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Showing posts with label author: Anirudh Burman. Show all posts
Showing posts with label author: Anirudh Burman. Show all posts

Wednesday, February 18, 2026

LRS TCS and Overseas Travel: A Policy Design Critique

by Anirudh Burman.

Transaction taxes introduce frictions in transactions. Sometimes these frictions are in the larger public interest, for example, the interests of protecting government revenue ex ante because of the difficulty of ex post tax collection. In other cases, transaction taxes operate primarily to constrain transactions and their costs outweigh their benefits. A useful test is whether the tax (a) solves a genuine enforcement or information problem relative to ex post assessment, (b) is broadly designed and relatively neutral across comparable transactions, and (c) has stable, predictable parameters so that individuals can plan and comply without disproportionate costs. In addition, withholding taxes can be levied when there is a clear problem with ex post collection. However, the design of such taxes must still be proportionate to the objective and should not create large, avoidable liquidity and compliance frictions.

This post argues that the Union Government's Tax Collection at Source (TCS) on outward remittances under the Liberalised Remittance Scheme (LRS) and on purchase of an overseas tour programme packages fails these tests. It introduces a large, transaction-specific friction on outward remittances under LRS and on the domestic purchase of overseas tour programme packages. It does so without a clear statement of objective or a stable instrument design.

Introduction: TCS on LRS and overseas travel

TCS on LRS and on overseas tour packages was first introduced in the 2020 Union budget and the Finance Act, 2020. The Finance Act, 2020 inserted section 206C(1G) into the Income Tax Act, 1961 ( See Finance Act 2020 amendment here). The legal architecture in section 206C(1G) has two components. One is tied to an authorised dealer who "receives an amount for remittance from a buyer...", who intends to remit money out of India under the LRS. The other is a receipt-trigger tied to a seller of an overseas tour programme package. The second trigger is not a "remittance", which is conceptually confusing, since the move is primarily aimed at taxing cross-border movement of capital: LRS, a scheme under the Foreign Exchange and Management Act, 2000, allows overseas remittances up to USD 250,000 per annum, and the first component introduces a TCS on this, whereas the second component imposes TCS on overseas tour packages, independent of LRS. The second component introduces frictions for domestic purchases routed through Indian sellers.

Since the 2020 Finance Act, the Union government has tweaked this provision multiple times, adjusting tax rates, thresholds and exemptions. This years Union budget proposes to rationalise these further, but leaves the basic architecture intact.

Brief chronology of events

The table below shows that the instrument has been repeatedly redesigned along: (i) rates/thresholds and (ii) scope/coverage/definitions. This makes compliance and planning difficult for affected transactions.

Title of document (1) Type of instrument (2) Date (3) What Changed (4) Provision in the regulatory instrument (5) Change type (6)
Finance Act, 2020 Law March 2020 (a) introduced TCS on LRS remittances above INR 7 lakh per financial year (general rate 5%) (b) set concessional TCS rate of 0.5% for education remittance financed by an education loan (c) introduced TCS at 5% on sale of an overseas tour programme package (no threshold in the section text) (d) created exemptions where buyer is Government/embassy etc., or where buyer deducts TDS on the amount (as specified in the provisos) Income-tax Act, 1961: s.206C(1G) Rate/ threshold; Scope/ definitions; Exemptions
Notification No. 20/2022 (S.O. 1432(E)) Notification March 2022 (a) created exemption from TCS for an individual who is non-resident and visiting India Income-tax Act, 1961: s.206C(1G) (Notification No. 20/2022) Exemptions
Notification No. 99/2022 (S.O. 3878(E)) Notification August 2022 (a) superseded previous notification and replaced the exemption category: TCS not applicable to a non-resident buyer who does not have a permanent establishment in India Income-tax Act, 1961: s.206C(1G) (Notification No. 99/2022) Exemptions
Finance Act, 2023 Law February 2023 (a) continued TCS at 5% on LRS remittances for education and medical treatment in excess of INR 7 lakh (b) continued concessional TCS at 0.5% on education remittances financed by an education loan in excess of INR 7 lakh (c) proposed increasing TCS rates from 5% to 20% for other LRS purposes and purchase of overseas tour programme packages Income-tax Act, 1961: s.206C(1G) Rate/ threshold
Foreign Exchange Management (Current Account Transactions) (Amendment) Rules, 2023 (G.S.R. 369(E)) Regulation May 2023 (a) removed exemption in FEMA Current Account Transactions Rules, bringing international credit card usage while outside India within Rule 5 (and therefore within LRS accounting), which can expand the practical ambit for TCS. FEMA CAT Rules, 2000: Rules 5, 7 Scope/ definitions
Press Release (Ministry of Finance): Clarification regarding applicability of TCS to small Debit/Credit Transactions under LRS Press Release May 2023 (a) clarified that international debit/credit card payments by an individual up to INR 7 lakh per financial year are excluded from LRS limits and will not attract TCS MoF Press Release Scope/ definitions
Press Release (Ministry of Finance): Important changes w.r.t LRS and TCS (deferral and thresholds) Press Release June 2023 (a) superseded the 19 May 2023 clarification and postponed implementation of the 16 May 2023 FEMA amendment, keeping overseas international credit card spends outside LRS (and outside TCS) until further order (b) restored INR 7 lakh annual threshold for TCS across all LRS categories irrespective of purpose (c) specified post-threshold LRS TCS rates: 0.5% for education loan, 5% for education/medical, 20% for other purposes (d) specified overseas tour programme package TCS: 5% up to INR 7 lakh and 20% above, INR 7 lakh (e) deferred the increased TCS rates to October 1, 2023. MoF Press Release: LRS/TCS Implementation/ deferral; Rate/ threshold
CBDT Circular No. 10 of 2023 (Guidelines to remove difficulty in implementation of changes relating to TCS on LRS and overseas tour packages) Circular June 2023 (a) clarified that overseas international credit card spending is not treated as LRS for now, so no TCS on such spends till further order (b) clarified that the INR 7 lakh LRS threshold for TCS applies per remitter (not separately per purpose or per authorised dealer) (c) clarified category boundary for overseas tour programme package, standalone international air ticket or standalone hotel booking is not a "package" (package must include at least two specified components) CBDT Circular 10/2023 Scope/ definitions
Circular No. 11 of 2023 Circular July 2023 (a) no change to TCS rates/thresholds/categories/exemptions. CBDT Circular 11/2023 Scope/ definitions
Foreign Exchange Management (Current Account Transactions) Amendment Rules, 2023 (re-insertion of Rule 7) Regulation June 2023 (a) reinstated exemption in FEMA Current Account Transactions Rules, excluding overseas international credit card use from Rule 5 (and therefore from LRS accounting), reversing the 16 May 2023 omission FEMA CAT Rules, 2000: Rule 7 Scope/ definitions
Finance Act, 2024 Law February 2024 (a) Inserted a sixth proviso to s.206C(1G) governing TCS collection based on the pre-amendment position (as on 01-04-2023. Income-tax Act, 1961: s.206C(1G) (sixth proviso) Implementation/ deferral
Finance Act, 2025 Law March 2025 TCS thresholds increased. Income-tax Act, 1961: s.206C(1G) (threshold amendment) Rate/ threshold
Finance Bill, 2026 Law February 2026 (a) proposed reducing TCS rate for LRS remittances for education/medical treatment (above INR 10 lakh) from 5% to 2% (b) proposed reducing TCS on sale of overseas tour programme package to 2% and removing the threshold/slab so 2% applies irrespective of amount (c) retained 20% TCS rate for LRS purposes other than education/medical. Finance Bill, 2026: s.206C(1G) Rate/ threshold

Regulatory uncertainty

A predictable, stable regime is important for economic freedom. Economic freedom implies the ability to plan properly, and planning requires foreseeability and predictability. The table above discusses frequent regulatory changes to the LRS and overseas travel framework since 2020. The government has revised thresholds, exemptions, rates frequently, set different TCS rates for different categories of spends and revised them, exempted non-residents, included or excluded foreign credit and debit-card spends, clarified what purchasing an overseas tour package means, and so on.

This matters for economic freedom: individuals cannot reliably forecast the cost of lawful foreign transactions, intermediaries cannot standardise compliance processes, and the effective burden depends on the tax rate, on exclusions and exemptions, as well as whether refunds are timely.

TCS on LRS and overseas travel as a hindrance to economic freedom

LRS was introduced in 2004 as part of a broader liberalisation of Indian finance in 2004. Since then, the LRS limit has been increased gradually from USD 25,000 to USD 250,000. This liberalisation reduced frictions in the ability of Indians to transact abroad, purchase foreign goods and services, and contributed to India's global integration.

