How large is the payment delays problem in Indian public procurement?

by Pavithra Manivannan and Bhargavi Zaveri.

Payment delays are endemic in government contracts in India. Businesses generally factor payment delays into the price of public sector contracts. Measuring the size and extent of overall payment delays from the government to vendors and contractors has, however, been a challenge. In this article, we use a novel data-set put together from public sources to ascertain the size of the payment delays problem in Indian public procurement.

When a private entity delays contractual payments, the delay is factored into the price of the next vendor contract or the debt contracted by the private entity. This feedback loop naturally instills payment discipline by aligning the payer's incentives with maintaining payment discipline. This is harder to achieve for government contracts, as information about payment delays in public procurement is often sparse, difficult to discern from budgetary statements or missing altogether. The problem is compounded as the state procures goods, services and works at various levels and through various entities owned by it. Payment delays affect the working capital cycle of vendors of all sizes. However, payment delays have a particularly deleterious impact on Micro Small and Medium Enterprises (MSMEs), which often have limited access to formal financial systems to bridge their working capital requirements. Timely payments, therefore, are of crucial importance to MSMEs as they rely on their cash-flow cycle to fund their working capital requirements.

Payment delays in contracts with CPSEs

A significant proportion of overall central government procurement is undertaken by centrally owned public sector enterprises (CPSEs). Most CPSEs are incorporated as companies and many of them are listed. We use the information in the annual results of CPSEs as a proxy to ascertain the scale of payment delays in the public procurement undertaken by the central government. We study the balance sheet and annual reports of listed CPSEs for the last three financial years, 2017-18, 2018-19 and 2019-20 ("study period").

We find that CPSEs had annual average outstanding trade payables of Rs.1.3 trillion as against an annual average procurement value of Rs.1.1 trillion, during our study period. This suggests that the annual average outstanding trade payables of CPSEs were about 18% higher than the annual average procurement undertaken by the CPSEs. We also find that when taken as a percentage of the value procured, CPSEs under some ministries, such as the Railway and Defence Ministries and Ministry of Housing and Urban Affairs, fare significantly worse than others. Further, we find that on an average, payments worth 8% of the total value procured from MSMEs are delayed for more than 45 days from their due date. Finally, we find that CPSEs demonstrate weak payment discipline towards all their vendors, and that the MSME vendors are not worse-off than the other vendors. This suggests that in the case of government contracts, the imbalance of the relative negotiating power of MSME vendors and non-MSME vendors has limited impact on the behaviour of the payer.

Our work demonstrates the potential to develop an ongoing system to measure payment discipline in public procurement, which could then act as a feedback loop for pricing vendor contracts when dealing with CPSEs and the government departments to which they are aligned.

Data and methodology

Our analysis is based on a hand collected data-set put together from the following two public sources of data:

1. the MSME Sambandh portal set up by the the Ministry of Micro, Small and Medium Enterprise in 2017, to monitor the implementation of the Public Procurement Policy, 2012;
2. Annual reports and annual balance sheets published by CPSEs.

Our data-set consists of firm level information about CPSEs, such as the year of their incorporation, listing date, industry classification, variables indicative of their financial health and the procurement undertaken by them. We augment the data-set with information on payments delayed by CPSEs to MSME suppliers beyond 45 days from the date on which such payments became due (hereafter, "delayed payments"). The Micro, Small and Medium Enterprises Act, 2006 (MSME Act)requires all companies that procure goods, services and works from micro, small and medium enterprises to disclose such payments in their annual report in the prescribed format.

Our data-set covers this information for 57 listed CPSEs. We collect the data for these CPSEs for three financial years beginning with the year in which the MSME Sambandh Portal was set up. This gives us data for the financial years, 2017-18, 2018-19 and 2019-20, which is our study period.

These 57 CPSEs are spread across 17 departments or ministries of the Central Government, with the largest number concentrated under the Ministry of Petroleum and Natural Gas (19.3%), followed by the Ministry of Power (10.53%) and the Ministry of Steel (8.77%). The CPSEs in our data-set are spread across 34 industries, as per the National Industrial Classification (NIC) scheme prescribed by the Ministry of Statistics and Programme Implementation (MoSPI). CPSEs in the business of 'electricity, gas, stem and hot water supply' account for the largest group (12.28%) followed by CPSEs engaged in the business of manufacturing coke, refined petroleum products and nuclear fuel (8.77%).

Each CPSE reports a target procurement value at the beginning of the financial year and the actual procurement value at the end of the financial year, on the MSME Sambandh portal. Table 1 shows the aggregate value of goods, services and works targeted and actually procured by the CPSEs in our data-set across different government departments.

Table 1: Procurement by CPSEs

	No. of CPSEs	Target (Rs. crore)	Actual (Rs. crore)
Department of Chemicals and Petrochemicals	2	371.66	308.38
Department of Commerce	2	17.28	18.3
Department of Defense Production	3	1963.33	2880.47
Department of Fertilisers	4	2547.34	2641.74
Department of Heavy Industry	4	16392.1	15209.25
Department of Telecommunications	2	0	0
Ministry of Coal	2	5977.39	1774.82
Ministry of Defense	3	5838.79	7066.05
Ministry of Housing and Urban Affairs	2	12.61	12.67
Ministry of Mines	2	2573	7132.09
Ministry of Petroleum and Natural Gas	11	52175.63	63849.08
Ministry of Power	6	6142.97	6608.55
Ministry of Railways	4	395.07	429.31
Ministry of Science and Technology	1	38	17.49
Ministry of Shipping	3	1725.67	1321.45
Ministry of Steel	5	4556.4	5356.22
Ministry of Tourism	1	125.07	34.85

The Ministry of Petroleum and Natural Gas is the largest procurer in our data-set, both in terms of the number of CPSEs and the value of goods, services and works procured by them. Table 1 also shows that a majority of the CPSEs have procured more than their annual targeted value. We observe this to be true across all the three financial years comprised in our study period.

Findings: CPSEs' outstanding dues

Trade payable are a rough proxy of the amounts due from a firm to vendors and service providers. We use the data on outstanding trade payable from the balance sheets of CPSEs as an estimate of payment delays in public procurement. Table 2 shows the three-year annual average outstanding trade payable due from the CPSEs in our data-set. The second column indicates the corresponding annual average value of procurement undertaken by these CPSEs, and the last column indicates the average outstanding trade payable as a percentage of the average annual procurement undertaken by the CPSEs.

Table 2: Average outstanding trade payable and procurement value

	Procurement value (Rs. crore)	Outstanding payable (Rs. crore)	Payable/ procurement (percent)
Department of Chemicals and Petrochemicals	308.38	106.11	34.41
Department of Commerce	18.3	1119.66	6118.36
Department of Defense Production	2880.47	3449.92	119.77
Department of Fertilizers	2641.74	1971.93	74.65
Department of Heavy Industry	15209.25	10297.54	67.71
Department of Telecommunications	0.00	2313.67	0.00
Ministry of Coal	1774.82	1898.59	106.97
Ministry of Defense	7066.05	3031.90	42.91
Ministry of Housing and Urban Affairs	12.67	2709.40	21384.37
Ministry of Mines	7132.09	1227.54	17.21
Ministry of Petroleum and Natural Gas	63849.08	82830.09	129.73
Ministry of Power	6608.55	7907.65	119.66
Ministry of Railways	429.31	1243.77	289.71
Ministry of Science and Technology	17.49	29.38	167.98
Ministry of Shipping	1321.45	1562.02	118.21
Ministry of Steel	5356.22	8739.99	163.17
Ministry of Tourism	34.85	58.94	169.12
Total	114660.72	130498.11	113.81

While the procurement value of a given financial year does not necessarily mean that the entire value of the contract becomes payable in the same financial year as the procurement contract may span across multiple years, the three year average numbers in Table 3, however, show a systemic break-down in the payment discipline of CPSEs. We speculate that these trade payable would have aggregated over time, and do not necessarily pertain entirely to the study period.

