Irreversible policies

Some policies are so badly designed that they become irreversible. Take, for example, the “5/20″ rules for airlines in India. For an airline registered in India to fly abroad, it needs to have been in operation for 5 years and have at least 20 aircraft. The rule is silly, and the government wants to change it. But established players say that changing the rule will be unfair to them, for they have sunk costs in order to comply with the rule and want newer competitors to go through the same.

Now, given that the airline industry is dynamic in terms of firms going in and out of business, there will always be new firms and old firms in the market. And given that the rule is fundamentally senseless, there will be proposals to change it at many points in time. Now, notice that the arguments that today’s established players are making can be made at all those points in time! In other words, if you were to postpone changing the rule because older airlines are going  to be unhappy, you are giving reason to postpone the rule change indefinitely!

When you design a policy, you should keep in mind that there is a chance that changed market environments might render it useless/absurd (as for the 5/20 rule, it was absurd from inception!). Hence, you need to consider how easy the rule is going to be to dismantle when it goes past its use-by date. If such a “poison pill clause” doesn’t exist in the rule, then it will be very difficult to undo and the absurdity will propagate into perpetuity, causing much more damage than necessary!

Then again, if the rule has been framed due to the influence of bootleggers (the 5/20 rule definitely has indications of that, and it is hard to identify any “baptists” who could have backed the rule), then the bootleggers are likely to prevent any such “poison pill clause” from being put in. Such are life.

How “non-vegetarian” is India?

Last week, after Master Chef India announced that the next season is going to be all-vegetarian, there was considerable outrage on social media. Most of the outrage contended that this was a result of the Hindu right dominating the narrative, and quoted studies that said that over 80% of India eats meat. It didn’t help that sponsors of Masterchef this season are Amul (the milk cooperative) and the Adani group, which is known to be close to the Prime Minister.

In this context, this chart from the Washington Post is quite instructive. The chart indicates the per capita per year consumption of various meats across different countries. It takes a lot of effort to find India in this chart, since it is almost non-existent. This chart shows how little meat per capita is actually consumed in India.

source: http://www.washingtonpost.com/blogs/wonkblog/wp/2014/07/14/the-coming-global-domination-of-chicken/

While it might be true that 80% of India’s population is not averse to eating meat, the actual fact on the ground is that very little meat is actually consumed. Which makes is okay to term India as a largely vegetarian country.

Whether that should necessitate a vegetarian-only cookery show on TV, though, is another matter and one that this blog has no opinion on.

Comparing Airline Pricing across countries

The WSJ reports, based on a survey, that airline prices are cheapest in India (HT: Nitin Pai). They evaluate the cost of flying in terms of cost per 100 km. The usual ridiculous comparisons that go with any such article are present in full here – they compare the per kilometer cost of flying to train and bus fares, and conclude that flying is cheapest (this reminds me of an equally ridiculous report in the Times of India which showed that the cost of India’s Mars mission was less than that of taking a bus in Mumbai).

A few thoughts on this report by the WSJ:

  • Per km is a wrong way at looking at air fares. In most markets (from my experience pricing air tickets and cargo), fares are set based on competition and to fill capacity. Notice that marginal cost of a passenger is really really low, so once a flight is in place airlines will do what they can to maximize their revenues from that.
  • Taking this forward air fares depend on the competition in a particular sector (btw, the way airlines price it, Bangalore-Barcelona is one sector, and the price of that doesn’t depend on the Bangalore-Frankfurt and Frankfurt-Barcelona prices. These are three independent markets and triangle inequality doesn’t necessarily hold. Just FYI). So going by the report, India has a lot more competition compared to other countries in most sectors.
  • Now think of other large countries (you need big area for flights to make sense) and think of their income levels compared to India. Only developed countries and other BRICS come to mind. All of them have a higher willingness to pay than India.
  • Airline prices are thus a function of simple (elastic) demand and (inelastic – flight schedules are announced by “season”) supply. So once in a season we have a lot of flights scheduled, competitive forces push prices down
  • Given that it’s demand and supply that determines airline prices and not costs, in my opinion the airline industry goes through cycles. You have lots of competing airlines. Prices are low and they lose money. In the course of time one or two go out of business or scale down, and that leads to increased prices. Airlines make money for a while, and then looking at the supernormal profits you have new entrants and so on. India right now is going through the phase where you aer getting more investors (Air Asia, Air Costa, Tata-SIA, etc.). That depresses prices. In a year or so I would think someone like SpiceJet will go out of business and that might push fares up for a while.
  • There’s also the seasonality factor – based on regular travel to Bombay over the last two years I’ve found that fares in the monsoon months are half of the fares at any other point in the year. It’s a function of demand, again (Indian seasons don’t exactly tally with international seasons according to which schedules are made, so this results in flawed matching)! Given the timing of the piece it is possible that Indian fares in the monsoon months have been sampled.