In 2020, the Finance Act introduced a friction of a 5 percent TCS, which it increased to 20 percent in 2023 for purposes other than education and medical expenses. The budget speeches of the Finance Minister in Parliament ( 2020-21 and 2023-24 ) do not provide any reasons for introducing this friction. TCS is collected at the time of transaction, regardless of eventual tax liability. TCS imposes a significant friction on such activity. By doing this, the TCS changes the set of choices individuals have by making certain specific uses and transactions costlier from the perspective of both compliance and financial liquidity. In addition, if refunds are delayed, the private cost is not 20%, it is the aggregated cost of the time value of money, the opportunity cost of having made other choices had this liquidity constraint not been imposed, as well as the friction and uncertainty of Indian tax compliance.

Finally, the effect of the TCS is distributional regressive. Individuals facing the highest liquidity constraints are hit the hardest (young professionals, small business owners, families with recurring expenses, etc.). While lower frictions for educational and medical purposes alleviate some of this, the remaining frictions impose invisible opportunity costs on many other types of potential activities.

Paying advance TCS on overseas travel

While the TCS on LRS taxes foreign remittances, the TCS on overseas travel taxes even domestic transactions.

It is important not to equate foreign remittances with domestic transactions. The state regulates cross-border outflows under FEMA and other regulations and has articulated some objectives for this (e.g., managing outflows, monitoring, national security), even if one disagrees with the choice of objective or the proportionality of the instrument. By contrast, domestic transactions already sit within a general indirect tax architecture (GST), whose design objective was precisely to subsume transaction taxes into a broad-based system.

The issue here is not whether cross-border remittances can ever be regulated or taxed, but whether a narrow, high-variance transaction friction outside the GST framework, where the tax is collected upfront regardless of eventual tax liability, represents a coherent and proportionate policy design.

CBDT Circular 10/2023, Question 8, states that "overseas tour program package" includes expenses for "travel" or "hotel stay" etc., and then clarifies that purchase of only an international travel ticket or only hotel accommodation "by in itself is not covered."

Though two of three conditions need to be fulfilled for this to be triggered, it effectively brings domestic payments within its ambit. If one buys an international flight ticket from a domestic airline or a domestic travel aggregator as part of an overseas tour, such domestic expenditure in INR will also be included within the threshold of the TCS. As drafted, this requirement seems to collect an advance tax on individuals spending within India's domestic economy for foreign travel, as well as any spends outside India. This is novel, as earlier prohibitions, even in the license-raj era focused on foreign transactions and remittances, not domestic consumption of goods and services for foreign travel. The use of tax-based frictions serves to reduce the average Indian individual's integration with the globalised economy. In addition, the continual changes discussed above also affect the predictability and forecasting of decisions within the domestic economy because domestic spends on foreign travel are also included within the ambit of TCS.

One possible defence of this TCS is that it is intended to reduce certain outflows, analogous to a Tobin-tax style tax on foreign exchange transactions. The analogy is limited. Tobin's proposal was to cushion exchange-rate fluctuations. It was also designed to disincentivise very short-term speculative round-tripping transactions through a small uniform charge on foreign exchange conversions. The TCS regime is significantly broader in coverage (household remittances and even a domestic purchase trigger for overseas tour packages) and has been set at rates (e.g., 20 percent for many categories) that are far from marginal.

The Finance Minister in her budget speech of 2026 has proposed to rationalise many of the tax rates under the TCS regime. The proposal to reduce TCS to 2 percent for certain categories moves the rate closer to the range conceptually associated with a low-rate transaction tax. The current budget proposal is welcome. However, the deeper concern is the instrument design: a transaction-specific levy that is collected upfront irrespective of final liability, without sectoral neutrality and predictability. A better course of action will be to only pursue those cross-border transactions where the Indian state has clearly articulated objectives in a neutral, low-friction, predictable manner. Absent this, the core concerns remain about the design, and the consequent inability for households to plan and execute their economic activities.


Anirudh Burman is a research at XKDR Forum.

Friday, December 23, 2022

Delays in government contracting: A tale of two metros

by Anirudh Burman and Pavithra Manivannan.

A state entity undertaking a procurement exercise must meet prescribed timelines throughout its procurement pipeline. Delays in one or more milestones adversely affect all parties involved: the procuring entity (increase in expenditure beyond the budget and disputes), the contracted vendors (uncertainty and delays in payment) and the public (delays in utilising public goods and services). At the outset, we recognise that the indicator of a successful procurement exercise are multi-fold: achieving required quality, adhering to timeline and limiting spending gap. Our approach employs the lack of delays as the indicator of a successful procurement exercise.

In a recent article, we examined the extent to which DMRC's (the Delhi Metro Rail Corporation) competence in timely project execution was borne out by data. We found that (a) DMRC is able to meet the Government of India's and its own stipulations in two stages of its procurement process, that is, contract award and vendor payments; and (b) In spite of this exemplary performance, DMRC has faced delays in overall project implementation that have gradually increased over time. This article seeks to understand the underlying factors that potentially contributed to DMRC's prompt performance in its procurement process.

It is not possible to understand DMRC's success in isolation. Instead, we analyse it relative to its predecessor, the Calcutta metro-rail system (Calcutta metro). The Calcutta metro was India's first metro-rail system to be implemented. It was plagued by delays and cost overruns. Such a comparative analysis of a successful public project to one that fared worse in execution is revealing. First, it shows the learning curve of the state in building capacity to execute public projects. Second, it helps to understand what works and what does not, when a state entity conducts a procurement exercise. The analysis can serve to provide valuable feedback in procurement reform policies.

Delays in execution of metro-rail systems

Formerly, the Ministry of Railways was responsible for the construction of mass rail services, including metro-rail systems in metropolitan cities. The Ministry undertook the construction of the Calcutta metro in 1971. In 1986, the Government of India (Allocation of Business) Rules, 1961 was amended to shift the responsibility of the urban transport system to the Ministry of Urban Development (now the Ministry of Housing and Urban Affairs). In contrast to the Calcutta metro, the construction of the Delhi metro-rail system (Delhi metro) was undertaken by the Ministry of Urban Development as the nodal union ministry. The role of Railways was limited to providing technical assistance.

We study the annual reports of the Delhi metro and the Parliamentary Public Accounts Committee Reports (1981; 1989; 1992) on the Calcutta metro, to estimate overall delays in both these projects. We source this data from the website of DMRC and the Parliament of India, respectively. Our data consists of six time periods during which there was significant procurement of works. The data includes the date of completion and submission of the detailed project report (DPR), the date on which the project received Union Cabinet approval, the date of commencement of works, the scheduled date of completion of the project, and the actual date of completion of the project, in part and full. These are presented in Table 1 below, as a timeline of events for the first line of the Calcutta metro and the first phase of the Delhi metro.

Table 1: Timeline of events
Event Calcutta Metro Line-1 Delhi Metro Phase-1
Completion of Detailed Project Report (DPR) 1971 1995
Project sanction 1972 1996
Project commencement 1978 1997
Scheduled completion 1978 2005
Partial commission (one section) 1984 2002
Project completion (fully operational) 1995 2006

We find that the gap between estimated and actual date of completion is a little more than a year for the Delhi metro. This gap was close to two decades for the Calcutta metro. Further, the lag between the date of sanction of the project to the date of commencement of works for the project is wider for the Calcutta metro (4 years) than for the Delhi metro (about a year).

This suggests that, from 1971 to 1995, there appears to be much improvement in the way procurement was undertaken for Indian metro-rail systems. We posit that the Delhi metro's success was shaped by the challenges faced and the experiences gained in implementing the Calcutta metro. Our analysis attributes learnings from the Calcutta metro to the following structure and list of processes adopted by DMRC: its institutional design, its financing and revenue models, global transfer of technical know-how, and expertise of its early leadership. In the subsequent sections we analyse how each of these features enabled the Delhi metro to avoid inordinate delays.

The institutional design of the procuring entity

What motivated the institutional design of DMRC? To answer this we look at various Parliamentary Committee reports, CAG reports and literature on the subject. Our review suggests that there were three main institutional constraints faced by the Ministry of Railways in implementing the Calcutta metro.

