

### Popularity of the decision

Several opinion polls show that the decision is popular. Consider the following conversation:

Friend: I have heard that person X in my neighborhood has kept a large stash of cash. He is now running around trying to launder it. He always flaunted his ill-gotten wealth, and it is good that he is going to suffer a big loss.

Me: The data from tax raids shows that about 5 percent of undisclosed income is kept in cash form. So, this decision will only inflict a small loss. Person X is just one person. The data I am referring to comes from thousands of tax raids. Even if Person X has a large stash of cash, it may be just a small percentage of the total black money he has. It is not worth causing so much disruption to society at large, in order to cause a small loss to the unaccounted wealth.

Friend: Even if that is true, at least all these corrupt people will lose their stash of cash. It will teach them a lesson. I am willing to incur some inconvenience for this. At least someone has done something to make the corrupt pay. It will help reduce corruption. This is about the moral standards of our society.

Reflecting on this exchange, I found four important differences in our perspectives:

Statistical vs. Experiential standard

Public policy professionals like me primarily rely on statistical thinking. My friend is using an experiential standard. For a person like me, the evidence drawn from statistics dominates a few human interest stories, but for many others, it is the other way around. Since black money and corruption are emotive issues that affect the general public, most people already have opinions based on personal experience or cultural impressions. It is not easy to change these opinions. My friend is open to a statistical perspective, but perhaps it would not immediately alter his view. Most of us humans are intuitive - we form an opinion quickly, and then look for reasons to support it.

We in the policy analysis world tend to forget the novelty and the limited use of the statistical perspective in society. Statistics became systematised only around the middle of the 18th century, and was introduced in education systems much later. For countless millenia, we have been forming opinions about the world based on what we perceive in our immediate surroundings. That is our natural instinct. On this particular question, given the nature of information involved (cash as percentage of unaccounted wealth), experiential knowledge of those who do not deal in black money may be off the mark. Unfortunately, the media have done a poor job of putting out relevant information. Those who support the decision and those who oppose it are disproportionately relying on anecdotal evidence. Anecdotal evidence is useful but only to understand the nuance of specific situations.

Aggregate vs. Local impact:

We differ on the scale of our analysis. While I am thinking about the aggregate trade-off between benefits and costs, my friend is looking at impact on his immediate community. Since he is a middle class professional, the costs to him and his community may be small, while, in his view, the impact on Person X would be quite large. Sometimes, it is better to think local, and at other times, it is better to have a broader perspective. Corruption is an issue where thinking local might often be more reasonable, given the way it affects us, but the larger question of disrupting black money storage might be better addressed with a broader perspective.

Any action vs. Complex policy projects:

We have different views about what has been done to solve the black money problem, and therefore our expectations from government also differ. I am used to the long time-scale over which policy projects play out. As an example, the Public Debt Management Agency has been in the making from the late 1990s, and we are still a few years away from seeing tangible results.

As a specialist, I appreciate pawn moves within a long strategy, even though the pawn moves tangibly deliver nothing in the short run. I would thus be happy if the government keeps chipping away on the battlefronts of corruption in the country, and see no need of taking such a disruptive and expensive action. My friend may not see it that way. He probably mistrusts the gradual moves, as it is not clear to him whether they are parts of a sound strategy or just delaying tactics. He is happy to see decisive action because, in his view, not much has actually happened on this front. For me, the choice is between impetuous action vs. careful work within a fully thought out strategy; he sees it as a choice between inaction and action.

We also differ on how we perceive this decision as an instrument of change. My friend sees this as an administrative measure but he also see it as a righteous battle in the war against "the corrupt". I see it only as an administrative decision that should be evaluated in specific and measurable terms. I am analysing whether benefits are likely to outweigh the costs. My friend may agree with this analysis, but perhaps he also sees this as a moral struggle that may include some lost battles, but has a noble objective.

These factors help explain why we in the intellectual world are puzzled at why the demonetisation decision was taken, but many other people (including writers in the media) are quite happy with it.

While this is a description of conditions now, things will change over time and space. Many people who are not policy professionals are opposing the decision. A key assumption behind my friend's support for the decision is that Person X, the "corrupt" person, is going to suffer. In a few months, many people like my friend may revisit their views, as they would see that not much changed in the life of Person X. This is a dynamic situation that is unfolding in front of us, and the change in a person's opinion about the decision would depend on many factors:

• The costs and difficulties suffered by a person and his near and dear ones. It's exciting to volunteer for a noble cause for a few days, but as the costs climb up, enthusiasm may decline.
• A person's political affiliation (we believe almost anything if we belong to a team).
• Whether one thinks of this as a moral crusade, which is to be supported simply because it was launched, and not on its measurable success.
• The extent to which one considers objectives that were added as afterthoughts (eg. making the economy cashess) to be relevant, and the extent to which these objectives are achieved.
• One's perception about government's overall success on other fronts that may rub off on this.
• The ability of the political opponents to create credible alternatives, so that there is a real incentive to apply cognitive resources in carefully forming a judgment. If there is only one game in the town, we have little incentive to judge the merits and demerits of each act carefully.