 

Dictatorships and primaries

In their excellent book “the dictator’s handbook” Bruno bueno de Mesquita and Alastair smith talk about why dictatorships usually put on a garb of democracy and hold (mostly) sham elections.

According to bueno de Mesquita and smith the reason is not to appear good in front of the international community, as the general discourse goes. Dictators are extremely rational actors, they say, and reputation in the international community didn’t usually give enough benefit to compensate for the cost of the garb of democracy and elections.

Instead, bueno de Mesquita and smith say that the real purpose of the elections is to keep followers in check. If a member of the dictator’s team “misbehaves” for example, getting rid of him is normally a difficult process. Essentially sacking is a hard job for anyone, even for hard nosed dictators. In the context of dictatorships sackings can get controversial and often bloody and is not a particularly pleasant process.

By putting in a garb of democracy, however, there is an easy way to sack an official. Assuming that in a dictatorship most citizens vote according to the fancies of the dictator, all a dictator needs to do to sack an official is to instruct the electorate to vote against the official the next time he is up for reelection. The sacking having been effected by “popular mandate”, the process is easier and likely to be less bloody and troublesome for the dictator.

Now, the question is if we can use this framework to understand the new US-style primary elections that the Indian national congress has been using for candidate selection in some constituencies in the forthcoming elections.

Normally in the congress, like in most other parties in India, candidates for elections are determined top-down, by the party “high command”. The risk with this however is that candidates who did not get a ticket to contest the elections know that for whatever reason the party high command is not in favour of them contesting. This can lead to disillusionment and can lead to defections to rival parties.

In this context a primary election acts as a facade through which the party high command can get its choice of candidates without pissing off those applicants who did not get the ticket. Now the purported message to these unsuccessful applicants is that the next time they should work of getting the support of the party rank and file in their constituency.

In reality however, with the party being high command driven, the rank and file has voted as per the instructions of the high command! The high command thus gets its choice of candidates without losing the support of the unsuccessful candidates.

So why is it that primaries work in the US? For the same reasons that elections work in democracies! In the US parties are truly democratic and organised bottom up. There is no high command there to (credibly) dictate the choices for the rank and file. So the results of the primaries are truly reflective of the opinion of the party rank and file.

In conclusion, given the high command based structure of political parties in India, primaries will not work. Instead they will only end up as instruments in the hands of the party high commands, just like the sham elections on dictatorships.

Narendra Modi should short the Nifty

The common discourse is that businesses like Gujarat chief minister Narendra Modi, and that India’s economic growth would get back on track if he were to become PM following the elections this summer. For example, this view was articulated well by my Takshashila colleague V Anantha Nageswaran in an Op-Ed he wrote for Mint last Tuesday, where he spoke of a “binary outlook for India” – either economic growth under Modi or further populism and stagnation under a Third Front.

Based on this view being the consensus, one can expect that the Indian stock market would go up significantly in case of a Narendra Modi victory, and would tank in case the Modi (and/or his party BJP) ends up doing badly. So what should Modi do?

He should short the stock markets, and fast. He needs money to run his campaigns, and he might be taking funds from friends and well-wishers, who expect some kind of payback in kind if/when Modi becomes PM. The question, however, is how he will pay them back in case he fails to become PM!

He will not have the power to pay back in kind. There is only so much he will be able to do as the Chief Minister of Gujarat. And given that he has got a lot of fair weather friends over the last couple of years, some of them might be disappointed that he didn’t become PM, and will ask for immediate payment. So how does Modi service these debts?