  1. The lack of coordination with the West Bengal State Government and the local agencies in Kolkata. There were delays in land acquisition, problems in utility diversions such as transport, water and sewage, and detection of uncharted utilities after commencement of works. These instances had a direct impact on the contracting process, such as frequent interruptions of works, revisions to scope of work, and change in construction methodology (Public Accounts Committee, 1981).
  2. Frequent changes and vacancies within the Ministry of several important personnel such as the General Manager and Chief Engineer. This was due to the administrative process of the Ministry. The Railways had to follow the conditions laid down by the Appointment Committee of the Cabinet with respect to retirement, superannuation and promotion (Public Accounts Committee, 1981). This resulted in loss of experience and expertise within the procuring entity.
  3. Inadequacy of financial powers delegated to the General Manager. From the year 1974 to 1982 the General Manager had the power to sanction tenders up to Rs. 1 crore only. This was increased to Rs. 2 crores in 1983 and Rs. 5 crores in 1985. This limited power of the General Manager meant, approvals for sanctions of higher value tenders had to be received from the Railway Board. This procedure was time consuming and caused delays in finalisation of contracts by up to 3 years (Public Accounts Committee, 1989).

We speculate that the above constraints prompted the authorities undertaking the Delhi metro project to adopt a different approach. The Calcutta experience provided two guides for the organisational structure of DMRC. One, to build institutional capabilities for executing a metro-rail system outside the Ministry of Railways. Second, to have a separate corporate entity with independent decision making authority. Thus, DMRC was set up with two distinguishing features which worked in its favour: It was formed as a limited liability company under the Companies Act, 1956 and the ownership of the entity vested equally in the Union and the State Government. The board of directors of DMRC constituted representatives from the Union Ministry of Urban Development, Department of Transport of GNCTD and the Delhi Development Authority. Such an institutional arrangement, by aligning incentives for all the stakeholders, enabled better coordination with the local government and ensured that the management had the backing of both the State and the Union Government. Further, functional directors appointed for distinct functions such as, project and planning, works, electrical, finance, business development and the like, had sufficient powers delegated to them under the Schedule of Powers (CAG, 2008). This facilitated quick decisions in expenditure approvals, qualification of bidders, finalisation and acceptance of contracts. Finally, the long tenure of key personnel such as the Managing Director, enabled the organisation to retain domain experience and expertise.

Financing and revenue models

For prompt execution and sustenance of any infrastructure project, timely flow of funds is essential. Metro-rail systems are capital-intensive projects. The Calcutta metro was fully funded by the Ministry of Railways. One of the main reported reasons for delay in the project was lack of funds and improper utilisation of allocated funds. Up until 1980, the Railways had not fully utilised the funds allocated for the project. Further, for subsequent years, sufficient funds were not made available for the construction. This resulted in shortage of raw materials, such as steel and signaling equipment, and delayed payments to vendors (Standing Committee on Railways, 1993; Public Accounts Committee, 1981). For the DMRC project, the Calcutta experience prompted the authorities to explore other avenues for funding such as, equity, external agency loans, subordinate loans from centre and state, property development revenue and central government grants. Most significant was the official development assistance (ODA) loan from the Japan International Cooperation Agency (JICA). Nearly 54-55 per cent of the first three phases of the DMRC projects was funded by JICA as a low-interest and long-term concessional loan. The funding pattern for each phase of the project sourced from the DMRC website is as set out in Table 2. Smooth flow of funds into DMRC enabled timely payment to vendors and ensured that the project was not delayed due to uncertainty in financing.

Table 2: Funding pattern for DMRC projects
Phase I Phase II Phase III
JICA loan 60% 54.47% 48.57%
Equity from GoI 14% 16.39% 10.04%
Equity from GNCTD 14% 16.39% 10.04%
Loans from Union/States 5% 6.56% 13.39%
Grants from States - 0.59% 10.62%
Property Development 7% 5.59% 7.34%

Another lesson came from the fact that the Calcutta Metro was not financially viable (Singh, 2002). The traffic earnings were inadequate to cover the operating expenses of the metro-rail system. This not only burdened the exchequer in the form of subsidies but also affected the public as the fare per trip that was charged had to be increased to sustain operations (Public Accounts Committee, 1989). Decrease in cash flow meant stalling of procurement of raw materials, and delays in payments to vendors.

The financial crunch faced by Calcutta Metro encouraged DMRC to generate revenue through non-conventional sources. DMRC adopted the examples of well-performing international metro-rail systems and sought to increase its non-farebox revenue. Table 3 below shows the revenue model of DMRC for 10 years (FY2011-FY2020) obtained from its annual reports. Revenue from traffic operations is categorised as fare-box revenue and revenue from real estate, consultancy and external projects are categorised as non fare-box revenue.

Table 3: DMRC Revenue Model (as percentage of total revenue)
Description Fare revenue Non fare revenue
FY20 65.49 34.51
FY19 62.92 37.08
FY18 55.22 44.78
FY17 45.69 54.31
FY16 53.35 46.65
FY15 60.34 39.66
FY14 55.74 44.26
FY13 62.93 37.07
FY12 65.74 34.26
FY11 65.05 34.95

On an average 58.49% of DMRC's revenue is from traffic operations (fare-box revenue) and 41.51% of the revenue is through other sources (non-fare box revenue). This is in line with international practice. For instance, the non-farebox revenue of some of the better performing metros in the world (in terms of ridership and network length), such as London, Singapore and Hong Kong, ranges from 25-60% of its total revenue. DMRC's capacity to source funds and remain financially viable has helped it to make timely payments to its contractors, repay its debts, and expand its network line.

Human capacity and technical know-how

Building human competence within the government is paramount to do procurement well. This includes both functional as well as technical competence. In India, the technical know-how to build metro-rail systems was lacking. The Calcutta metro was the first ever underground railway project undertaken in India. Despite this, global tenders were not invited for construction of the work. Neither the construction firms in the country nor the Railway Administration possessed the experience to construct underground structures for a rapid transit system. The lack of expertise led to frequent abandonment of works and changes in scope of work, resulting in huge financial implications in addition to time overruns (Public Accounts Committee 1989 and 1992). Thus, when the idea of a metro-rail system in Delhi was born, the need to rope in personnel with prior expertise and experience, such as, B.I. Singal and E. Sreedharan, was recognised.

Mr. B.I. Singal was the former Director General of the Institute of Urban Transport and the then Managing Director of RITES (Rail India Technical and Economic Service). Mr. Singal came in with 11 years of experience in the planning and building of some of the finest metro-rail systems in the world, such as the Hong Kong MTR (known for completing the project within time and budget) and Taipei metro-rail network. RITES prepared the feasibility study on building a metro-rail system for Delhi. Mr. Singal made sure that his RITES team had a few professionals who had previous experience of working with the Calcutta metro. Mr. E. Sreedharan, the first Managing Director of DMRC, had served as the Chairman and Managing Director of Konkan Railways. He brought in his domain experience of working with the Railways as well as the management experience of heading an autonomous entity. Studies document some effective practices adopted by Singal and Sreedharan which we speculate had an impact on the organisation's procurement practices. They insisted on independence in decision making, speed, and global exchange of knowledge and expertise (Ashokan, 2015; CPI, 2017). This resulted in creation of DMRC as a separate legal entity and in transfer of Japanese technology and know-how in building metro-rail systems.

After the failed attempt at indigenisation by the Calcutta metro, the authorities felt the need to tap in to global expertise for the Delhi metro project. In addition to funding from JICA, Japanese Consultants were also brought on board. This ensured transfer of foreign technological knowledge, skills and expertise to DMRC. DMRC engineers developed technical skills such as tunneling technologies, and functional skills such as management ethos, and value for time from their Japanese counterparts (Onishi, 2016). This enabled DMRC to build in-house capacity, which now helps other metro-rail networks in the country.

Discussion

Our work shows how the Indian state attempts to achieve better outcomes by identifying lessons from its past shortcomings. The challenges faced by the Calcutta metro shaped the Delhi metro's institutional design, financial structure, and human resource competence. Our article highlights the importance of these three factors in enabling desirable procurement outcomes.

A key insight from our analysis is that these factors do not work in isolation. Autonomy in decision making, efficient and experienced personnel, adequate financing, and right institutional choice are all inter-operable and go hand in hand. If a procuring entity seeks to realise better outcomes, procurement reforms must not merely pick the lowest hanging fruit of these factors. Instead, a sector-specific approach of studying the past experiences must be employed to act as feedback into future projects. Our research provides a framework to assess such past successes and failures, and demonstrates the potential of deploying such research.

References

Public Accounts Committee, Fifty-fifth Report, 1981, Hundred and Forty-second Report, 1989 and Ninth Report, 1991.

Standing Committee on Railways, Second Report, 1993 and Thirty-fourth Report, 2007.

Comptroller and Auditor General of India, Report No. Performance Audit 17, 2008.

Pavithra Manivannan, Lessons from the Delhi Metro, Business Standard, July 2021.

Anirudh Burman and Pavithra Manivannan, Timeliness in government contracting: Evidence from the country's largest metro-rail network, The Leap Blog, August 2022.