### Judgment and Popularity

Should popularity matter? A crude caricature of liberal democracy is one where all decisions are made by the people. This is not how the Republic of India, and all representative democracies, are constructed. In a representative democracy, it is incumbent upon elected leaders to hear the people's concerns, and then exercise their own judgment to choose a suitable course of action. Governments deviate from this responsibility in two ways.

1. Sometimes, governments refer even complex decisions to public opinion. Prominent recent examples include: the 2015 public referendum on the Greek debt relief package, and the Brexit decision.
2. Sometimes, governments take decisions that appear popular (read: supported by a majority of the citizens), and use popularity as the only measure of success, without asking themselves pertinent questions, such as: is the decision harmful to some citizens? Could the decision be harmful in the long run?

In a democracy, the will of the people should matter. However, the entire machinery of modern republican governance is meant to channel popular will through exercise of sound judgment. Why is this machinery required? In an essay published in 1819, Benjamin Constant presented a distinction between the liberty of ancients and the liberty of moderns. For the citizens of ancient republics (eg. classical Athens), liberty meant having a share of the sovereign authority.

This was direct democracy - citizens had to carry out many functions of government "collectively but directly". They came together in the public square to discuss and make decisions about war and peace; to form alliances with foreign governments; to vote on new laws; to pronounce judgments; to evaluate the performance of the magistrates; and so on. To do all this, citizens were expected to devote considerable time towards public and political matters, such that the individual citizens and their private concerns were less important than public concerns. Such participation was expensive. Societies had to depend on slaves to free up the time for citizens to perform civic duties, and the concept of private life was limited. Also, only 10-20 percent of residents had the privilege and responsibility of being citizens.

Modern liberty as exercised in modern republics is very different. It is largely private, and it is enjoyed by everyone in the country. It is essentially about removal of obstructions and encumbrances that prevent individuals from doing what they wish to do. It is an expansion of the private sphere. This liberty is made possible because of the system of representative democracy, wherein governments are elected to govern, and citizens participate in politics mainly through the instrument of voting, and through part-time civic engagement during intra-election periods to keep a check on the government. A minuscule portion of the populace participates in politics, and an even smaller number holds office. Citizens elect; the elected govern; and the citizens hold the elected accountable for outcomes.

Government leaders and their advisors are doing policy work full-time, while ordinary citizens are living their private lives. Ordinary citizens do not have the knowledge or the time to choose the right policy, nor do they have the full information to judge the merits of a complex policy that has just been announced.

In this context, direct democracy is suitable for certain local issues where people can see the inputs and outcomes. For complex, macro issues, legislators and governments may seek public opinion (perhaps through opinion polls), but then they must exercise their own judgment. People demanded an attack on black money, but they did not demand demonetisation as the weapon of choice. When asked, people seem to be saying that they support the move, perhaps because they believe that it is worth trying, when other measures don't seem to have worked. However, leaders are in the arena and they must also hold their decisions to other measurable standards of success. Popularity does not necessarily attest to soundness of a policy. It is for the leaders to exercise judgment in devising the least expensive and most effective ways to attack generation and storage of black money.

Reckoning of costs and benefits, expressed in rupees, is important. It is likely that the demonetisation decision fails this test. However, even if it did pass the test of a careful cost-benefit analysis, there are important elements of political thinking which should be brought into the policy discourse:

• Impact on rights of individual citizens
• Impact on rule of law and uncertainty in the society
• Impact on institutions

### Impact on rights of individual citizens

One problem with a cost-benefit approach is that, unless it is done very carefully, it can justify inflicting a great deal of pain upon innocent people just so that society in the aggregate can benefit. Even when done carefully, it is still based on the utilitarian assumption that as long as a decision is beneficial in the aggregate, it can be justified. This aggregate net benefit is a necessary condition for a decision, but is it a sufficient condition?

In a totalitarian system, where individual identity is subsumed under the collective good, aggregate benefit is both a necessary and sufficient condition. However, in a democratic republic, individual rights and duties provide the foundations on which democratic self-government is established and sustained. Civil and economic rights must be preserved, even in face of aggregate societal benefits. For example, a poor person may not contribute much to the GDP, but is still a citizen who has a piece of the constituent power that established the State in the first place. Any consideration of costs and benefits must be over and above an understanding of the rights of individuals that cannot be taken away.