We then look at three departments/ ministries that account for the largest procurement by value in our data-set, to investigate the differences in the payment behaviour of CPSEs towards MSMEs and non-MSME vendors (Table 3). The CPSEs in these three departments also account for nearly 75% of the total outstanding trade payable of all the CPSEs in our data-set.

Table 3: Outstanding trade payable of CPSEs (as percent of value procured)

	2017-18		2018-19		2019-20		Total
	Non-MSME	MSME	Non-MSME	MSME	Non-MSME	MSME	Non-MSME	MSME
Department of Heavy Industry	84.02	7.87	80.87	15.82	110.63	11.81	88.89	12.22
Ministry of Petroleum and Natural Gas	182.65	7.60	187.97	3.56	143.05	4.13	171.49	4.32
Ministry of Power	116.44	14.90	161.54	15.35	292.02	21.73	175.63	17.46

In each of the three cases, the proportion of total outstanding trade payable to the value procured by the CPSEs during the study period is much higher for non-MSMEs than MSMEs. In the case of the Ministry of Petroleum and Natural Gas and the Ministry of Steel, the proportion of outstanding trade payable to non-MSME vendors exceeds 100% of the value procured, on an aggregate basis across the three years. Compared to non-MSME vendors, this proportion is significantly lower for MSME vendors (the highest being 21%).

Findings: Delayed payments by CPSEs to MSME suppliers

The final leg of our measurement involves estimating the 'delayed payments' by CPSEs to MSMEs, that is, payments delayed beyond 45 days from their due date. We aggregate the delayed payments outstanding as at year-end, by CPSEs to MSMEs, government department wise. Table 4 shows the delayed payments as a percentage of their annual procurement value from MSMEs.

Table 4: Delayed payments as percentage of procurement

	2017-18	2018-19	2019-20	Average
Department of Chemicals and Petrochemicals	6.22	11.73	11.84	10.46
Department of Commerce	0.86	47.38	1.08	17.47
Department of Defense Production	5.82	3.35	5.44	4.78
Department of Fertilizers	7.58	5.25	4.82	5.38
Department of Heavy Industry	7.91	15.92	12.11	12.37
Department of Telecommunications	0	0	0	0
Ministry of Coal	9.11	5.42	8.47	7.19
Ministry of Defense	3.55	3.20	3.98	3.56
Ministry of Housing and Urban Affairs	6.72	4.86	5.49	5.70
Ministry of Mines	2.79	1.51	2.85	2.37
Ministry of Petroleum and Natural Gas	4.12	4.80	6.18	5.25
Ministry of Power	24.95	25.33	31.87	27.51
Ministry of Railways	11.03	20.58	11.02	13.62
Ministry of Science and Technology	0	0	0	0
Ministry of Shipping	14.36	3.47	2.94	5.62
Ministry of Steel	4.84	10.18	4.81	6.18
Ministry of Tourism	0	0	21.13	21.13
Total	7.36	8.06	8.70	8.16

We find that the delayed payments by CPSEs to MSMEs average at about 8% of the actual value of goods, services and works procured by them from MSMEs during the study period. This percentage has marginally increased from 2017-2018, and is higher than the average in 2019-20.

Conclusion

In this article, we take a sector-agnostic approach to measure the scale of the payment delays problem in public procurement in India. An analysis of the annual returns and balance sheets of CPSEs gives us new insights on the scale of the problem at three levels, namely, at the level of the CPSE, the industry and the government department to which the CPSE is aligned.

Our analysis provides evidence of the popular perception of CPSEs' weak payment discipline to vendors. Taken as a percentage of the average procurement undertaken by CPSEs, the payment delays by CPSEs to their vendors far exceeds their procurement values. Second, while CPSEs demonstrate weak payment discipline to both MSME and non-MSME vendors, the delay seems to be much larger towards large vendors than the small ones. Third, the delayed payments reporting requirements mandated under the MSME Act provides us an illustrative picture on the payment discipline of the CPSEs. For two out of three years of our study period, we notice that the total delayed payments to MSMEs is higher than the three-years average (Rs. 2323.42 crores).

Our approach of understanding payment delays in public procurement in India, through balance sheets of CPSEs demonstrates the possibility of setting up ongoing systems for the measurement of payment discipline of government departments through CPSEs aligned to them. Further, these delays may be indicative of either of liquidity mismatches or solvency issues, at the CPSE, or a mix of both. By approaching this problem from a balance sheet perspective, our study lays the foundation for conducting future work on the possible relationship between the financial health of the procurers and their payment discipline.

The authors are researchers at the CMI-Finance Research Group and thank Susan Thomas for valuable discussions.

Linking welfare distribution to land records in India: Part 1

by Diya Uday and Bhargavi Zaveri.

Over a year ago, the Union Government announced the PM-KISAN scheme, which is the first centrally sponsored scheme for making direct benefit transfers to farmers. The scheme, which promises an annual transfer of Rs. 6,000 to farmers, is in line with the trend towards substituting in-kind subsidies with direct benefit transfers (DBTs) in welfare programs in India.

For example, in 2018-19, Rs. 2 trillion (around 8% of total government expenditure) was reportedly delivered through DBTs to beneficiary accounts. In the last two years alone, at least four state governments have rolled out DBTs for providing direct income support for farmers (Table 1).

Table 1: Agricultural income support schemes (2018-19)

	Union	Telangana	Andhra Pradesh	Odisha	West Bengal
Name of scheme	PM Kisan	Rythu Bandhu	Rythu Barosa	Kalia	Krishak Bandhu
Year of announcement	2019	2018	2019	2018	2018
Basis of calculation	Absolute	Per acre	Absolute	Absolute	Per acre
Annual amount	6000	10000	7500	4000	5,000
No. of instalments	3	2	2	2	2
Eligibility	Landowners	Landowners	Landowners/tenants	Landowners/tenants	Unclear
Annual budget allocation (INR crores)	75,000	12,000	8,750	5,611	3,000
Intended no. of farmers (in Mn)	120 (households)	6 farmers	4 farmers	7.5 households	7.2 farmers

Source: These features are extracted from the scheme documents available in public domain as on January 2020.

A common theme that runs across these agricultural income support schemes is that they utilise land records. India has had a checkered history in the field of land record administration and welfare distribution. For example, a previous attempt at linking the fertiliser subsidy to digitised land records has reportedly failed. The variation in the quality of land records across states, and of state capacity for the identification of beneficiaries, will affect the working of such schemes. We may anticipate problems such as the time-lags involved in the updation of records, the area of the land parcel where the subsidy is linked to the size of the land and the identification of possessory interests such as renters and share-croppers. For example, a ground truth study conducted across Maharashtra, Rajasthan and Himachal Pradesh, showed substantial lags in the updation of land records on account of a change in ownership (NCAER 2017). In Maharashtra, for instance, it took an average of 85 days to update the revenue records to reflect a change in the ownership of a land parcel on account of a sale transaction, and 110 days to reflect such a change on account of the death of the original owner (IGIDR 2017).

The implementation of such schemes is complicated by the fact that while the land records are generally maintained by the Revenue Department of the state government, the Agriculture Department is responsible for the implementation of the income support scheme. The efficacy of such schemes would thus depend on the extent to which these departments are able to collaborate.

A new study on the Rythu Bandhu scheme in Telangana

Telangana is an interesting place to study the implementation of an agriculture income support scheme delivered through DBT by entirely relying on land records. This is because unlike the other states that have rolled out similar schemes, the state government of Telangana, before rolling out the Rythu Bandhu scheme (RBS), undertook a state-wide land records updation drive. Referred to as the Land Records Updation Program (LRUP), the drive involved officers of the Revenue Department visiting each village for rectifying errors, updating the land records and issuing a new de-facto land record, referred to as Pattadar Passbooks, to the owners of agricultural land parcels.

While some have acclaimed the RBS as a success story for providing relief to farmers and innovating in the space of agriculture support (here and here), the scheme has been equally criticised for excluding landless and tenant farmers from its purview.