A part of his campaign budget should go into shorting the Nifty – perhaps by means of buying puts (with a May expiry – not sure they’re traded yet). This way, in case of his victory, he will end up losing his premium, but he will be able to pay back his creditors in kind, since he will be PM. In case he loses? The markets will tank anyway, and he will end up making a packet on these puts, which can then be used to pay back his current well=wishers!

Easy, no?

The Congress Party is a bubble

I think the congress party is a bubble. From what I’ve observed of the party in the last 10-15 years, they have no real ideology other than “loyalty to the Nehru-Gandhi family”. In other words, they have grown and flourished significantly without having any strong fundamentals. Which means they are in a bubble.

Let’s say you are a congressman and for whatever reason you were pissed off with Rahul Gandhi following his interview with Arnab Goswami on Monday. Now, because the uniting ideology in the party is “devotion to the family”, you cannot come out in criticism of the family or one of its members. If you do, you get hounded by other Congressmen, whose loyalty to the party is chiefly due to loyalty to the family.

Now, imagine a large number of congressmen think thus. If they had a way to communicate to each other about their displeasure with the family, they would come together and raise a no confidence motion against the party leadership. However, the problem is that no Congressman wants to let it be known in the party that he doesn’t like the family, for he can be accused of betrayal and removed from the party. Hence he keeps his thoughts to himself. That he keeps his thoughts to himself means that other congressmen who feel the same way also keep their similar thoughts to themselves, and the general discourse is that all congressmen are loyal to the family.

So why is “the family” is so powerful in the Congress? The answer is that the family is powerful because Congressmen think the family is powerful. A congressman thinks that his career in the party will be furthered if he is seen as being loyal to the family. So irrespective of his opinion, he puts up a facade of being loyal, and that increases the value of being loyal to the family!

A commodity is said to be in a bubble if its price is being driven up solely because other players in the market think that its price is going to be driven up, without the fundamentals being in favour of an increase in prices. You can think of “the family” of the Congress as one such commodity. Congressmen like to praise the family (i.e. go long the commodity) because they think everyone else in the Congress is doing the same, and thus the “price” is going to increase.  You can see the cycle of positive reinforcement that is at play here.

Like all bubbles, the Congress Party bubble is also bound to burst. And like other burst bubbles, this one is likely to end badly for the party – a split in the party cannot be ruled out in the period immediately after the bubble is burst.

The problem with bubbles, however, is that you don’t know when it will burst – anyone who can predict when a bubble can burst would be an extremely rich person. And you don’t want to be shorting a stock thinking the bubble might burst, only for the bubble to continue. And so you continue to dance, for the music is still playing.

Drivers in India

One of the recent data sets in data.gov.in is the number of driving licenses issued in different states of India until March 2012. Based on that, it is interesting to see which states have more drivers. The first chart here shows the proportion of population of each state that has a driving license (states for which data is unavailable have been left out). Note that this proportion is an overestimate since the number of licenses given includes people who have subsequently died, and thus not been counted in the state’s population as of 2011. Nevertheless, as a relative measure, this is useful:

dl

 

Notice that the highest numbers are in Goa, Tamil Nadu and Maharashtra, all of them among the more prosperous states. States at the bottom include Assam, Uttarakhand and Jammu and Kashmir. The latter two are extremely hilly, thus discouraging driving. Nevertheless it would be an interesting correlation between proportion of drivers in a state and its per capita GSDP. Which is what we do next:

dlgsdp

 

We see that apart from Delhi (where presumably a large portion of the population gets its licenses from other states?) and Sikkim (a hilly area where not too many are expected to drive), there is a strong correlation between the proportion of drivers and the per capita GSDP!

Finally, what proportion of drivers in each state are women? The following graph shows that:

dlwomen

 

Manipur, where over 30% of licenses have been handed out to women, stands way ahead of other states. The other state that stands out is Andhra Pradesh, where a measly 1.5% of driving licenses belong to women. Contrast this with neighbouring states such as Odisha (12%), Karnataka (15%) and Tamil Nadu (8%)!