The decision to discontinue the Rs. 500 and Rs. 1000 notes is harmful for economic liberties of citizens. For weeks, their ability to conduct their economic lives are severely disrupted. Money is of no use if one cannot use it when one needs to. By restricting withdrawals from banks, which is a decision of questionable legality, and by limiting exchange of notes, people have been deprived of using their hard-earned money when they need it. Because of the restrictions, some may be forced to take losses even on their hard-earned money. As my colleague Anirudh Burman has argued, these are forms of expropriation. The right to property is a right under Article 300A of the Constitution of India, though it is not a Fundamental Right. However, intruding upon the property rights of citizens is bad policy, regardless of whether the Constitution of India prohibits it or not.

The decision has led to considerable problems for people who needed cash for an emergency, for a pre-planned social event, or for other legitimate purposes. This is an insulting way to treat citizens, and potentially infringes upon their other rights. Their ability to take care of their health, to move across the country, to practice their profession, etc, are affected by this abrupt decision. Many of these impacts are not fully captured in a simple cost-benefit analysis.

### Impact on rule of law and uncertainty in the society

Order is our most fundamental need, and uncertainty is the enemy of order. The decision to disrupt the medium of exchange for so many people, and then implementing it in such a haphazard way, has generated enormous uncertainty. This uncertainty that has been unleashed could have unpredictable consequences, which ex-ante cost-benefit analysis cannot consider. For example, conspiracy theories and frauds are thriving due to this large scale disruption. Policy decisions should always try to minimise uncertainty, especially in decisions implemented at large scale. This decision fails this test.

Governments are expected to put in place system to reduce uncertainty, and to solve the problems that create uncertainty. For example, systemic crisis in the economy creates uncertainty. When Lehman Brothers failed and the global financial crisis began, the chief task of central government and RBI was to reduce uncertainty and maintain stability in the financial system.

One of the main ways of reducing uncertainty is to uphold the rule of law. Rule of law is a complex notion, but at it hearts are certain core principles. First, laws should be consistent with natural rights and principles of natural justice. Second, laws should be clear, predictable and widely known beforehand. Third, laws should be applied uniformly across similar situations. Fourth, due process should be followed, which means every application of law should provide the private party with information about the application of the law, the reasoning behind the application, and a mechanism for appeal.

This decision has hurt rule of law and increased uncertainty. When government repeatedly promised to allow exchange of notes till December-end, but abruptly banned such exchange, the principle of predictability was violated. This did not just surprise those with black money, but also put others in difficulty. The myriad rules and frequent changes are placing enormous cognitive load and hurting clarity of law. Harming property rights at such large scale without proper investigation, prosecution and conviction is not consistent with the due process requirement. Inflicting harm on the innocent goes against natural justice.

The expansion of discretionary powers and purview of the tax authorities is also likely to weaken the rule of law. The pronouncements from government seem to suggest that it is going to be open season for the taxman. They will have the authority to send notices and start investigations against anyone who may have deposited cash. This has subverted a basic principle of law enforcement: everybody is innocent until proven guilty. One way in which this principle is put in practice is by requiring a reasonable burden of evidence before investigation, before prosecution and, of course, before convicting someone. The suspicion underlying the note ban decision turned everybody depositing cash, which is usually a legitimate activity, into a potential suspect.

We look back with disapproval at the License Permit Quota Raj. Yet, sometimes we forget that the regime of innumerable, impossibly complex rules did not come up in one day. The rule books kept gathering fat over decades, before they were committed to a bonfire in early 1990s. This regular addition to rules was necessitated by a mindset of suspicion. There was an endless cat and mouse game between the State and the citizen, because the State wanted to control everything. If the present trend continues, a similar game could be afoot yet again. This time it would be about cleansing the society of all forms of corruption.

### Impact on institutions

Institutions are not just their buildings, people or statutory powers. They are ideas that exist in the minds of people. The RBI has earned its credibility over more than 80 years, maintaining an image of an independent organisation that values integrity. There are criticisms of RBI that it may have become hostage to its own success, and now stands in the way of India's progress in macroeconomics and finance. However, its legitimacy and integrity have almost never been questioned. Now, the same institution has been placed in a very difficult position.

The way this decision was presented and is being implemented, there is cause to suspect that institutional distinctions were ignored, except as mere formalities. Government's messaging is not helping the matter. Some in the government are crediting its leadership for the idea, while others are saying that it was RBI's idea. Communications about all matters are centralised at Ministry of Finance, even regarding matters in RBI's jurisdiction. This episode is harmful to the efforts to portray RBI as an independent central bank. Add to all this the drama around badly printed notes, faulty drafting of notifications, and poor communications from the central bank, and we may have the beginning of the end of an institution's credibility.