These developments bring up many interesting questions:

• How was the LRUP done?
• To what extent did it contribute towards the design and the implementation of the RBS?
• What are the co-ordination and information sharing mechanisms set up between the Revenue and Agriculture Departments?
• Has the reliance on land records for the identification of beneficiaries resulted in exclusion and inclusion errors? What is the extent of such errors? 
• What is the impact of linking the entitlement under the RBS to the size of the land parcel?

Answering these questions will help in understanding the state capacity required for conducting a state-wide land records updation drive, the problems that arise in linking land records to welfare distribution, and the design and operationalisation of DBTs which use land records for the purpose of identification of beneficiaries.

We investigated these questions through a series of interviews, focus group discussions and matching of land records with beneficiary databases in Telangana, over a period of six months. In a two part series of articles here on The Leap Blog, we unveil our key findings. A more detailed version of this work is visible in Thomas et. al., 2020.

In this first part, we describe how the Telangana government undertook a state-wide land records updation program, the outcomes of the updation program and its potential impact on the identification of beneficiaries under the Rythu Bandhu scheme. The LRUP, which primarily aimed to cover agricultural land, achieved fairly large coverage in terms of area (86%). All districts, except Hyderabad (which does not comprise agricultural land) were covered under the LRUP. The number of disputed land parcels was surprisingly low (~5%), and a fresh revised digital land record could be issued to ~93% of the land parcels that were covered and undisputed.

We argue that the scale and efficiency of the LRUP and the rate of disputed land parcels, is attributable to two factors: the lack of a survey that measures the boundaries of land parcels; and restricting the nature of rights and interests in the updated digital land record. We further argue that these constraints have influenced the design and scope of the RBS, restricting its benefits to land owners, and excluding tenants and share-croppers whose interests are no longer recorded on the land record used for the identification of RBS beneficiaries.

In the next article, we will look at the implementation of the RBS, the payment mechanisms used, the overall satisfaction levels and the extent of errors in the identification of beneficiaries under the RBS.

Our study supplements theoretical perspectives on state capacity in India, generates fresh insights into the kind and quantum of capacity required for the upgradation of land records, a probem that is believed to be a significant challenge to India's development. It also contributes to the literature on state capacity and welfare programs in India (Muralidharan et al (2016); Totapally et al (2019)).

Our study involved interviews with government officials of departments of the State Government which were involved in the implementation of the LRUP and the RBS, namely, the Revenue Department, the Agriculture Department and the Finance Department. We interviewed officials of these Departments at the level of the state, two sample districts and sample villages in each of these districts respectively. Additionally, we interviewed officials of the Finance Department and the Integrated Tribal Development Agency (ITDA), which is the department within the government responsible for the delivery of services to tribal communities in scheduled tribal areas.

The districts of Nalgonda and Mulugu were selected as sample districts for the study, owing to the concentration of a large number of small and marginal landholdings and the population of scheduled castes and scheduled tribes in these districts. To obtain insights into the overall satisfaction levels with the RBS, we conducted focus group discussions with beneficiaries and non-beneficiaries in the two selected villages in these districts. Finally, for the purpose of estimating the extent of errors, if any, in the coverage of beneficiaries under the RBS, we compared the base land records in each of these villages with the RBS beneficiaries lists.

Scope of the LRUP and capacity deployed

The LRUP was envisaged as a three month exercise to improve land records in respect of agricultural land in Telangana through two phases:

1. First phase : This phase covered (a) land parcels with no disputes and (b) land parcels where there were undisputed errors on the records, such as errors of names and surnames.
2. Second phase: The second phase was designed to cover disputed land parcels, such as land parcels in respect of which disputes are pending in the revenue or civil courts, or land parcels that belonged to a Wakf (land belonging to a religious charity and administered by a statutory board) or had boundary disputes with the Forest Department. The key here was that there was a finite list of categories of "disputes" that were identified by the State Government for the purpose of excluding land parcels from Phase 1.

Table 2 gives an overview of the coverage of the LRUP. It shows that except for one district, namely, Hyderabad, which has no agricultural land, the LRUP covered all the districts aggregating to 86% of the area of the state.

Table 2: Coverage under the LRUP

Unit	Coverage	Total	Coverage (%)
Districts	32	33	96.77
Mandals	573	584	97.26
Revenue Villages	10,823	10,343*	Unclear
Area (in acres)	2,38,18,551	2,76,94,830	86
Source: Revenue Department (June 2019) *As per Census 2011.

The coverage indicated in Table 2 was achieved in three months, with the Revenue Department officers having been divided into teams led by the Tehsildar (an official of the Revenue Department in charge of a cluster of villages). The Collector of each district was responsible for the formation of appropriately sized teams for the district, with the mandate of covering 250 acres per day per team. Table 3 gives an overview of the resources deployed for the purpose of the LRUP.

Table 3: Overview of resources deployed for the LRUP

Duration of the project	15th September, 2017-31st December, 2017
Total number of revenue officers involved in the project	3,500
No. of teams	1,507
No. of villages assigned to each team	9
Estimated area to be covered per day	250 acres per team
Estimated No. of days per village	10
Estimated No. of days per district	100
Source: MCR Human Resource Development Institute of Telangana and interviews.

We find that four distinct records are maintained at the level of the village (Table 3a) and the village-level exercise involved updating one of the records, namely, the Record of Rights and the issuance of digital Pattadar Passbooks (explained below) to each land owner.

Table 3a: Overview of land records maintained at the village level

Sethwar	A record containing details of cultivable area on each agricultural land parcel.
Khasra Pahani	A record containing the details of crops on each agricultural parcel of land.
Pahani	A record containing parcel-level information on the ownership, non-ownership interests, area, cultivable and non-cultivable portions, cropping patterns on each agricultural land parcel.
Record of Right (Form 1B)	A record containing a sub-set of the information from the Pahani records, with a focus on the ownership, area, manner of acquisition of each agricultural land parcel
Pattadar Passbook	A record containing information on the ownership of the land parcel.

Each team was part of a training conducted by the District Collectors on (a) the objectives of the exercise; (b) step by step processes involved in the exercise; (c) the formats for the collection of information; (d) the statutory processes to be followed for the correction and modification of the records; and (d) the daily progress reports to be sent to district and state. A state level control room and multiple district-level control rooms were set up to deal with questions that cropped up during the exercise. The reporting heirarchy was clear. The Tehsildars would prepare daily reports for the District Collector, who in turn, was responsible for compiling the village-wise reports in her District. Each report contains information on (a) the details of missing serial numbers for entry in the the Pahani; (b) the extent of variation in the area of the land parcel reflected in the Sethwar and the Pahani; (c) unsettled disputes and issues in the village; (d) details of the land assigned by the government; and (e) list of land parcels put to non-agricultural use in the village.

Budget deployed for the LRUP

An analysis of the financial statements of the Telangana Government shows that while the budget does not separately allocate funds for the LRUP, there is a significant increase in the budget allocation for overall 'land reforms' for the year of implementation of the LRUP, namely, financial year 2017-18 and the financial year 2018-19 (Table 4). In the absence of specific information on the extent to which this allocation was utilised for the LRUP, it is difficult to draw any insights. However, our interviews yielded more specific, although rough, information on the amounts spent for the implementation of the LRUP (Table 4a).

Table 4: Overview of budget estimates for land reform in rural areas (2015-2020)

Financial year	Budget estimate (INR lakhs)	Year-on-year change (%)
2015-16	1363.03*
2016-17	1256.56	-7
2017-18	1335.85	6.31
2018-19	1502.20	12.45
2019-20	1506.18	0.26
Source: Annual Financial Statements. *This is the actual amount spent on land reforms in 2015-16.

Table 4a: Budget estimates for implementation of the LRUP

Aggregate budget (INR crores)	100
Amount used for printing Digital Pattadar Passbooks	40-60
Amount allocated per district for title verification, etc.	1-2
Source: Interviews conducted with state government officials (June 2019)

Table 4a shows that a blanket amount of Rs. 1-2 crores was allocated per district for the process of conducting the title verification, and the overall implementation of the LRUP. This was in addition to the regular budget of the Revenue Department. The allocation was uniform across all districts without regard to their size or other factors which might complicate the implementation further such as fragmented land parcels and vast forest areas. In the absence of district-level data on the usage of these additional funds, it is difficult to ascertain the sufficiency of these amounts or the extent to which a uniform allocation poses problems for the larger or more complex districts.

