Ep 9: Policy Mistakes We Can't Unsee

Watching the Wheels

The episode explores historical 'Policy WTFs'—government decisions that led to disastrous unintended consequences. The hosts analyze how pro

Key takeaways

• India's anti-dumping duties on PTA (2013) increased costs for polyester, undermining the textile sector and women's manufacturing jobs.
• The West Bengal Land Reforms Act 1950 allows neighbors to preempt land sales, creating 'dead capital' and market uncertainty.

Main topics

• Indian textile industry protectionism
• West Bengal land pre-emption laws

Notable quotes

Pro markets, good. Pro business, often bad, usually bad.

Conclusion

The episode serves as a cautionary tale about how state intervention a

Transcript preview

Speaker 3 (0:00) Do you own your own bodies? The state says no. Do you own your own land? The state still says no. Do you own your own money? Well, think again. The state says no. In this episode, we are going to talk about policy WTFs that will shock you, that will make you sad. But don't worry, we will make you happy. Watching the wheels. Speaker 3 (0:26) Welcome to Watching The Wheels. I'm Amit and these are my good friends Shruti and Pranay. And today is going to be a day of looking back at the past. Looking back at the past in a good way because we're going to talk about pleasant things right now immediately. But after this, it's more in the sense of cautionary tales and what not to do and some of it is pretty poignant and sad. But what is a good way that I mean? Well, you know, when I used to do my blog India Uncut in the auties, I used to have a section there which I love doing, which was called WTF. And I would pick crazy news from around the world and put them. And there were so many of them that I would actually do an annual roundup. Speaker 3 (1:03) Thank you. Speaker 3 (1:30) because he actually goes deep into policies and talks about the unintended consequences, what goes wrong, why the policy was mad to begin with. And then we thought, why not make it a section on the show? Now I will let you on into an inside secret. You are indeed privileged to learn this. When I suggested the idea for the show to Shruti and Pranay, I suggested we call it the sense makers, because in a sense, I think that's what people look for. to people like us to do, you know, make sense of the world to the best of our abilities. And therefore, because the show was going to be called Sensemakers, I said, why not have a section called Nonsensemakers? So which is exactly what WTF is in a sense, except in today's episode is not a separate section as such. Rather, we have collected almost the greatest hits right at the start, one policy WTF each, that's our main course for today. And then we have some fun sections. And we will indeed have an infinite game as well after that, where I feel I will be humiliated once again. But, you know, let us defer that by talking for as long as we can about WTF things. Speaker 3 (2:37) So Pradeh, on to you first to talk about your policy WTF of this week. But before you do that, a few words about how you started the section Memorable Moments. Is it difficult to find these every week? Just, you know, give us some gyan on that. Speaker 2 (2:49) No, it is never difficult to find these. You just have to read a week's newspaper. You will always find a few of them. So it's very easy to find. So actually what we thought is when we were writing RSJ and I, we often came across these. kind of egregious policies, right? And after a point of time, we thought, man, this is becoming a huge list. So why don't we compile it together? And in fact, in our book, Missing in Action, there were many of these also put together. So now it is, I think once a week, I definitely find one. And then it's just about finding the time to write about it and find better evidence, better examples. So it's quite fun. So what are we starting with today? Right. So as you can guess, I have more than 100 of them, but I have to constrain myself and talk about something which I wanted to. So I'm going to exclude all the big ones, okay, demonetization and things like that, which we have discussed before. And also the one which we should probably do in another episode, which is how minimum support prices led to Delhi pollution. Maybe we'll do that later. But one I wanted to talk about today is my favorite one from the last 10 years. So that is about how pro-business protectionism led to less employment opportunities for Indian women. So now let me explain what is the causality. So first thing we know that the largest. employer of women in India in the formal sector is the textile industry, right? So 46 % of all Indian women in manufacturing sector work are just in the apparel and textile sectors combined, right? So it's a huge employer. So the more the employment in this sector, it's a nice indicator for some of the questions we did in the episode one, which Shruti mentioned about where have all the women gone. Okay, so let's talk about this sector right now. And in this sector, what we've