Four decades later, the capitulation of the judiciary during the Emergency still looms large in our imagination of that institution's ability to protect our rights in our darkest hours. This note ban episode threatens to similarly cast a long shadow upon macroeconomic and financial policy in India. This episode indicates the limitations of legal protections such as statutory independence, job security under Article 311 of the Constitution, etc. The vaunted checks and balances appear to be inadequate. The Constitutional design of dividing power and vesting it in multiple institutions has been revealed to have severe limitations in practice, especially when a powerful government sets its mind to do something.

Another long-term institutional impact of this decision would be seen in the increase in the draconian powers of tax authorities. The nature of power of tax authorities is such that effectiveness can only be achieved by a complex system of accountability. Maximising revenue is not necessarily the best objective, as it may lead to abuse of power. The recent announcements seem to suggest that the tax department, especially their enforcement officials, will be given a carte blanche to go after depositors of cash. Since this is a high priority for government, they might err on the side of excess. Some may abuse their powers for personal gains. The damage to the institution would be lasting, and it might take a long time to restore a sense of balance and accountability.

### Nature of the larger project

The decision is so astonishing that it has inspired utopian or apocalyptic pronouncements, depending on which side of the argument one is on. It has challenged our prior assumptions about the possibilities of policymaking in India. Is this the launch of a grand project? We obviously don't know, but it would help to consider the record of the individual at the centre of this decision - the PM. Based on the PM's governance record and work style, it seems he usually does not embark upon such adventurism. This decision is a break from his own record. Unlike Mao, Trotsky, Stalin, and others being invoked to explain what is going on, there was almost no foreshadowing for this decision.

The characterisations of this decision as an act of tyrannical overreach may be useful as warnings, and even understandable use of hyperbole to critique an egregious decision, but how do they fare as approximations of truth and as predictions of what is to come? Here is another way of thinking about this: could this decision be just an example of failure of the policymaking process? The following inter-dependent assumptions mattered the most in this decision:

• the portion of high denomination notes used for storing black money, and
• the pace of remonetisation with new notes.

If most of the notes are used to store black money, and if the remonetisation in cash could be done in a week or fortnight, the decision would appear very different, albeit there would still be strong arguments against it. The PM may have been advised that not more than, say, Rs. 5-6 lakh crore, will come back, and the remaining cash is all black money, which will be difficult to launder if the government places severe restrictions on exchanges and withdrawals. Perhaps the government under-estimated the role of cash as a medium of exchange, and as a store of legitimate value. They may also have over-estimated the pace at which remonetisation in cash would happen. For a few days after the announcement, government leaders did say that remonetisation would take just two to three weeks.

All these mistakes may appear implausible, but not if you consider the very small number of people involved in this decision, and the views of certain persons who claim to have advised the government. Moreover, the history of policymaking is replete with bad decisions when there was ample evidence to counsel a different course. It is quite possible that the process began with wrong assumptions, which were not corrected in time. This obviously does not absolve anyone of responsibility, as the consequences do not depend on original intent.

If the government indeed started with different assumptions, it must now be surprised by the Rs. 8.44 lakh crore (as on November 27th) that have already come back, and the long timelines for remonetisation in cash form (till date, only up to 18 percent done). So, the government is now forced to improvise. Introduction of new objectives (eg. go cashless), reneging on important promises (eg. note exchange), and innumerable changes in timelines and rules are signs of improvisation. It is dealing with the fog of a rapidly unfolding situation in this vast, complex land of ours.

It is difficult to do meaningful improvisation, because this policy decision does not allow for much flexibility. Since the decision is founded on suspicion, flexibility is assumed to be "misused" to launder money. The only way to really cut costs was to roll the decision back, once it became clear that benefits might be smaller and costs might be larger than expected. However, rolling back would make the government look inept. Most leaders would prefer to appear authoritarian, than to appear inept. They would rather be feared than be ridiculed. Hence, improvisation seems to be the only politically feasible option. The kinds of things being done to improvise seem to be making things worse. This is not surprising, because governments are inherently not good at processing information quickly and efficiently, especially in a rapidly evolving context.