Digital Pattadar Passbooks

One of the key components of the LRUP was the issuance of digital Pattadar Passbooks (PPBs) to all the owners of agricultural land whose land was found to be undisputed during the LRUP. The PPB is a land record unique to the erstwhile unified state of Andhra Pradesh. Originally, it recorded the interests of owners, Pattadars (defined, under the land revenue laws, as the person who pays the land revenue), mortgagees, and tenants on the land parcel. The purpose of this document was to facilitate farmers' access to credit. For example, the AP Rights in Land and Pattadar Passbooks Act, 1971 allows farmers to apply for credit on the basis of the passbook; and empowers the Collector to recover, on behalf of the lender, an unpaid loan obtained on the basis of the passbook.

The State of Telangana adopted the AP Rights in Land and Pattadar Passbooks Act, 1971 and renamed it as the Telangana Pattadar Passbooks Act, 1971. In 2018, Telangana made two critical amendments to the Telangana Pattadar Passbooks Act, 1971: first, it dispensed with recording the interests of tenants and occupants who are not owners on the PPBs. The reason for this is unclear. However, the current law governing agricultural land tenancies in Telangana, which confers superior rights to protected tenants (namely, tenancies created in 1950) reportedly led to insecurity among owners of agricultural land parcels. It is possible that this was the motivation for restricting the set of rights that were recognised in Pattadar Passbooks.

Second, it specifically provided that loans could be made on the basis of the electronic record of rights, and that the production of the PPB should not be insisted upon for advancing a loan on the security of land, the interest of the owner in land or the crops growing on it (Table 5).

Table 5: Recording of interests in Pattadar Passbooks: pre and post 2018 amendment

	Pre-2018	Post 2018
Pattadar	Yes	Yes
Mortgagee	Yes	No
Tenant	Yes	No

The non-inclusion of tenancies and other interests in the PPB is an important amendment as it ultimately affects the identification of beneficiaries under the RBS.

Disputes uncovered in Phase 1 of the LRUP

Contrary to the popular notion of land being a highly disputed area, nearly 95% of the area covered under the LRUP was cleared as free of disputes related to ownership during the first phase (Table 6).

Table 6: State-level outcomes under the LRUP

LRUP outcomes: in acres and gunthas
Total extent verified	2,38,53,248.36
Total extent clear	2,28,77,333 (94.65)
Total extent not clear	9,75,915.34 (4.09)
LRUP outcomes: in number of land parcels
No. of Survey Nos. verified	1,96,78,844
No. of Survey Nos. cleared	1,87,60,272 (95.33)
No. of Survey Nos. not cleared	9,18,572 (4.66)
Total No. of Khatas covered	71,71,409
Total No. of cleared Khatas	67,68,151 (94.37)
Agricultural Khatas	60,00,509
Non-agricultural and govt. assets	7,67,642
Total No. of Khatas not cleared	4,03,258 (5.62)
Source: Revenue Department, Government of Telangana. Numbers in brackets are percentages of the total of the head under which they appear.

It is possible that the speed of implementation of the LRUP, the coverage and the high clearance rate is attributable to the manner in which the verification process was conducted. Since the LRUP was not preceded by a survey, the entries in the land records with respect to the area and parcel boundaries, were verified on a self-declaration basis. In the article that follows this one, we demonstrate the discrepancies in the area recorded in the base land records and the Rythu Bandhu beneficiary lists. Second, the LRUP involved the updation of a limited number of fields of information in a PPB. As mentioned above, interests other than ownership were not recorded in the revised PPBs. Since interests such as tenancy and possession, which are inherently more difficult to record, were not within the scope of the program, this might have contributed to the wide coverage, low disputes and speed of implementation of the program.

The design of the LRUP and its bifurcation into two phases has important implications for the scale that the program could achieve. As mentioned above, all disputed land parcels were kept out of the purview of the first phase. Thus, for instance, land parcels with respect to which cases are pending in the civil courts or revenue courts or were subject to succession disputes, were kept for Phase 2 of the LRUP. This ensured that digital PPBs could be issued in respect of the bulk of the land parcels (93%) that were cleared of ownership related disputes under the LRUP (Table 7).

Table 7: Number of digital Pattadar Passbooks issued under the LRUP
No. of cleared agricultural Khatas	60,00,509
No. of PPBs issued	55,85,396 (93.08)
No. of Khatas cleared for PPBs, but not yet digitally signed	4,15,113 (6.91)
AADHAAR is available	1,65,055
AADHAAR is not available	2,50,058
Source: Revenue Department, Government of Telangana (June 2019). Nos. in brackets are percentages of the total of the head under which they appear.

Conclusion

The LRUP was envisaged as a speedy and one-time state-wide intervention for the updation of land records and the issuance of updated digital Pattadar Passbooks in Telangana. While the scale and the speed of the program holds important lessons on the importance of planning and capacity, the design and implementation of the program have several unintended consequences affecting the utility of land records generally and the design of the RBS more specifically.

Our study reinforces the notion of the multiplicity of land records at the village level. The ubiquity of the digital Pattadar Passbooks has made them a de-facto land record for ascertaining claims to ownership in Telangana, although their original purpose was restricted to allowing easier access to agriculture credit on the security of the underlying land and crops grown on it. As demonstrated in Table 3a, information about an agricultural land parcel is now spread across the base land records - such as the Pahaani records and the record of rights - which are usually maintained in all states under the respective land revenue laws, and the digital Pattadar Passbooks. This increases the potential for inconsistency in the information across different land records, even as the records are maintained by the same department of the State Government. Given the large-scale digitisation of base land records in Telangana, and the relative ease with which they can be accessed by citizens through digital portals such as MeeSewa, the need to overlay these records with a new land record in the form of Pattadar Passbooks, remains questionable.

Second, the LRUP was not preceded by a state-wide survey. The design of the program restricting the kinds of interests required to be recorded in the updated digital Pattadar Passbooks allowed the program to proceed with relatively higher speed. Counter-intuitively, the level of disputed agricultural land parcels was relatively lower than one might have estimated. However, this seems to be in line with a previous study that sought to investigate the degree of concordance between information recorded in digital land records and reality in Maharashtra, Himachal Pradesh and Rajasthan. The survey found relatively high concordance on ownership between the digital land records and reality. For instance, the study in Maharashtra found that out of the 102 samples land parcels examined across two villages in Maharashtra, 101 of them were owned by the person reflected in the digitised land record. However, the study found higher discrepancies in recording encumbrances and the area of the land parcel as reflected in the digitised land record and the actual area occupied in reality.

In short, the LRUP could achieve this scale within such a short span of time due to the simplification and minimisation of information that was required to be recorded in the Pattadar Passbooks. However, even as the discourse on the formalisation of land records leans towards widening the range of information recorded in land records, the measure of creating a new digital land title record with a restricted set of information would have the unintended consequence of the record being of limited utility.

Finally, the failure to record interests such as tenancy and mortgages on the digital Pattadar Passbooks, might have influenced the design of the Rythu Bandhu scheme. Reliance on the digital Pattadar Passbooks for the identification of beneficiaries leads to exclusion of landless farmers, such as tenants and share croppers, who are cultivating land and incurring expenditure as tenants. To ensure that the agriculture income support is beneficial, the design of the land record that is used as the base for the identification of beneficiaries, is critical. If the land record records interests such as tenancy and occupancy, it is easier to include tenants and actual cultivators within the ambit of the DBT scheme thereby ensuring that the intended benefits under such schemes reach the tiller of the land.

References

Sanand, Gupta and Prabhakar. A Pilot Impact Assessment of the Digital-India Land Records Modernisation Programme, NCAER (2017).

Narayanan et al. Report on the implementation of the Digital India Land Records Modernisation Programme (DILRMP) in the state of Maharashtra, IGIDR (2017).