Yumiko Onishi, Breaking Ground: A Narrative on the making of Delhi Metro, JICA, 2016.

Centre for Public Impact, The Construction of the Delhi Metro, November 2017.

Saurabh Singhal, Non Farebox Revenue for Metro - A Global Perspective, Business World, May 2022.

The International Association of Public Transport (UITP), World Metro Figures, 2018.

M.S. Ashokan, Karmayogi - A biography of E. Sreedharan, Penguin, 2015.


Anirudh Burman is an Associate Research Director and Fellow at Carnegie India. Pavithra Manivannan is a Senior Research Associate at XKDR Forum and Chennai Mathematical Institute.

Friday, August 12, 2022

Timeliness in government contracting: Evidence from the country's largest metro-rail network

by Anirudh Burman and Pavithra Manivannan.

Introduction

Infrastructure projects in India are plagued by delays (MOSPI, 2022). Proposed explanations include failures of government contracting for public procurement (Singh, 2010, Sinha and Vatsa, 2021, etc.). In this article, we measure delays in the procurement process of the largest metro-rail network in the country -- the Delhi Metro Rail Corporation (DMRC) -- which is considered a successful project. It fares well on global ranks on some parameters such as network length and ridership. The early phases of this metro rail project have been lauded for timeliness in execution and contract payments (Expenditure Management Commission, 2016).

We look at two distinct datasets to obtain a birds eye view and a procurement-oriented view of the delays in DMRC. We find that DMRC is prompt in stages of the contracting processes for which we are able to find evidence, but that the overall project implementation suffers from time overruns. We put this knowledge together to obtain insights into government contracting.

Our approach

As with contracts drawn between any two counterparties, government contracting is a pipeline that runs through four phases (Mehta and Thomas, 2022): (I) Contract specification and design, (II) Contract tendering and award, (III) Contract management and (IV) Contract closure. Flaws in government contracting shows up as inefficiencies in public procurement such as delays in infrastructure projects, which in turn, results in cost overruns, loss in revenues, vendor dissatisfaction and lack of competition when government wants to procure, and ultimately, deprives the public of the intended benefits.

We use three data-sets to understand the timeliness of government contracting in DMRC projects.

  1. A data-set of the time taken by the various DMRC projects, sourced from the CapEx database published by the Centre for Monitoring Indian Economy (CMIE).
  2. A data-set of tenders awarded by DMRC, hand-constructed from the 'Contracts Awarded' section of the DMRC website;
  3. A data-set of payments made by DMRC, hand-constructed from the 'Vendor Payment Details' section of the DMRC website and from an RTI application.

The first data is sourced from the CMIE CapEx database. The CapEx database records the date of significant events for each project. We collect data for the three operational metro networks constructed by DMRC, that is, Phase 1, 2 and 3. This data-set consists of project level information such as, the date of announcement of the project, initial completion date, actual completion date and time overruns.

The second dataset is a hand-constructed data-set consists of tender level information for awarded contracts of DMRC, such as the department calling for tenders, nature of work, date of publication of Notice Inviting Tender (NIT), date of issue of letter of acceptance and value of the contract. This data-set covers this information for 892 tenders for a period of 5 years (2016-2020). DMRC categorises these tenders into 7 heads: Civil and Architecture Works, Electrical Works, Operations and Maintenance, Rolling Stock, Track Works, Signalling and Telecom and Property Development.

In addition, we categorise the contracts for IT services and housekeeping works as 'Miscellaneous' and the procurement done by DMRC for other metros in the country as 'For Other Metros'. The highest number of contracts were awarded for Operation and Maintenance works (623) and the least for Rolling Stock (2). Table 1 shows the typology of procurement undertaken by DMRC during our study period.

Table 1: Typology of DMRC Procurement
Category 2016 2017 2018 2019 2020 Total
Civil and Architecture Works 17 28 9 15 9 78
Electrical Works 5 1 3 5 13 27
Operations and Maintenance 0 65 167 200 191 623
Rolling Stock 0 0 0 2 0 2
Track Works 12 2 0 1 3 18
Signalling and Telecom 8 1 0 0 3 12
Property Development 0 5 3 10 5 23
Miscellaneous 4 14 23 8 13 62
For other metros 5 7 17 8 10 47

Our second hand-constructed data-set consists of monthly bill payment status of DMRC. Pursuant to government communication (vide D.O.18(18)/IFD/2019 dated 05.11.2019), DMRC uploads its monthly vendor payment details on its website since December 2019. This data gives us periodic information about the bill submission date and the bill payment date of DMRC vendors. Since the website does not archive its data we obtained our data partly from the DMRC website and partly vide an RTI application made for this purpose. Our data-set consists of 20,654 bills for the period between November 2019 to August 2021. The payment period is unknown for about 1,550 bills in our data-set, which we discard in our analysis.

We restrict our study to benchmark DMRC's performance against the timelines prescribed by its internal guidelines (DMRC Procurement Manual, 2016 and General Conditions of Contract, 2019) and the Central Government procurement guidelines (General Financial Rules, 2017 and the Manual for Procurement of Works, 2019). We do not employ a comparative analysis with other procuring entities for two reasons: One, availability of data in government portals such as the CPPP (Central Public Procurement Portal) and websites of the procuring entities are often sparse and sporadic. Second, a deeper understanding of the fundamental functioning, internal rules, processes and organisational structure of each entity is required for a meaningful comparison and it warrants a separate study.

Findings: Time overrun in DMRC project implementation

In the CapEx data, we are able to see that, between 1995 to 2021, there were three projects announced, implemented and completed by DMRC. These are the Phase 1, Phase 2, and Phase 3 lines. These have been operational from 2006, 2011 and 2021 respectively. From this data, we are able to locate various timelines for all three phases, including the date on which the Phase was announced, to the date on which they were completed and commissioned for public use for fully operational metro lines. We calculate the time overruns as the difference between the date projected initially as the completion date for a Phase and the date on which it was actually completed and operationalised. These are presented as project delays in Table 2.

Table 2: Project delays (in months)
Phase 1 15
Phase 2 32
Phase 3 102
Source: CMIE Capex Database

Findings: Timeliness in contract award by DMRC

High-income countries, countries with greater political accountability, and countries with greater economic freedom process public works procurement in a more timely manner (Djankov and Bosio, 2020). Each of these countries does infrastructure procurement following its own regulations to award contracts. In India, works procurement is guided by the Manual for Procurement of Works, 2019. According to Clause 5.6 in this manual, the time taken by Ministries and Departments from the date of opening the tender to the date of awarding of contract is 90 days.

We estimate the actual time taken by DMRC to award tenders (Table 3). This is calculated as the time taken from the date of opening of the tender to the date of issuing of the acceptance letter. We find that, on an average, DMRC takes 91-92 days to complete the tendering process.

Table 3: Time taken to award tenders (in days)
Year No. of tenders Average time taken
2016 51 101
2017 123 98
2018 222 103
2019 249 81
2020 247 89
Average 178 92

Findings: Timeliness in making vendor payments by DMRC

Payment delays are endemic in public contracts in India. DMRC has sought to avoid payment delays by including provisions for both interim and final payments within its Procurement Manual and General Conditions of Contract, 2019 (GCC). Depending on the type of contract, payments may be made at different stages of the procurement cycle. At Clause 11, the GCC provides for set timelines for the scrutiny of invoices and payments to be made by the procuring entity:

  • Interim payments: A contracting firm may apply to the respective project engineer of DMRC requesting for an 'interim payment certificate'. This certificate will be issued based on achieved milestones or prescribed payment schedule in the contract, if any.
    1. Within 21 days of the request, the project engineer must issue the interim payment certificate specifying the amount due to the contractor.
    2. DMRC is mandated to make 80% of the certified payment amount within 7 days of issue of the certificate.
    3. The balance 20% is to be made within 28 days of issue of the certificate.
  • Final payments: Once the project engineer certifies that the contractor has completed all his obligations related to a particular work, the contractor is entitled to apply for a 'final payment certificate' with the required supporting documents.
    1. Within 28 days of receiving this request, the project engineer must issue the final payment certificate stating the final amount due.
    2. DMRC is mandated to pay the amount certified in the final payment certificate within 56 days of issue of this certificate.

We look at the vendor payments data-set of DMRC to analyse the adherence to these timelines. We find that, on an average, DMRC takes about 4 days to clear its dues from the date of submission of the bill by the vendors (Table 4). For the data-set in our study, the maximum days taken by DMRC to make its payment is about a year.