I do not think that the government intended to cause so much harm. However, what matters now is what it does from here on. If the government indeed had different assumptions about how this will work out, it may now be pleasantly surprised that it has popular support for the decision. For now, this support is a source of power. It remains to be seen if and how this support will change over time. So, the next steps are quite uncertain. Has the government unwittingly committed itself to a high stakes utopian project to make an honest society out of us, and would therefore feel compelled to take more such "bold" steps? The grand pronouncements about high modernist fantasies such as "cashless India", and utopian ambitions such as "cultural revolution" against corruption, suggest that the government may take that road riddled with enormous risks and unclear payoffs. Or could the government somehow carefully climb down and go back to a governance that is focused on getting the basics right?

This event has also revealed a great deal about our intelligentsia, our media, and even the broader civil society. There is much to be thought and learnt from this teachable moment. The shaping of the narrative is instructive to watch. In my eyes, there is one effort that has suffered considerable damage: the effort to build a new conservative movement in India.

The spiritedness around the 2014 election presented an opportunity to lay the foundation for a different narrative of governance - one founded on more conservative principles. There is an ongoing attempt to build a community for nourishing conservative thought to take on the intellectual and institutional hegemony of the so-called "left". This effort is necessary for India's political and social discourse. The weaknesses of a countervailing intellectual force may have led to a certain stagnation in our political imagination. The possibilities of politics have not kept pace with the needs of our society.

If a conservative intellectual movement deepens its roots and informs principled conservative politics, in the resultant political churning, there is a genuine possibility of a different politics to emerge. Take the example of economic issues. On these issues, our present political discourse largely operates in a post-1991 consensus. The consensus is essentially about a gradual opening up to private capital, but with state continuing to occupy the commanding heights of the economy. It is a version of state-managed capitalism, but without a capable State. We also see failures of the State to get the basic tasks of governance right, while fighting innumerable battles for social and economic justice.

One of the reasons for the weaknesses of the Indian state is the baggage it carries from its socialist past. In terms of its mood, it is still a controlling, commanding entity. It wants to control outcomes across a wide range of domains. It suffers from a common curse of countries that were late modernisers: an overwhelming number and variety of social and economic demands are placed on it. Conservatism has its own excesses, but on many issues, it could provide an important counter-view to overcome the present stagnation. It could, among other things, help redefine the roles of the State, the market and the civil society, and the interplay between them.

The note ban decision and the narrative around it has emphasised the weakness of the Indian intelligentsia. We do not have a critical mass of people upholding values such as protection of property rights; who understand the need for limited government to protect civil society and markets; who oppose State-led utopian projects.

Utopian social engineering projects try to perfect human nature. A conservative perspective would suggest that human imperfections cannot be eliminated by diktat. The State can only mitigate the consequences of these imperfections to an extent. The efforts to overcome flaws of human nature should be in the social domain, not in the domain of State power. If the new Indian conservatives think that expanding state power to pursue their favorite social and economic objectives is a good idea, they should see that the same power would later be used for ends that they don't agree with. This is a mistake that many on the left had made. Further, if they think that property rights must be compromised at the altar of a project to reduce black money, they may be missing the woods for the trees.

Irrespective of what the original intent may have been, the note ban decision matches or surpasses the worst excesses of high modernist socialism in India. It was not a conservative move. The decision threatens to radically empower the government to harass and intimidate citizens of the country. It damages property rights.

Sadly, instead of forming the vanguard of an intellectual and social movement, too many are choosing to be Praetorian guards for political power. This is inherently bad for the long-term project, not because all compromises are bad, but because compromising core principles is potentially devastating for a movement that intends to distinguish itself in terms of its worldview.

### Conclusion

The original assumptions underlying the decision remain unclear, but it seems to be causing considerable harm. All this harm is likely to buy us only a small dent on the black money problem and the elimination of a few hundred crores of fake currency. This is not a good bargain, especially considering the long-term consequences. I am not sure the government intended this bargain. Still, at the moment, the decision is popular.

Government may have painted itself into a corner of righteousness. Since, this decision seems to have struck a chord with a larger number of citizens, political ambition might tempt the government to double down on this path, and take more "shock and awe" decisions. It would take considerable statesmanship to veer away from this path of temptation fraught with enormous risks but questionable benefits.

The government would do well to reflect on the failures of the policymaking process that led to what appears to be a bad decision. If this was indeed a genuine mistake, and government's assumptions turned out to be wrong, it would be unwise to risk making more of such mistake in an impatient pursuit of lofty goals. Our government's capacity to run complex programmes is very limited, and it is best expended on higher priority problems, such as building the criminal justice system, achieving public health goals, improving learning outcomes in primary education, building a credible defence apparatus, ensuring provision of sound infrastructure, ensuring clean air and water, and so on.

The author is a researcher at the National Institute of Public Finance and Policy. Views expressed here are personal. I thank Ajay Shah and Anirudh Burman for useful discussions.