Muralidharan, Karthik, Paul Niehaus, and Sandip Sukhtankar. 2016. Building State Capacity: Evidence from Biometric Smartcards in India. American Economic Review, 106 (10):2895-2929.

Swetha Totapally, Petra Sonderegger, Priti Rao, Jasper Gosselt, Gaurav Gupta. State of Aadhaar Report 2019. Dalberg, 2019.

Thomas, Uday and Zaveri. Linking welfare distribution to land records: a case-study of the Rythu Bandhu Scheme (RBS) in Telangana, IGIDR (2020).





Diya Uday and Bhargavi Zaveri are researchers at the Finance
Research Group, Mumbai. The study was supported by the Omidyar Network India.

Policy puzzles about UIDAI

A great debate is taking place about UIDAI. We have worked on many aspects of the policy puzzles about UIDAI.

-- Is UIDAI worth building, in the sense of comparing the financial costs and the financial benefits? In November 2012, we did a cost benefit analysis, and the answer seems to be Yes.

-- How should UIDAI think about the user charges for the infrastructure services that it provides? We were part of the UIDAI thought process on these questions in December 2013.

-- The public administration side: What were the ingredients that led up to the successful launch? A good paper is UIDAI's public policy innovations, by Ram Sewak Sharma, September 2016.  Building on this paper, Praveen Chakravarty has an article Building forts, not empires, 9 September 2016.

-- There are grave problems associated with privacy in India. How do we avoid the China model? An early paper on privacy in India is Towards a privacy framework for India in the age of the Internet, by Vrinda Bhandari and Renuka Sane, October 2016. This paper includes one section analysing the Aadhaar Act from the viewpoint of this proposed privacy framework.

-- Can the judiciary review the Speaker's decision on classifying the Aadhaar Bill as a money bill? Pratik Datta, Shefali Malhotra and Shivangi Tyagi have a paper from March 2017, in which they feel the answer is Yes.

-- If a country had to build an Aadhaar like system, what kind of law and regulations would be required?  Is the Aadhaar Act and the associated regulations (both of which were issued in 2016) an adequate legal foundation? Vrinda Bhandari and Renuka Sane feel this is not the case.

-- As Aadhaar becomes the core around which the citizen's relationship with the state revolves, we need to ask if citizens have access to an adequate grievance redressal mechanism? Vrinda Bhandari and Renuka Sane think the answer to this question is a resounding no.

-- Why do we need a fundamental right to privacy? Smriti Parsheera argues that the potential ramifications of not recognising this right run much deeper than the Aadhaar issues of today.

-- UIDAI is an important new organisation, and it should emerge as a high performance agency. Vrinda Bhandari, Renuka Sane and Bhargavi Zaveri argue that under the present law, UIDAI is neither performance oriented nor is there accountability for failure. They propose that the UIDAI should be held to appropriate accountability standards, so as to create an environment where it will perform well.

Judicial review of the Speaker's certificate on the Aadhar Bill

by Pratik Datta, Shefali Malhotra and Shivangi Tyagi.

Under the Indian Constitution, for a bill to be enacted into a law, it has to be approved by both Houses of the Parliament - the Lower House (Lok Sabha) and the Upper House (Rajya Sabha). There is one exception to this general rule. A bill certified as a 'money bill' by the speaker of the Lower House can be enacted into a law by the Lower House alone, without any approval from the Upper House. The Aadhar Act, 2016 was enacted using this route. After being passed by the Lok Sabha, the Lok Sabha speaker certified the Aadhar Bill as a 'money bill'. Accordingly, amendments suggested by Rajya Sabha were not considered and the bill was enacted into law. This led to a controversy, ultimately leading up to a constitutional challenge by Mr. Jairam Ramesh before the Supreme Court. Mr. Ramesh alleged that the speaker incorrectly certified Aadhar Bill as a 'money bill', allowing Lok Sabha to enact the law completely bypassing Rajya Sabha. This matter is going to come up for hearing before the Court on March 14.

Article 110(3) of the Indian Constitution states that the decision of the speaker, whether a bill is a money bill or not, "shall be final". In Mr. Ramesh's case, the Supreme Court has to first decide if it can question the speaker's "final" decision to certify Aadhar Bill as a 'money bill'. The Supreme Court has in three earlier decisions refrained from questioning the speaker's decision. These judgments are Mangalore Ganesh Beedi Works v. State of Mysore (1962), Mohd. Saeed Siddiqui v. State of UP (2014) and Yogendra Kumar Jaiswal v. State of Bihar (2015). As per these judgments, the speaker can certify each and every bill to be a `money bill' capable of being enacted by Lok Sabha alone, rendering the Rajya Sabha and the bicameral legislative system redundant. And the Supreme Court cannot question the speaker's decision since it is "final".

In a recent paper titled Judicial review and money bills, we argue that this position of law developed by the Supreme Court is incorrect. Many commentators have already argued that the enactment of the Aadhar Act through the money bill route was unconstitutional. For instance, Alok Prasanna Kumar, Amber Sinha and Suhrith Parthasarthy have pointed out that the Supreme Court's decisions denying judicial review are problematic. Vanya Rakesh and Sumandro Chattapadhyay have also made out a case favouring judicial review of the speaker's certificate. Our paper adds to this line of literature by substantiating these arguments in detail. In this post, we highlight five reasons why the Supreme Court could legitimately question the speaker's decision in spite of its "final" status under the Constitution.

Indian Constitution does not explicitly bar judicial review

The Indian Constitution adopted the concept of money bills from the British Parliament Act, 1911, with crucial modifications. The 1911 Act defines `money bill' and lays down a procedure for them. Section 1(2) defines a bill to be a money bill which 'in the opinion of the Speaker of the House of Commons' contains only specific provisions. Article 110(1) of the Indian Constitution defines a bill to be a money bill 'if it contains only' specific provisions. Effectively, in Britain the determination of whether a bill is a money bill is left to the subjective 'opinion' of the British speaker. In contrast, the definition of `money bill' under the Indian constitution is not left to the subjective opinion of the Indian speaker. The Indian speaker's decision has to be based on the definition provided in the Constitution.

The 1911 Act mandates the British speaker to endorse his
opinion on money bills, on a certificate. Section 3 gives absolute legal conclusivity to the certificate of the speaker. It reads:

Any certificate of the Speaker of the House of Commons given under this Act shall be conclusive for all purposes, and shall not be questioned in any court of law.

Article 110(3) of the Indian Constitution also grants 'finality' to the Indian speaker's decision. It reads:

If any question arises whether a bill is a Money Bill or not, the decision of the Speaker of the House of People thereon shall be final.

Unlike the 1911 Act, the Indian Constitution does not mention that the speaker's decision "shall be conclusive for all purposes" and "shall not be questioned in any court of law". Therefore, although the Indian Constitution grants conclusivity to the speaker's decision, it does not explicitly bar judicial review. We find that the Constituent Assembly intended for the "final" status given to the speaker's certificate, to be applicable only inside the Parliament - including the Rajya Sabha and the President. Our paper explains this argument in detail.

"Final" decisions have been questioned by Supreme Court

Decisions of various authorities have been given "final" status under the Indian Constitution. Yet the Supreme Court has on multiple occasions exercised judicial review over such decisions. For instance, in Kihoto Hollohan vs Zachillhu (AIR 1993 SC 412), the "final" decision of the speaker regarding disqualification of members of the House under Tenth Schedule of the Indian Constitution, has been held to be a judicial decision subject to judicial review. This suggests that the "final" status given by the Indian constitution does not automatically immune the Indian speaker's decision or certificate from judicial review. Our paper provides a detailed table where we show that there are 17 types of "final" decisions in the Constitution, out of which there are only 3 instances where the Constitution specifically mentions that the validity of such "final" decision cannot be questioned. The decision of the speaker, whether a bill is a money bill or not, is not one of them. Moreover, the Supreme Court has held 5 types of "final" decisions to be subject to judicial review.

British and Indian Parliamentary systems are different

Much of the differences between the 1911 Act and the Indian
Constitution originate from the inherent differences between the British and Indian parliamentary systems.