Table 4: Time period for clearance of dues (in days)
Year No. of bills Average time Median time Minimum time
2019 1326 5 2 0
2020 9887 4 3 0
2021 7891 4 4 0
Total 19104 4 3 0

Payment delays by public sector enterprises in India to their vendors far exceeds their procurement values (Manivannan and Zaveri, 2021). We find that DMRC is an outlier in terms of maintaining payment discipline to its vendors, and in adhering to the timelines provided in its GCC.

Discussion

The public discourse on government infrastructure procurement focuses on delays and time overruns being an indicator of poor government contracting. In this article, we have analysed the capability of a procurement-intensive public sector enterprise to keep up with its timelines in two stages, that is, in contract award and payments. We find that DMRC takes about 3 months to award a contract, and about 4 days to clear its payment dues to vendors. Regardless of this exemplary performance on awarding contracts and paying vendor dues, we also find that the overall project implementation by DMRC failed to meet scheduled timelines to complete. All three phases took a longer time than originally expected. In fact, we observe that the overall project time delays increased from the Phase 1 project to the Phase 3 project.

Executing infrastructure projects on time has been a continuous concern and challenge in India. Our analysis about DMRC timeliness in awarding contracts and in making payments provides evidence against the popular perception that public projects are delayed due to delays in decision-making by the public authorities and their inability to make timely payments. Instead, we speculate that these are because of other factors for overall project delays, some of which could be misaligned allocation of scope and risk in procurement contracts and poor contract management. A deeper analysis into each project, procurement practises, financial and institutional structure of DMRC may help in understanding the reasons for its timely performance in certain procurement processes and the potential causes of time overruns. These learnings can then be adopted by other procuring entities to achieve better procurement and project outcomes.

References

Ministry of Statistics and Programme Implementation Infrastructure and Project Monitoring Division, 434th Flash Report on Central Sector Projects, January 2022.

Ram Singh, Delays and Cost Overruns in Infrastructure Projects: Extent, Causes and Remedies, Economic and Political Weekly, Vol 45, No. 21, May 2010.

PC Sinha and Ananys Vatsa, Delays in Project Completion in India, Indian Journal of Projects, Infrastructure and Energy Law, January 2021.

Erica Bosio and Simeon Djankov, Timely procurement of public works, World Bank Blogs, February 2020.

Department of Expenditure, Ministry of Finance, General Instructions on Procurement and Project Management, October 2021.

Expenditure Management Commission, Recommendations of the Expenditure Management Commission, December 2015.

Department of Expenditure, Ministry of Finance, Manual for Procurement of Works, 2019.

Delhi Metro Rail Corporation Ltd., General Conditions of Contract, November 2019.

Pavithra Manivannan and Bhargavi Zaveri, How large is the payment delays problem in Indian public procurement?, The Leap Blog, March 2021.

Charmi Mehta and Susan Thomas, Identifying roadblocks in highway contracting: lessons from NHAI litigation , The Leap Blog, July 2022.

Charmi Mehta and Diya Uday, How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states , The Leap Blog, March 2022.


Anirudh Burman is an Associate Research Director and Fellow at Carnegie India. Pavithra Manivannan is a Senior Research Associate at XKDR Forum and Chennai Mathematical Institute. We thank Susan Thomas for valuable comments and discussions.

Thursday, February 27, 2020

Base and superstructure: Ideological constraints affecting India’s land markets

by Anirudh Burman.

As a scarce resource, land in India has often been, and will continue to be a source of heightened contestation. This contestation has taken place on the base of the legal framework that regulates land markets. This legal framework enables the state to exercise extensive control over the market. Over the decades, state power has been used extensively in an attempt to restructure socio-economic relations in society.

This legal framework has been successful in fomenting political mobilisation, it has not increased the efficiency of the market in any meaningful manner. If the underlying premises remain unchanged, this feature of our land markets - intensive political contestation without meaningful efficiency or equity gains - is likely to continue. This is likely to become increasingly contentious given the increased dynamism of the Indian economy - rapid urbanisation, diversification of the rural economy, and industrialisation.

During colonial rule control over land was not subject to democratic power. Since 1947, the use and control over land has been under democratic control. However, in these years, the issue of control over land was a huge source of conflict. Radical laws were passed to redistribute agricultural land and to ensure equitable rights for the cultivating class. However, their success was limited. Their implementation gave rise to a spate of litigation, and also led to extreme violence.

For all the frenzied activity over the equitable distribution of agricultural land, and planned urbanisation, the outcomes have been poor. Both agricultural and urban land in India are frightfully expensive. Getting land to set up industry often becomes a political nightmare. The rural economy that is intrinsically tied to land remains woefully stagnant. Migrants to urban areas are unable to afford decent housing, sanitation and safety.

An important dimension of this field is that these outcomes are rooted in the ideological basis on which Indian markets for land rest on. This ideological framework is broadly common across different kinds of land markets in India - rural, urban, industrial. And this framework has developed over the years in a manner that has rigged the land market against those who depend on it the most.

India’s regulatory framework in the land market today resembles that of other sectors like the financial markets and the telecom sector before they were liberalised. Market liberalisation did two things - it limited the scope of government regulation, and reoriented regulation to solving problems that privately-dominated financial and telecom sectors faced. This led to the growth of both these markets, and generated unprecedented benefits for consumers and prosperity for investors.

Similarly, the regulation of rights in land has a strong connection with the size, dynamism and growth of India’s land market. Laws and regulations that impair such rights constrain the land market.

State regulation of agricultural and rural land


Today, the state regulates almost all parts of the agricultural land market extensively. It determines what is agricultural land, and what is not. It determines who can own agricultural land. Many states prohibit non-agriculturalists from buying agricultural land. Others prohibit non-residents of a state from buying agricultural land within the state.

It also places restrictions on other kinds of transfers of agricultural land. For example, land given to the dependents of deceased military personnel cannot be transferred in many states. Through land-ceiling legislation, it lays down how much agricultural land one can own based on its estimation of what constitutes a sufficient amount of land.

Many states in India do not recognise tenancies and prohibit subletting of agricultural land. Others place restrictions on the contracts tenants and owners of agricultural land can enter into. Other regulations place restrictions on leasing and subleasing of agricultural land.

State regulation of towns and cities


Just like agricultural land, state regulation of urban land markets is extensive. In urban areas, the state not only decided who will own how much, and for what purpose, its role starts at the very inception - of deciding when a town should be called a “town” and a city a “city”. While almost all countries adopt some similar framework to regulate land-use, the framework adopted by India has been criticised by many as being too stringent, and one that effectively slows down the process of providing urban facilities like sanitation to rapidly growing new towns.

Conclusion


This restrictive regulatory framework has failed to provide dividends. Property in major Indian cities is more expensive relative to most other major cities in the world. Rural incomes have remained stagnant and required substantial government support. It is therefore time to revisit this regulatory framework (a) by understanding why this framework has failed, and (b) what can be done to reform this framework.


The author is researcher at Carnegie India. This paper was presented at the APU-NIPFP workshop Strengthening the Republic#1, January 11, 2020.

Friday, September 14, 2018

Privacy, Aadhaar, Data Protection: Statist Liberalism and the Danger to Liberty

by Anirudh Burman.

Kings will be tyrants from policy when subjects are rebels from principle.

                                         - Edmund Burke, Reflections on the Revolution in France

Edmund Burke wrote these lines in a scathing critique of the demise of ancient traditions of allegiance, fealty and "dignified obedience" in the wake of the French Revolution. These lines today apply in a very different sense to the search for state-centred solutions to protecting privacy and personal data. The discourse over privacy, identification and data protection shows that liberal concerns with state power co-exists with a preference for state coercion in the name of furthering ostensibly liberal objectives. This discourse is marked by the absence of underlying liberal principles based on societal and associational freedom, and instead, repeatedly shows a preference for state coercion for achieving its ends.

This discourse and the policy responses to the same fail to address two fundamental questions: first, what does the right to privacy seek to protect? Privacy is treated as an end in itself, and this has significant ramifications on how we think about constituting liberty in our society. Second, what institutional and associational processes are necessary to protect privacy? Institutional and associational processes that rely overwhelmingly on state coercion are counter-intuitive and may ultimately harm individual privacy and autonomy.

I address three major strands of the privacy discourse that address different aspects of the right to privacy, but share a common problem: the discourse is framed in a manner that treats privacy as an end in itself. The result of the nature of this discourse is that state power to infringe on privacy seems to have strengthened rather than weakened. I begin with analysing the existing discourse on the debate over whether India's increasingly ubiquitous identification system, Aadhaar, violates privacy rights or not. I argue that by focusing on Aadhaar's constitutionality vis-a-vis the right to privacy and not examining the ends for which Aadhaar is being used, the existing debates fail to question the use of state power via Aadhaar and its implications for privacy and liberty.