seen and we know many of our viewers will also know that India is not doing very well. And since 2011, in fact, India has been doing terribly in this sector. Our share of exports in the global market has gone down in this, whereas Bangladesh, Vietnam, etc. have become a lot better in this. So now the causality begins with this. Speaker 2 (5:24) textile which goes into the vest for export is not cotton. Cotton is what we use in our clients. In the West, it is mostly polyester and the synthetics. So the decline of India's textile sector is largely a decline of this polyester exports. So now why did polyesters decline since 2011, etc.? You can say Bangladesh gets preferential treatment in the European Union, but also there are other countries where India could have exported, but that has also not happened. So there is something definitely internal to India, which can explain at least some part of what has happened. So now let's go to this artificial fiber cloth, which we talked about as polyester. A key input of polyester is something called PTA, purified terephthalic acid. And it is a very important ingredient. It comprises nearly nearly 50 % of the input costs of this particular fiber, right? So in 2013, October, two major domestic PTA producers, they petitioned the government that, you know, let's put anti-dumping duties on imported PTA because this was largely coming from China. It was at much cheaper rates than what these two firms could produce. And the government said, yes. I will grant you this wish. We will put anti-dumping duties only for six months. Okay. Guess how long it stayed. It stayed for six years. They said it was only for six months. It stayed for six years. Then in 2018, you will remember there was this wave of Aakmanirbhar Bharat and the idea that we should be more Aakmanirbhar. So under that, it got worse, it worsened in 2018 and the government piled on additional import tariffs on PTA. So this happened over the last five, six years since 2013 and then in 2018. So the result was that a key input ingredient, which comprises 50 % of the value of the fiber, got expensive. That cascaded downstream into higher costs for fiber making, for apparel and In return, Indian products obviously got costlier. Right when Bangladesh's preferential treatments from EU were going on and Vietnam signed a bunch of FTAs with Australia, Canada, EU, it entered the RCEP. All these led to these two countries benefiting, whereas our decline in textile sector began that time. And thus. Over time, what has happened is this industry hasn't grown the way it should have gone to. And disproportionately, the effect of this would have been felt by women in the manufacturing sector. So this is a long connection. But the story doesn't get, it goes from bad to ugly. So there is something more which happens. What has happened as a result of this is firms which are vertically integrated, right, which their own domestic manufacturing of PTA, these two firms earlier. And they could convert the PTA into yarn and into apparel. They obviously benefited hugely because of this, right? So their market share domestically grew a lot more at the expense of people who were importing this and exporting outside. And because the costs of even these vertically integrated players are much higher because the PTA they are producing is at a much higher cost, they are able to corner the domestic market. they are not able to export. And that's the familiar tale we see with many Indian firms who are happy to corner a domestic market but not look outside. So this, I think, is a textbook policy WTF, which I think deserves a lot of mention. This comes, by the way, from a excellent paper by Abhishek Anand and Naveen Joseph Thomas called Reigniting the Man-Made Fiber Sector in India. It's Speaker 1 (9:33) a Speaker 2 (9:33) 2022 paper. So what do you guys have to think about this? Will it be in your Hall of Fame? Speaker 1 (9:42) I don't know about Hall of Fame, but I will start by saying none of this has surprised me, unfortunately. I don't know if this is because we study deregulation and regulation for a living, but why am I not surprised by any of it? Yeah. Hall of Fame, maybe in the sense of just how large the opportunity is. This is not a minor area, either in terms of, you know, its potential for growth or how large a percentage of consumption basket or production basket it is or the number of people it could employ. So it is like a WTF on every margin, just simply because of scale and potential scale for me. Speaker 2 (10:20) Yes. So it is not in the Hall of Fame. Definitely. It is in the Hall of Shame. And now, Shruti, what is your Hall of Shame policy WTF? Speaker 1 (10:30) Oh boy. Before that, before that, Speaker 2 (10:32) before that, Speaker 1 (10:32) before Speaker 3 (10:32) that, one second. Before that, I must interrupt and point out a terminological confusion that may arise for some people who don't understand how we use these terms. Pranay pointed out how all of this shit happened because of a pro-business measure. And I want