Britain follows a system of parliamentary sovereignty where the legislature is supreme. In their model it is possible to give absolute conclusivity to the speaker's certificate and immunise it from judicial review. We feel this was not possible under the Indian Constitution since it is not based on parliamentary sovereignty. Giving absolute conclusivity to the speaker's certificate or decision would have been incompatible with the overall scheme of the Indian Constitution, for two reasons.

First, India has a written constitution. All organs of the state (including the speaker) must abide by the Constitution. Any violation is liable to be struck down by the courts. This separation of powers is a basic feature of the Indian Constitution. Allowing the speaker to violate the constitution without any recourse to judicial review impinges upon this basic feature of the Indian Constitution.

Second, Britain does not have a written constitution. Therefore, it is impossible for the British speaker to violate the constitution. The British Speaker can only violate the rules made by either Houses of the British Parliament or procedural laws enacted by both of them. These being 'internal matters' of the Houses, such violations are immune from judicial review. In contrast, India has a written constitution. Certain law making procedures are prescribed by the Indian Constitution (like the money bill procedure), while some other procedures are prescribed through rules by both the Houses of the Indian Parliament (like voting on bills and resolutions). Similar to Britain, the rules made by the Indian Parliament are treated as 'internal matters' of the Houses, immune from judicial interference. We feel violation of constitutional procedures are not 'internal matters', and hence cannot be immune from judicial review. This explains why the Indian constitution framers did not explicitly bar judicial review of the speaker's decision as is the case in Britain.

Supreme Court's contradictory jurisprudence

Our research highlights the inherent contradiction within the Supreme Court's own jurisprudence on judicial review of legislative proceedings and the Indian speaker's certificate on money bills. Article 122 of the Indian Constitution prohibits the courts from questioning parliamentary proceedings on the ground of 'procedural irregularity'. We argue that 'procedural irregularity' refers to violation of procedures in rules made by each House under Article 118 or in any law made by the Houses under Article 119. Violation of a constitutional procedure is not mere 'procedural irregularity'. This distinction was highlighted by a seven judge bench of the Supreme Court in Special Reference No. 1 of 1964. It held that if the procedure followed by the legislature is illegal and unconstitutional, courts can exercise judicial review. This interpretation of Article 122 has been blatantly disregarded by lesser benches of the Supreme Court in the three decisions mentioned earlier. These three cases erroneously held that violation of the constitutional procedure for money bills is a mere 'procedural irregularity' and hence cannot be questioned by the courts.

Other common law jurisdictions allow judicial review

The position followed by the Indian Supreme Court is at odds with the position adopted across five common law countries with written constitutions and bicameral legislative systems. Our research shows that courts across these jurisdictions broadly support judicial review in this regard. In Australia, if a law imposing taxation deals with any extraneous matter, the Australian High Court can exercise judicial review under section 55 of the Commonwealth of Australia Constitution Act, 1900. The Canadian Supreme Court has observed that the procedural requirement must be complied with to create fiscal legislation. The Constitutional Court of South Africa has exercised judicial review to determine if a Bill was calculated to raise revenue or not. The US Supreme Court has categorically held that a law passed in violation of the Origination Clause (equivalent to money bills under the Indian Constitution) would not be immune from judicial review. Pakistan Supreme Court has in four cases struck down laws enacted as money bills since they did not fall within the definition of money bill under article 73 of their constitution.

Conclusion

Our research suggests that Indian legislative proceedings are immune from judicial review only on the ground of 'irregularity of procedure' and not for constitutional breaches. If a House commits breach of any procedure in any rule made by itself or in any legislation that the Houses themselves had passed, such breach is an internal matter for the House itself to act on. It is not open to judicial review. But if a House commits a breach of any constitutional procedure, such breach is open to judicial review. A contrary interpretation would mean that the Indian speaker can certify each and every bill to be a 'money bill', practically dispensing with the need for the Rajya Sabha. Such an interpretation would effectively render the constitutional design of a bicameral legislative system completely redundant. This is precisely what has been done by the three earlier judgements of the Supreme Court. Jairam Ramesh v. Union of India offers the Supreme Court an opportunity to revisit its interpretation of the Constitution on this issue.

References

Pratik Datta et al., The controversy about Aadhaar as a money bill, Ajay Shah's blog, March 20, 2016.

Vanya Rakesh and Sumandro Chattapadhyay, Aadhaar Act as Money Bill: Why the Lok Sabha isn't Immune from Judicial Review, The Wire, May 9, 2016.

Alok Prasanna Kumar, Why the Centre's dubious use of money bills must not go unchallenged, Scroll.in, May 11, 2016.

Amber Sinha, Can the Judiciary Upturn the Lok Sabha Speaker's Decision on Aadhaar?, The Wire, February 21, 2017.

Suhrith Parthasarthy, What exactly is a money bill?, The Hindu, February 27, 2017.

Pratik Datta et al., Judicial review and money bills, February 28, 2017.

 

The authors are researchers at the National Institute of Public Finance and Policy, New Delhi.

Universal basic income in India: An idea whose time has not come

by Ajay Shah.

Cash transfers to poor people

For many years, economists have advocated cash transfers to poor people as the best tool for poverty elimination. This avoids the inefficiency of in-kind transfers such as those undertaken by the Indian `Public Distribution System' which is beset by operational difficulties, and transfers to the non-poor.

The basic arithmetic works out as follows:

If we deliver \$0.5/day to the bottom 20% of society, this is an expenditure of \$48 billion/year at the current Indian population of 1.3 billion. This is 2.4% of GDP/year.

This calculation is all nominal. When we say \$0.5/day this is Rs.35 per day or Rs.12,775 per person per year. This a decent scale of transfer that eliminates poverty in India today.

The debate around this lies on the problem of spending 2.4% of GDP. This is a very large number, when compared with the small size of the Indian State. As an example, the total revenue of the central government is just 9% of GDP. We can debate whether spending 2.4% of GDP on this one project is a good idea. I personally think it is, provided it is part of an overall (daunting) policy project:

1. It should be accompanied by closing down all the existing poverty programs;
2. We'd need the State capacity to identify the poorest 20% of the population.
3. Even under perfect execution on the above two issues, this will increase fiscal stress. We'd need to accompany this with fundamental reform of the tax system, so as to reduce the tax-related distortions which are hampering GDP.
4. We'd need the political maturity where the government does not use this cash transfer highway to give out dole on a large scale when elections are approaching. I feel we would be playing with fire if these kinds of systems are built, without a corresponding Constitutional amendment that requires fiscal responsibility.

Cash transfers to all

This benign discussion does not carry through when you switch to `Universal Basic Income'. This is a transfer to everyone. This is attractive because it removes element 2 of the work program above -- you no longer need the State capacity to identify the poorest 20% of the population. But now the basic arithmetic jumps up by a factor of 5x:

If we deliver \$0.5/day to everyone in India, this is an expenditure of \$238 billion/year at the current Indian population of 1.3 billion. This is 11.9% of GDP/year.

For a country where the total revenue of the central government is 9% of GDP, this is completely out of reach.

There are countries where certain Universal Basic Income proposals are within reach. As an example, consider Sweden. Their population is 0.01 billion people. If they paid \$0.5/day to everyone, this would cost \$1.8 billion per year. Their GDP is pretty large -- it is \$600 billion USD per year. Hence, such a program is a cost to them of 0.3% of GDP. They might be able to afford numbers bigger than \$0.5/day also. It makes sense for them to discuss a small Universal Basic Income.

Conclusion

For rich countries, it is feasible to pay out \$0.5 per person per day to all. This is the fashionable `Universal Basic Income' proposal that is being talked about in the West. In the West, the left believes this is a good idea, while others think it is a bad idea. That is a reasonable discussion.

In India, we need to first get up to a per capita GDP of nominal \$10,000 per person per year before we start talking about this.

Like many other themes of the economic policy discourse in the West, Universal Basic Income is a discussion that belongs in the West which is inappropriately transplanted into India.We need to be grounded in our backyard, and have common sense about the numbers. We should understand our backyard, and  have an authentic sense of the important issues which should be the Indian policy discussion.