The next major strand of the privacy debate, the judgement of the Indian Supreme Court in Justice K.S. Puttaswamy v. Union of India ("Privacy judgement") also treats privacy as an end, rather than a means to protect other ends. As I argue, the consequence of the judgement is to provide clarity for the use of state power with respect to privacy rights rather than to elucidate those aspects of social existence that need protection from the state through privacy rights. Data protection, and the Personal Data Protection Bill proposed by the Justice Srikrishna Committee is the third major strand of the privacy debate. The Bill also treats privacy as an end. In seeking to protect data as an end in itself, it confers a wide jurisdiction on the proposed Data Protection Authority. By doing so, the Bill gives the Authority the power to potentially surveil all data in India in order to, ironically, protect data privacy.

I argue that by treating privacy as a broad right and an end in itself, we have defined the role of privacy in society narrowly. Instead, privacy as a right has to be discussed in specific contexts such as marriage, sexuality, crime records and employment history. Each context reflects a different tension between a specific public interest and the privacy interests of specific individuals. Only such specific discussions on how privacy rights can help individuals protect their freedoms, can further the interests of liberty in our society.

Efficiency, Privacy and Aadhaar

In the decades since independence, Indian politicians and intellectuals by and large agreed on the need for a social welfare state. Specifically, a State that would strive to provide health, education, food, and infrastructure to its populace. Despite the mixed record of the State in achieving these objectives, the premise of what the Indian State should do has not been challenged to any substantial degree. While the State has withdrawn from running industries and fostered private markets over the past three decades, the assumption that welfare is a fundamental task of the Indian State has not been questioned. In fact, the welfare state character of the Indian State has been significantly expanded in the past two decades through initiatives such as NREGA and others addressing food security and debt relief.

A central task before a welfare state is identification, or what James C. Scott calls the quest for "legibility". The search for legibility is rooted in policy makers' inability to comprehend complex realities and their consequent search for symbols or markers that make society comprehensible or "legible" to them. For the purposes of the State, individuals must be defined primarily in terms of specific traits (e.g. age, education, residence, income, profession, ethnicity, caste, etc.) While this quest for legibility is not confined only to the state, no state can act on its welfare mandate without making individuals legible. Benefits are distributed to individuals based on how a state identifies them. Thus, if only "the poor" can avail of LPG subsidies, defining who is "poor" becomes of central importance. Aadhaar is the product of this search for better identification, required due to ever-increasing welfare and regulatory functions the Indian State has to perform.

In the decades before Aadhaar was implemented, the manner in which the state identified beneficiaries was critiqued as being deeply flawed. The systems were rife with documented instances of poor implementation and fraud. Additionally, many in need of what the welfare schemes sought to provide lacked the documents to prove their eligibility for the same. While concerted efforts were made to improve public distribution systems through initiatives like computerisation, significant exclusions continued to take place. These improvements were also unevenly distributed across state governments, and subject to sustained political commitment.

Any improvements in targeting/identification however, have remained subject to new political diversions and demands from the State. NREGA for example, was a new social welfare scheme that required the determination of eligibility on metrics that were different from say, traditional PDS schemes. It required the State to collect and maintain information about individuals based on metrics that the Indian State had not collected in a systematic manner prior to its introduction. Every new scheme that requires benefits to be conferred to individuals had and continues to have its own metrics for eligibility (Jan Dhan Yojana requires very different kinds of identification requirements than say, Start-up India).

The demand for better and different forms of identification therefore increase each time a new benefit has to be made available to individuals. If the state has to perform an ever-increasing number of welfare functions, it will require ever-increasing information about intended beneficiaries, as it needs to know whom to include and whom to exclude. Over time, therefore, the extent of information collected about individuals increases due to the numerous functions the state is required to perform.

This is not just confined to welfare measures. Any state action that intends to regulate individual conduct has to determine whom to regulate and on what basis. If, for example, persons with criminal backgrounds are to be excluded from contesting elections, the state needs to collect and analyse information about the criminal backgrounds of those contesting elections. If the state intends to regulate banking, it needs to collect information about banks and financial firms.

The increase in the collection of information for discharging the functions demanded from the state constitute the source of the concerns with privacy. The largest threat to individual privacy therefore comes not from the existence of Aadhaar, but from the ever increasing number of regulatory functions and welfare measures demanded of the Indian State. Problems of identification systems are downstream of these demands. State-centred solutions, and unprincipled welfarism pose a greater threat to individual privacy and liberty than any single identification system used by the Indian State.

This is borne out by a careful analysis of the main points of contention in the Aadhaar and data protection debate.

Aadhaar is a database that maintains bio-metric and other personal identification information about individuals. If a government or private agency wishes to verify the identity of an individual, the Unique Identification Authority of India (UIDAI), as the custodian of the Aadhaar database, enables such authentication through specified mechanisms. Aadhaar does not maintain records of what was authenticated. It retains a record only of when a person's identity was verified and by whom, not for what purpose.

Aadhaar is therefore more or less a value-neutral utility. In itself, it does not have a fixed use other than to identify individuals. It is up to the user (the government or private agencies) to use it as a means of identification for a specific purpose. Such use depends solely on its utility as an accurate system of identification. It does not pre-suppose what the system is going to be used for. Its raison d'etre is to enable the state to identify individuals accurately, if required. Its existence, in fact, promotes discourse on what it ought to be used for, and how it ought to be used.

When Aadhaar was conceptualised and being created, the state promised that the system would be used for identifying beneficiaries of social welfare schemes. This has however, not remained the case. From tax compliance to school admissions and new phone connections, the use of Aadhaar has extended well beyond social welfare purposes. It is, however, important to note that this growth is demand-led for the large part. Government departments and agencies, as well as private firms, are using Aadhaar because it is a largely accurate database compared to other mechanisms for verifying individual identity. State authorities and private agencies are mandating Aadhaar-based authentication because they see value in it, not because the UIDAI says they must. The alleged threat to privacy has therefore come about not because Aadhaar exists, but because the State chooses to use it for discharging the functions demanded of it.

Some detractors have argued that Aadhaar is unconstitutional as some individuals are unable to access social welfare benefits due to authentication failures. In many such cases, the implementation by these departments and agencies has been faulty. Aadhaar authentication requires a connection to the central Aadhaar database, and this becomes problematic in cases of poor internet connectivity. In such cases however, it is the user agencies that are at fault. Making Aadhaar authentication mandatory in remote areas with low internet connectivity is an example of poor planning and implementation. It is the use of Aadhaar that must be debated.

This and other issues have been brought up in a clutch of cases currently pending before the Supreme Court. The cases in the Supreme Court however lay the blame on the existence of Aadhaar rather than its uses. Additionally, of the many grounds of challenge, there are some that are simply not amenable to effective redress through judicial mechanisms. The first is the question of exclusions. Any system of identification is designed to exclude. The purpose of identification is to enable inclusion at the cost of exclusion. The danger is that of unintended exclusions. People should not be excluded from benefits that were intended to be made available to them. The detractors of Aadhaar claim that the implementation of Aadhaar is leading to arbitrary exclusions, with persons who were previously included now being excluded. However, one must distinguish between the role of Aadhaar in unintended exclusions, and the uses of Aadhaar leading to unintended exclusions. For example, if there were no scheme called NREGA being implemented, there would be no Aadhaar-related exclusions from NREGA. In such a case Aadhaar would continue to exist, but not be the cause of any exclusions in NREGA. Exclusions are occurring because there is a welfare function that the state is discharging.

Another point of detraction has been that of data security and data leakage. The claim is yet again, that because of its potential for misuse, the use of Aadhaar for seeding information about citizens creates a potential for misuse. However, any information that the state stores by aggregating data using some other central identification ID (PAN numbers, passport numbers, Voter ID cards, etc) is subject to the same potential issues. Any central identifier that could be used to link multiple databases is likely to suffer from similar issues. If PAN numbers or mobile phone numbers are used to aggregate data about individuals instead of Aadhaar, the same fear of profiling is still likely to exist. The problem is therefore not with Aadhaar, but with the process of profiling individuals. It is therefore necessary to problematise the issue of profiling, rather than the use of Aadhaar for profiling.

The discourse on these issues reflects undue focus on means rather than ends. It is important to distinguish between Aadhaar as an instrumentality of the state, and the purposes for which Aadhaar can be used. It is the latter that leads to privacy concerns, not the existence of the instrumentality itself. The same privacy concerns will remain tomorrow if Aadhaar is replaced by another system of identification. The Indian state will continue to violate individual privacy, liberty and dignity if the ends to which systems of identification are used are not carefully examined, questioned, and thought through.