to point out the difference between pro-business and pro-markets. People think, oh, pro-business is good for Speaker 2 (10:50) free markets, Speaker 3 (10:50) but no, it's exactly the opposite. You know, big business has interests which are contrary to free markets. When you think about what does a big business want? Now, let's say you're a big business, you have access to power, you can fund a politician's campaign, or you can find other ways to make the state do what you want. What are you going to do? You're going to restrict competition in your area. You know, you don't want free markets. Once you have acquired your position, your dream is a monopoly, but failing that you want to stop competition as much as possible, put barriers to entry. That's pro-business, it's anti-free markets. People often conflate these two. What is good for the established businessman is not necessarily good for markets. And this is what what we need to consider. It's a classic mistake. In fact, even Ram Guha made in his book, India after Gandhi, where he talks about the Bombay plan. And he says, look, all those industrialists wanted exactly the kind of state led, you know, economy that Nehru envisaged. So even they felt so I was like, of course, they will feel like that, because they are the entrenched people, they are being protected by this Fabian socialism. Ultimately, of course, you know, Nehru took over Air India from Tata and said, do not speak to me of profit, it is a dirty word. So just deserts for that poor man. But, you know, know, that's something you must always remember. Pro markets, good. Pro business, often bad, usually bad. Just look at the impact on markets. I'm sorry, important. I had to clarify that. Please continue. Speaker 1 (12:08) No, this is an incredibly important addition because you're right. The two things get keep getting conflated. And I'll add one more caveat. There's a difference between pro incumbent business. and even pro-business. What we typically tend to do in a lot of these is we are protecting one or two incumbents. We're not even protecting all potential businesses that currently exist or will exist, nor are we protecting foreign business. So it's not even a catch-all pro-business clause, which would be an improvement over what has actually happened in the example Pranay told us. Speaker 2 (12:42) Right. So Shruti, regale us with your policy WTF. Speaker 1 (12:47) Okay, so I'm going to start with a story and this is a real life story. Okay, so in 1979, there was a poor gentleman called Gopal Sardar. He bought a plot of land in West Bengal, unfortunate Speaker 2 (13:01) for him. Speaker 1 (13:02) And this also explains why we call him poor. Okay, he registered the deed. The sale was fine. There was no bad faith. There was no fraud that was alleged. Nothing went wrong. Six years after this event, after the sale, his neighbor Karuna Sardar went to court to take it from him. And her only claim was that she owned the plot next to him. Now, the reason why she could approach court was Section 8 of the West Bengal Land Reforms Act 1955 lets a neighbor, but it must be an adjoining neighbor, walk into a completed sale. deposit the price the buyer paid plus 10 % and have the court swap this pre-emptor as the new buyer in lieu of the old buyer. Okay, so this is called a right of pre-emption. The case, of course, ran through the lower courts and then Calcutta High Court and then the Supreme Court threw it out in 2004. Speaker 1 (14:02) The only reason the Supreme Court threw it out 25 years after a legitimate sale was because Karuna Sardar's claim came in, as they said, hopelessly barred by time. That is, she was six years late in filing her claim. Had she filed within four months of the sale, the law would have just handed her the plot instead of Gopal Sardar, though he followed all the rules. Speaker 2 (14:26) Okay, Speaker 1 (14:26) now what is this rule? This is section 8 of the West Bengal's Land Reforms Act 1955. This exists on the book today. So I wish I was discussing some cute historical what the fuck kind of situation. No, this is an everyday present day what the fuck that is going on. Okay, the rule in plain terms basically says or defines when and how an owner of a plot in West Bengal can have his sales secured and when it can be preempted and who can preempt it, right? So, if the rayyat of a property, that is the owner of a property decides to alienate the property, there are a few different people who can now come in and preempt that. The first is someone who has a co-share in the property. So, you know, we follow Hindu undivided property rules in terms of succession, customary law. Similarly, you know, for those who come from Islamic and other faiths. So if someone is a co-person or a first cousin and the land has not been alienated, they obviously have an interest in the same plot and they can preempt and say, hey, I'm a technically I have an interest in this piece of land and I was not consulted. So far, so good. Speaker 2 (15:38) Sorry, Shruti, what is land being