Subsidies are the last refuge of a failed policy maker

by Ajay Shah.

The government wants to subsidise your use of energy efficient household appliances. RBI wants to subsidise merchants who accept cards. Many people want to increase Internet access by using subsidies, e.g. the money disbursed through the `USOF'. Are all these subsidies appropriate?

Market failures versus your pet peeve

My pet peeve about the world is that there isn't enough classical music. Does this justify State intervention? The careful answer of an economist is: No, the scope of interference must be limited to `market failures'. Market failures are situations where the free market gets the resource allocation wrong. These are also generally situations where the free market gets the price wrong.

A useful four-part classification of market failures helps us look for them. The four categories are: market power (e.g. a monopoly that jacks up the price and cuts the quantity produced), asymmetric information (e.g. you buy medicines at a shop but you don't know whether they're adulterated), public goods (e.g. law and order, where the private sector will always under-produce), and externalities (e.g. your smoking gives me cancer).

The absence of an opportunity to trade widget $x$ at time $t$ is not, in general, a market failure. It may be a perfectly rational outcome for the retailing industry to not sell woolens in the desert. It may be a perfectly rational financial market where limit orders of a certain kind are absent. We may want more prosperity, more development, through which these markets would be more active, but the absence of trading in widget $x$ at time $t$ is not, in general, a market failure. In India, often times, we find that abnormally low trading is caused by government failures where the government is banning or interfering with various kinds of economic activity.

Similarly, when we see person $p$, and we dearly wish that he could buy butter, but he is too poor to buy butter, this is not a market failure. It's poverty.

When we see something that is going wrong in the world, the first hygiene check should be: Is this just my value judgement, or is this actually a market failure? Just because I like classical music, this does not mean that the slow death of classical music is a market failure.

Addressing market failures

When faced with a market failure, we may try to come up with a State intervention which would address this market failure. This is a dark art which involves the following considerations:

1. The smallest use of force is the best. The best intervention that gets the job done is the one which uses the least coercive power of the State.  Spending money is grounded in taxation, which is a high use of the coercive power of the State. Each rupee of money spent by the government probably imposes a cost of Rs.3 upon society. We should be cautious before going there. In general, the engineering question -- the search for tools which address a market failure using the least force -- requires scientific knowledge in the form of a good understanding of the market failure. As an example, a careful analysis of the problems of energy efficiency leads to solutions very different from subsidising energy-efficient equipment.
2. Taking implementation constraints seriously. Some interventions are infeasible in the light of the constraints of State capacity. Sometimes, the incentives of politicians and officials are impossible to correct, and while we can conceive of a nice tool for addressing a market failure, this may prove to be administratively infeasible. When implementation constraints are unsurmountable, we should just walk away leaving the market failure untouched. The lower the State capacity in a country, the more we should push towards laissez faire. Addressing a large class of market failures through State intervention is the luxury of people who possess State capacity. There is libertarianism of necessity and there is libertarianism of choice; we in India have to often engage in the former.
3. Subsidies are the tool of choice when faced with one kind of market failure: externalities of the positive kind. Consider education. When person $p$ gets more educated, he captures certain gains, but there are also gains to society at large which are not captured by him. These positive externalities are not valued by person $p$, who would tend to under-invest in education. This under-investment is a market failure: the free market outcome is the wrong resource allocation. We can correct this market failure by having a subsidy. While this logic is true some of the time, not all positive externalities can be addressed using subsidies. Here's an example : of market failure in the undersupply of criticism.
4. How big should the subsidy be? This requires two pieces of measurement. We should measure the positive externalities. The magnitude of the subsidy should be set to the point where the marginal gains to society from the last unit of subsidy is equal to the marginal social cost of funds. At present, in India, we have little empirical economics ability on measuring either. When we don't measure these things, caution requires a bias in the downward direction: push towards low or zero subsidies.

Addressing the `digital divide' using subsidies? 

Consider recent debates about the `digital divide'. Facebook and others proposed net non-neutrality as a way to increase their profit rates, and claimed that this would address access problems to the Internet. Proponents of net neutrality said that if access was a concern, this could be achieved by issuing bandwidth vouchers through which the government pays for (say) the first Rs.50 of data consumption per month by each citizen of India. Yes, this can be done. But should it be done?

Suppose most consumers use data comm to watch cat videos. In this case, why should the violence of the State (taxation) be brought to bear on increasing the consumption of cat videos? Before we propose a subsidy that would increase consumption of data communications, we should have measures of the spillovers, the positive externalities.

Ordinarily, a subsidy is funded by general tax revenues. In this case, people often rush to proposing the use of the `Universal Services Obligation Fund' (USOF). This is a less efficient means of raising public resources as it is a tax on one sector. The marginal social cost of USOF money is higher than the marginal social cost of funds. Intuitively, if the marginal social cost of funds is 3, I suspect the marginal social cost of USOF funds is 6. A subsidy funded through USOF would thus have to be significantly lower than a subsidy funded through general tax revenues.

Aadhaar and the Indian debate on subsidies

Nandan Nilekani and his team were very controlled in their arguments. They said: We have no opinion on whether the purchase of LPG should be subsidised, but assuming you want to do this, here's a way to better implement this subsidy. The re-engineering of many subsidy programs using Aadhaar has occupied public attention and absorbed management capacity in government.

But this does not change the basic question: Why should we have the LPG subsidy in the first place? Now that the Aadhaar system is built, we should go back to asking deeper  questions. Do we really want to have a fertiliser subsidy?

The rampant use of subsidies

We can't get our policies on ATMs right, so let's just subsidise ATM placement in northeast states. This sort of policy reflex is found all over the Indian policy landscape.

We failed to get our policy framework on payments right. Now we see a point of pain: acceptance infrastructure is lacking. The solution: subsidies in the form of an `Acceptance Development Fund'.

We failed to get prices right and interest rates right. Hence, households have incentives to buy energy inefficient equipment. The solution: subsidies.

We failed to make the Bond-Currency-Derivatives Nexus work. The solution: create a specialised class of financial firms named `primary dealers' and subsidise credit to them.

We failed to make infrastructure financing and the Bond-Currency-Derivatives Nexus work. Infrastructure projects are unable to sell corporate bonds. The solution: subsidies in the form of tax exemption for these bonds.

A conjecture about the rampant use of subsidies

Why are subsidies rampantly used in India? Why are policy makers so quick to reach into their toolbox of diverse possible interventions and pick on the subsidy?

Perhaps there are many market failures out there. Perhaps there are pervasive failures of policy analysis, misbehaviour by politicians and officials, and a shortage of State capacity. Hence, many market failures are not addressed. Solving these problems at the root cause is hard. The easy way out is a subsidy.

From a political point of view, sound policy work on addressing market failures involves using the coercive power of the State in order to force certain persons to behave differently. This is always unpleasant and makes some people unhappy. Spending money, on the other hand, is always popular. The unhappiness is concentrated against the Ministry of Finance which has to use State violence in collecting taxes. Once taxes are collected, every department of government, and every government agency, is too happy spending money. This is the soft option, compared with actually addressing market failures.

Actually fixing policy institutions is hard work. The leadership of most policy institutions lacks the ability to achieve State capacity. Subsidies are a tempting alternative for an `action-oriented government'.  Samuel Johnson said `patriotism is the last refuge of a scoundrel'. In similar fashion, subsidies are the last refuge of a failed policy maker.

Inequality

If you believed that income inequality was a problem, the subsidy which addresses that is a transfer of Rs.1000 per person, every month, to the bottom decile of society. There is no need to interfere with the working of the market economy, for the purpose of reducing inequality.

Conclusion

Many times in India, subsidies are being used to express sheer value judgments; they are just the faddish thinking of one bunch of hausfraus running policy versus another. At other times, a market failure is indeed present. But instead of more subtle interventions and the minimum use of force -- based on a sound scientific understanding of the anatomy of the market failure -- we tend to rush to the excessive use of force that is a subsidy. Every subsidy is grounded in the monopoly of violence of the State that is required for tax collection. We should be far more circumspect before doling out subsidies. Subsidies are the last refuge of a failed policy maker.