Some of these issues require political solutions, others judicial ones. The judiciary can provide judicial answers to legal questions. It is not a forum that can provide answers to questions of efficiency. It cannot help society decide on what is the most effective method of identifying individuals while respecting individual privacy. This is a political decision that has to be reached through a political process. The judiciary can also not answer questions as to what are "good" methods of data aggregation and storage. These are technocratic decisions that also have to come from the political process.

This is due to the very nature of the judicial process which seeks blunt answers to blunt questions - "is Aadhaar constitutional or not?". Any path the Supreme Court takes to balance competing interests such as privacy versus efficiency will be, at most, a second-best alternative to what sustained political engagement could have created. The nature of judicial outcomes is to provide perfect legal certainty by ending political contestation with legal certainty. Judicial interpretations of constitutions have the effect of ending political and legal disputes, not to create space for further political negotiations.

Any future negotiation can only take place by treating the court's decision as a given. A good example is the spectrum allocation case, where the Supreme Court held that telecom licenses were arbitrarily allocated, and that future allocations can only happen through auctions (subsequently modified by the Supreme Court in another case). Any further discourse on the subject had to deal with the fact that spectrum had to be mandatorily auctioned, with no possibility of discussions over better methods of spectrum allocation. This is what happens in most cases that come before constitutional courts. In the judcialisation of Aadhaar, we may have lost a significant opportunity to negotiate politically and improve its functioning.

The nature of relief claimed from the Supreme Court in the Aadhaar case asks some legitimate questions that the Supreme Court is well placed to answer, particularly with respect to whether the law should have been passed as a money bill, and in which instances Aadhaar can be made mandatory. But it also asks many questions that do not help address the real concerns about privacy - if all identification systems lead to exclusion, in what circumstances is exclusion constitutionally impermissible? If all data aggregation systems are potentially vulnerable to leakage and theft, in what circumstances is data leakage unconstitutional? If all state welfare functions lead to some kind of profiling, what kinds of profiling are constitutionally impermissible? In short, what are the values that the right to privacy seeks to protect?

Privacy judgement: Clarifying the use of state power

If the expectation from the Supreme Court in the case of Justice K.S. Puttaswamy v. Union of India ("Privacy judgement") was that it would explain what underlying values the right to privacy seeks to protect, it was belied. While the Supreme Court bench that decided this case was constituted because the Aadhaar bench made a reference to it, this case itself did not decide on privacy rights vis-a-vis Aadhaar.

In a remarkable feat of judicial activism the Court not only declared that there is a fundamental right to privacy, but that this right is an end in itself. The leading judgement (given by 4 out of 9 judges) states that the purpose of the Court in writing the Privacy judgement is to expound upon the right to privacy by providing a "doctrinal formulation".

The judgement lists a series of Indian cases in which a right to privacy has been claimed. As the Court itself notes after discussing these cases, many past judgements have held that a right to privacy exists under the Indian Constitution. What then, one might ask, was the need for this nine-judge bench? The answer provided by the Court was,

"...The deficiency, however, is in regard to a doctrinal formulation of the basis on which it can be determined as to whether the right to privacy is constitutionally protected..."

The Court therefore intends to assert the existence of a right to privacy as an end in itself, rather than a means to an end. Unlike all previous cases the Privacy judgement itself notes, this judgement was written with no applicability to a specific dispute before the court.

A long line of jurisprudence listed in the Privacy judgement highlights the fact that privacy has always been used to protect a specific interest or value: In Kharak Singh's case, it was privacy in the context of night-time domiciliary visits. In RM Malkani v. State of Maharashtra and PUCL v. Union of India it was privacy in the context of telephone tapping. In Gobind v. State of MP, the discussion on privacy was in the context of history-sheeting under state police regulations. In Malak Singh v. State of Punjab it was a surveillance register of specified categories of convicts. In Rajagopal, the judgement on privacy centred around the question on whether the autobiography of a convicted prisoner, allegedly co-authored by someone else, could be published. In Mr. X v. Hospital Z the issue of unauthorised disclosure of a patient's HIV status was in question. In Sharda v. Dharmpal the question of privacy rights arose in the context of a court order forcing a person to undergo a medical examination as part of divorce proceedings. In District Registrar and Collector, Hyderabad v Canara Bank, the question of privacy was in the context of the confidentiality of documents submitted to a public official. In the US Supreme Court case of Griswold v Connecticut that the Privacy judgement cites as well, - the right to privacy was held to exist in order to address a specific concern, namely the right of a married couple to use contraceptives.

In fact, globally, one would be hard pressed to find a judgement that is totally divorced from a factual dispute, that does not treat the right to privacy as essential to protecting other specific rights. Why does this matter? It matters because in treating privacy as an end, the judgement and the detractors of Aadhaar fail to deal with the underlying issues that infringe upon privacy and liberty. This in turn leads the Court to formulate tests that on closer inspection, clarify the use of state power with respect to privacy rights, without adequately explaining what those privacy interests are.

The Court notes that privacy is essential for the protection of individual autonomy and dignity. But it does not elaborate on what aspects of autonomy are worthy of being protected by privacy. Other than illustrating some examples of how the right to privacy could be applied to specific situations such as sexual orientation and data security, it provides no guidance on how this right to privacy is expected to interact with situations where individual privacy is subjected to larger societal interests. For example, the Court talks about the protection of individual identity in the context of data protection, but provides no explanation of what specific harms the right to privacy seeks to protect in the context of the misuse of personal data.

This is important as there are situations when individual autonomy and privacy may legitimately be circumscribed by societal interests. These include the disclosure of health records for buying health insurance or seeking health benefits, and the disclosure of income related information for claiming subsidies, etc. The judgement offers no consideration of the tension between individual privacy, liberty and public interest; this could only have been done in light of a specific dispute where the Court would have been forced to balance real and conflicting tensions.

Faced with this lack of factual circumstances, the Court in the Privacy judgement instead justifies possible constraints on privacy rights through a vague necessity doctrine. The Court states that the right to privacy can only be constrained by a parliamentary law made for a legitimate state interest, with constraints proportional to the object the law seeks to achieve.

It is, however, explicit in stating that the question of legitimate state interests in violating privacy rights can only be reviewed on the grounds of arbitrariness. In addition to laying down this test in the absence of specific circumstances, the judgement provides broad illustrations of what could be considered legitimate state purposes - national security, promotion of innovation, conferring social welfare benefits, etc. Unlike previous cases where the facts of the dispute ground the doctrinal points made by courts, the doctrinal points here can be construed widely or narrowly depending on the specific predilections of future courts.

The question of legitimate state interests is the question that should have occupied the attention of the Court - what kinds of infringements of privacy are permissible when specific actions of the State are claimed to be in furtherance of legitimate state interests? As per the Court, the only basis on which such a claim can be challenged is that of being arbitrary and disproportional. As long as there is no arbitrariness or disproportionality, infringements of privacy are permissible. However, neither arbitrariness or disproportionality are tests related directly to liberty and privacy in themselves.

For example, it is one thing to question whether the law related to telephone tapping is arbitrary or disproportional to the legitimate objectives of national security. It is another to question whether telephone tapping violates privacy or not. As per the test laid down by the Supreme Court, the law would not be unconstitutional if it were not arbitrary or disproportional. The test limits the discussion on the tension between privacy and national security only to the grounds of arbitrariness and proportionality. In doing so, the Court arguably missed an opportunity to create tests for legitimate state interests in interfering with privacy rights. Instead, the judgement of the Court illustrates a broad range of legitimate state interests where the state can interfere with privacy rights.

The same conclusion can be reached regarding the applicability of this judgement to other issues. If combating marital rape is a legitimate state interest, the Privacy judgement takes us no further in thinking about how to enter the private sanctuary of a bedroom in a way that respects the privacy of the married couple. Any law can be made as long as it is not arbitrary or disproportionate to a widely construed notion of a legitimate state objective. This is arguably an incomplete test, since it does not seek to balance the legitimate privacy interests of the married couple with the objectives of the state. The only balancing factors are that such laws not be arbitrary or disproportional. These tests are however, not related to liberty interests. The US Supreme Court in Griswold v. Connecticut found liberty interests that were violated by state laws that interfered with the use of contraceptives. Had that law been judged on the basis of arbitrariness and disproportionality, the outcome in the case may have been different.

State power has therefore been arguably expanded by limiting the grounds of challenge to arbitrariness and proportionality. It is therefore debatable whether we are better off than earlier, having created clear limits on the right to privacy, without any clear, substantive limits on state power. Only the state seems better off.

Personal Data Protection Bill: Leviathan On Steroids and the End Of Privacy

A logical consequence of treating privacy as an end in itself is the Personal Data Protection Bill proposed by the Justice Srikrishna Committee. Because the Bill treats data protection as an end in itself, it focuses only on the protection of data rather than the protection of interests that would be harmed by the unscrupulous use of data. The Bill casts a wide net, and in the process proposes the creation of arguably the most powerful and draconian state regulator India may ever see.

First, the lack of clarity of underlying values - the purview of the Bill extends to all data (in electronic form or otherwise). "Processing" of data is defined to include "collection" of data as well. So, the kirana store down the street that provides credit to customers for buying groceries on the basis of their previous repayments, a record of which it maintains in physical registers, would be subject to state supervision for its data management practices. The Bill mercifully provides some small exemptions for such "small entities" in Section 48 for manual processing, but they still have to comply with other data protection requirements.

Further, any discussion on specific privacy interests should have to deal with multiple conflicting interests - if individual privacy is important for the sake of, say, protecting individuals from online sexual harassment, a data protection law would have to deal with the tension between the right to access and participate on the internet freely and visibly, with the genuine potential for online abuse and harm. The provisions enabling data processing after consent would have to be tailored for this specific issue. Similarly, in its broad application of data protection requirements to the entire economy, the Bill fails to balance the tension between the conflicting interests of economic growth and data protection.

An example of the possible problems that may arise due to the lack of clarity on the ends of the Bill are the requirements regarding discrimination. The Bill states that "any discriminatory treatment" is a harm, and creates penalties and offences for causing such harm. But, devoid of any grounding of what forms of discrimination are permissible, this becomes an impossible standard to adhere to. Legitimate forms of discrimination such as preferring to lend money to people who pay back on time, over those who do not are essential to society. However, if a prospective borrower is refused a loan based on his or her credit history, this could constitute "harm" under the Bill.

Similarly, if an online matrimonial site shows its user only high net-worth suitors from Bihar based on an analysis of the user's past preferences, such discrimination would be beneficial for the user, but would be construed as discriminatory, unless there is clarity on what the provisions regarding discrimination seek to protect us from. But, since there is no real clarity on such ends, the supposedly safe route the Bill takes is to create a regulator with vague powers and ask it to protect data.

Parts of the Bill have been taken from the EU's General Data Protection Regulation (GDPR). The GDPR however sits on a bedrock of privacy jurisprudence (example) in the EU that goes back decades. We have borrowed the legislation without borrowing the privacy jurisprudence and the overall institutional ecosystem within which the GDPR operates. When the Bill is enacted, it will be interpreted and implemented without the underlying benefit of this jurisprudence. There will therefore be substantially less guidance for the proposed Data Protection Authority (DPA), and fewer checks on how it will interpret its powers.

Second, the claim that the DPA proposed by the Bill is a Leviathan on steroids is not a light one. One look at the definitions of "data" and "processing" confirms the wide scope of the law. In Section 60, the first function of the DPA is an ambiguous "monitoring and enforcing application of the provisions of this Act". In Indian state parlance this translates to: Use state coercion to solve every real or imagined problem provided you have the resources to do so. Even if the DPA were to construe such language strictly, it would have to intrude into almost all systems of data collection, storage and processing within the country to perform this function effectively. In the name of protecting data, it would necessarily have to supervise all data.

If for example, the DPA is to monitor compliance with the codes of conduct it is required to write for data processing, it will have to monitor the way in which data processors implement such codes with respect to their consumers. This will have to be done an economy-wide scale. One may argue that this can be done through less intrusive methods, but that is missing the point. The substantive power is there, and the powerful choice of how to regulate remains with the state. We shall remain at the mercy of liberal men, not liberal laws.

This broad jurisdiction is almost unprecedented for India. This is a huge departure from sector-specific jurisdictions carved out for other state agencies. The Reserve Bank of India can only collect data about banking and some other financial firms. SEBI can only do so with respect to the securities market. TRAI can only collect information about those in the telecommunications industry. The DPA is a regulator of data across sectors and jurisdictions. It will have the power to impose significant compliance costs and penalties on all individuals and enterprises that may collect data, even for purely incidental purposes.

Third, failure to abide by data protection requirements could land persons in jail. The offences under the Bill are proposed to be non-bailable. When combined with vaguely drafted provisions, this would have significant negative effects on society if the law is effectively applied. The Srikrishna committee report does not explain why such draconian punishments are required for the protection of data. Even serious crimes like murder are bailable. The report does not show any evidence to prove that misuse of data is a crime worse than murder.

The net consequence of the Bill, if enacted, would be this - the enactment of arguably the most powerful and intrusive regulatory agency in India, the enactment of draconian offences with great potential for misuse, and a punch in the face of private enterprise. Command and control is back, this time the driving force being the ideology of statism.

Conclusion: Privacy through the state, not from it

The ongoing discourse on privacy, Aadhaar and data protection leaves us with the inescapable role of the state as a mediating entity. In the Aadhaar discourse, the uses of identification will continue to be decided by the state without any clear agreement on what such uses should be. The right to privacy elucidated by the Supreme Court will have to evolve on a case-by-case basis as more state action relevant to privacy emerges. The Personal Data Protection Bill empowers the state to protect our data with broad and vaguely defined powers.

The fight for privacy as a means to protect individual liberty has, in the forms it takes today, led us to a point where state power on the whole, has been arguably strengthened vis-a-vis society. Contradictory to its stated aims, the current outcomes of the privacy debate are predicated on state coercion as a tool for protecting liberty.

It is a grave error to presume that the state will act benignly to uphold liberal values of privacy and autonomy. One reason is that these privacy values have not been sufficiently articulated - the discourse is almost entirely around means and not the specific interests the right to privacy seeks to protect. This can only be done by discussing privacy in specific contexts - if land records are to be made publicly accessible for increased efficiency in land markets, what is a reasonable expectation of privacy in such a context? Or, if the state wishes to build a sex offenders registry, how do privacy interests militate against such a system? As stated earlier, problems of identification systems are downstream of these issues. By not questioning the ends of identification systems like Aadhaar, its detractors are attempting to have their cake and eat it too. Even if Aadhaar is struck down, it is doubtful if privacy interests will be served in the long run.

Second, a liberal state cannot be built in isolation from the larger state apparatus. A state that habitually violates the rule of law and relies on draconian laws cannot be trusted implicitly to uphold liberal values just because the law empowering it is for a seemingly benign purpose. The Right to Education Act, a seemingly benign law, provides everyone the right to free and compulsory education, but does so by seriously constraining the right of private educational providers to actually provide education. This is routine for the Indian state - the pursuit of seemingly liberal objectives through coercive mechanisms. A state that routinely treats dissenters as traitors, evicts helpless landowners, and uses torture as an investigative tool, cannot reasonably be expected to act liberally in the interest of liberal values, especially if it is given draconian powers with vague objectives. It is reasonable to presume that the data protection law will suffer from the same illiberalism that we see in the Indian state.

A lot has been said of the misuse of data by private firms. A reasonably responsive state acts as a bulwark against such misuse. There is no bulwark against the state. If it is determined to take a certain course of action, whether it is the imposition of an emergency or the demonetisation of currency, no system of checks and balances is sufficient. Additionally, in the case of the data protection Bill, there has been no evidence shown by its proponents that the scale of the proposed data protection requirements is in any way commensurate to the dangers posed by private data companies.

Perhaps the greatest threat to individual liberty, autonomy and dignity comes from the fact that state action crowds out non-state action. State regulation operates to the exclusion of self-regulation. If, for example, the State determines the prices of essential commodities, private persons cannot negotiate and agree on the prices of such commodities. Though it has its problems, civic-associational regulation is often capable of much greater nuance and compromise than state regulation. State regulation in contrast, operates largely within binaries - permission versus prohibition, legality versus illegality, all enforced with coercive power behind it.

Those arguing in favour of privacy must avoid resorting to similar binaries. The present discourse rests on absolute moral claims about privacy, where political arguments should be made. Escalating political arguments to moral ones hastens the end of democracy. Since the moral claims of one side are considered odious and abhorrent by the other, no middle ground can be reached because collaboration with the opposition is treasonous in a moral fight. This spells greater danger for the survival of democracy; the only beneficiary is the increasingly-powerful State, and the stakes for capturing power become higher and higher. The impulse to turn to state-centred solutions has to be checked if individual privacy and dignity are to be preserved.

 

The author works with the National Institute of Public Finance and Policy, and is extremely grateful to Suyash Rai and Vasudha Reddy for discussions and inputs.