The controversy about Aadhaar as a money bill

by Pratik Datta, Shivangi Tyagi, and Shefali Malhotra.

In India, a bill usually becomes a law once it has been passed by both Houses - Lok Sabha and Rajya Sabha – and the President assents to it. `Money bills' are an exception. A money bill is deemed to have been passed by both the Houses even if it is passed only in the Lok Sabha. Rajya Sabha's approval is not necessary although it can recommend amendments to a money bill. This provision of the Constitution of India is grounded in the history of the UK.

Even before the Magna Carta (1215), English Kings had bound themselves not to impose certain taxes without the consent of the common council of their realm. The King would summon the Parliament whenever a new tax was to be imposed. Over time, the Parliament became a permanent institution. The House of Lords (Upper House) and House of Commons (Lower House) developed into separate and distinct organs. With time, as trade and commerce flourished, the Commons' contributions became the major source of revenue. So did their say in the Parliament. Consequently, the privileges of the Commons and the restrictions on the Lords in respect of imposition of charges upon people evolved organically over several centuries. Till 1911, no statute explicitly codified these privileges or restrictions.

In 1909, the Lords rejected the annual Finance Bill passed by the Commons. A government whose Finance Bill is rejected can only resign or dissolve Parliament, because without money it is impossible to govern. This prompted the enactment of the Parliament Act, 1911. The preamble of this 1911 Act explicitly states its purpose of `restricting the existing powers of the House of Lords'. Section 1(2) of this Act, for the first time, defined a money bill, one which could become a law even without the consent of the Lords. But it could contain `only' provisions dealing with all or any of the subjects specified in that section. Additionally, section 3 gave conclusive status to the certificate of the Speaker of the House of Commons as to whether a bill is a money bill. It explicitly stated that such certificate `shall not be questioned in any court of law'.

These provisions of the English Parliament Act, 1911 informed the drafting of Articles 109 and 110 of the Indian constitution, and Article 73 of Pakistan's constitution. But there is one crucial difference. Article 110(3) of our Constitution says if any question arises whether a Bill is a Money Bill or not, the decision of the Speaker of the House of the People thereon shall be final. Unlike the 1911 Act, Article 110(3) does not state that such certificate shall not be questioned in any court of law. Instead, Articles 122 and 212 of Constitution states that the validity of any proceedings in Parliament or a State legislature shall not be called in question on the ground of any alleged irregularity of procedure.

However, in the context of Article 212 in Special Reference No. 1 of 1964, the Supreme Court kept open the possibility of questioning the validity of proceedings inside the legislative chamber, on the ground that the proceedings suffer from an illegality or unconstitutionality and not merely procedural irregularity. Non-compliance with the constitutional provisions on money bill is certainly unconstitutional and not merely a procedural irregularity. Although this should theoretically give the Indian courts the power to question the Speaker's certificate on money bill, till date the Apex Court has refused to do so. In contrast, Pakistan's Supreme Court has on certain occasions struck down statutory provisions passed through money bills for non-compliance with Article 73, their constitutional provision on money bills.

Recently, the certification of the Aadhaar Bill by the speaker as a money bill caused much furore. A careful analysis of Article 110 and of the Bill reveals that the Bill was tightly drafted in order to try to make it a money bill. Section 7 does not make it mandatory for everyone to get an Aadhar – it is only for those who want to avail a subsidy, benefit or service. To put it simply, if you want a (prescribed) subsidy, benefit or service, go get an Aadhar. Further, the draft clarifies that this subsidy, benefit or service will be withdrawn only from the Consolidated Fund of India (CFI). This brings it within the purview of Article 110(1)(c) [withdrawal of money from CFI] or Article 110(1)(d) [appropriation of money out of the CFI]. Even if it was not clarified so explicitly, unilateral transfers (like subsidies and benefits) are covered within the Government's non-plan expenditure.

Since the Bill does not prescribe any subsidy, it may not fall squarely within clauses (c) or (d). But it definitely prescribes 'matter incidental to' withdrawal or appropriation of money from the CFI'. Under Article 110(1)(g), a money bill could comprise of provisions dealing `only' with matters incidental to clauses (a) to (f). Since most of Aadhar Bill provides for a mechanism to transfer subsidy, benefit or service from the CFI, it can be argued that this is `incidental' to withdrawal (clause c) or appropriation (clause d) of money from the CFI, which justifies a money bill.

An area where the Bill may have ventured beyond the scope of a money bill is disclosure of information in the interest of national security, in section 33(2). Can such a provision be inserted into a money bill? Article 110(1) states that a Bill shall be deemed to be a money bill if it contains `only' provisions dealing with subject matters within clauses (a) to (f) or any matter incidental to any of the matters specified in clauses (a) to (f). It could reasonably be argued that disclosure of information for national security is neither covered specifically, nor is it `incidental' to the objective of targeted delivery of subsidies, benefits or services from CFI. Avoiding this provision would have largely reduced the legal risk and criticism that the Government has been subjected to.


The authors are researchers at the National Institute of Public Finance and Policy.

Should a government subsidise the purchase of energy-efficient equipment?

Today the Financial Express has a story, where LED bulbs costing Rs.400 will be sold at Rs.10 with the government paying for the difference. Does this make sense? I think it does not, and that this situation calls for a lot more sophistication in thinking about public policy.

What's the market failure?

The first and obvious place where this spending program fails to make the grade is on the question of public goods. I get a gift of Rs.390 to have a LED bulb, I benefit. The bulb is a private good. A gift to people who buy LED bulbs is as wrong as government spending on other private goods. Just as we criticise a government which runs health clinics for perambulatory care, we should criticise the government when it gifts money to people for the folks who buy LED bulbs. This is just the faddish thinking of one bunch of hausfraus running policy versus another.

The guiding question, in all design of government, should be: What's the market failure? I am not able to see a market failure in the working of the market for LED bulbs.

Get the prices right

Some people in the field of energy have an almost moralistic perspective on energy efficiency. Higher energy efficiency is seen as a good thing, regardless of cost. This is the wrong way to think about it. Energy efficiency is just one part of economic efficiency. An LED lamp is a big up front payment and then a stream of gains in the future. Whether the LED lamp is worth putting in depends on (a) The magnitude of each gain (i.e. how much you use that lamp) and (b) The discount rate. If the interest rate is high, it will make sense to buy a Tungsten bulb instead.

To obtain efficiency in the field of energy we should think about three things:

1. The first is the question of pricing of energy. When energy is cheap, it will be squandered by consumers, and vice versa. Externalities should be priced in. The biggest externality that is not being priced in is carbon emissions. When we fix these mistakes, the price of energy will go up, which will encourage people to buy energy efficient equipment.
2. When a household chooses to get capital goods of more or less energy efficient equipment, the flip side of these decisions are the capital goods that will be invested upstream, in the large factories of the energy industry such as generation utilities or natural gas infrastructure. Optimality requires that society should solve that overall problem correctly, and the overall problem is the combination of energy production, energy transportation and the end-devices which use energy. It is not obvious that the greatest bang for the buck is always obtained at the device end.
3. For that overall problem to be solved correctly, consumers and energy companies should be hanging off a sensible financial system which shows interest rates to both which are internally consistent. The failures of the Bond-Currency-Derivatives Nexus in India hamper that. The interest rates seen by households (which determine their purchase of LED bulbs) are strange, and the interest rates seen by the energy industry are quite different and also strange.

The engineer in me marvels at LED lamps. I was thrilled when the 2014 Nobel Prize went to the geniuses who made blue LEDs; this is simply one of the great sagas of the 20th century. I have watched Shuji Nakamura ever since he moved to UCSB in 1999. But this `gee whiz' should not blind us on questions of public policy; we should be hard headed in how we thinking about what government does. Most of what government in India does is not the job of government; most of what government ought to do in India is not being done. The rocket science that we require in India is the great organising principle of the market economy -- the Bond-Currency-Derivatives Nexus.