alienated? Lands also have feelings? Speaker 1 (15:44) Oh, alienation of land simply means sale, gift, lease. That is, you are no longer the person who's operating the land. Sorry, this is a very specific legal term. Okay. Speaker 2 (15:56) But Speaker 1 (15:56) land, the way I would phrase it colloquially is land cannot afford to have feelings given what all trauma we have imposed on it. Maybe that's why land feels alienated as a factor of production because nobody cares about land. Speaker 3 (16:12) And we complain about the anthropomorphization of AI and look at you land having feelings. Speaker 1 (16:21) Come on, please. Speaker 2 (16:22) Where Speaker 1 (16:23) are your Indian sentiments? So the first kind of person who has a right of preemption is a, you know, sort of someone who has an interest in the same property or a co-sharer of the property. The second one is a bagidhar. And this is again defined in the statute. This is typically a sharecropper. who cultivated the owner or the rayyat's land under different kinds of sharecropping arrangements. There is Adhibhaga, there is Pura Bhaag, there are so many different versions. And the third is the rayyat or the owner of an adjoining or neighbouring plot. So now, let's say that Amit and Pranay are neighbours. Pranay decides to sell his land to me. Within a four month period, Amit can come in and preempt the sale as long as he offers the sale value that I offered Pranay plus 10 % on top of that. So 110 % of whatever, you know, I offered. That's the general rule. Now, when does the Supreme Court actually throw this stuff out as in the case of Gopal Sartar? Very rarely. it usually enforces the rule. So there are very few situations where the Supreme Court or the high courts don't enforce the rule. So the first is, of course, statute of limitations, which is what happened in this case. If they don't adhere to the four month time period, then immediately, you know, the case can get thrown out. Six years and stuff is just too long. Right. So that's part one. The second is if there is someone who is a co-sharer, like a co-parsener or a sharecropper who didn't get notice of the sale. OK, but in the case of a next door neighbor like Amit and Pranay, you don't need to give them notice. The next door neighbor does not require specific notice of the sale. So this is another instance in which they might throw them out. The third is the money. It can't be that Amit thinks whatever is appropriate for the purchase price of the land plus 10%. He actually has to offer whatever was offered by me plus 10%. Can you imagine all this has gone to court? Okay. Now, this is a very big problem because you already know how difficult land markets are to navigate in India. How impossible it is to buy and sell land. After a legitimate sale is completed in good faith and everyone has signed the deed, you can still have someone come in from the outside and say, you know, this sale is not valid. And what that does, I mean, the consequences are so clear. It creates so much uncertainty. And the one area you don't want uncertainty is sale and purchase of land. So it throws everything into question. So typical, you know, market response to this is there are just fewer land sales. right and the other consequence of this is people who want to do this in good faith just incur so many higher costs now if you notice before someone is willing to buy land in west bengal they want a no objection certificate from everyone and the dog and the cat and the cow standing outside like this has become this no objection certificate thing has become a a separate cottage industry because there are these crazy rights of preemption that have come in and god forbid You actually have a valid sale of land and it does go to court. You're stuck there for 25 years. So Gopal Sardar owned a piece of property for 25 years that was under litigation that he could not convert to another use, that he could not lease to anyone, that he could not further sell because he had this nightmarish neighbor who took him to court for 25 years. And these are tiny bits of property, right? So now why does this actually, you know, why did this... any of this come about, right? The reason this came about is some very, very old law. This is because there used to be fire sales that happened in, you know, old colonial times, where a raiyat or a sharecropper or someone fell upon bad times, and then suddenly there was a fire sale, right? Part two of it was that sometimes you were a raiyat or a sharecropper in a particular or under a particular zameendari and someone outside that zameendari comes in and purchases that land to expand their own footprint or something like that. So these were the reasons that the original law was even debated. And I think this whole craziness started in 1855. you know, if I'm not wrong. So that's when it all begins. And they start debating whether this is a good idea or not. So this is a Bengal Tenancy Act of 1885 when it was drafted, okay. Then there was, you know, they decided at that time that this is going to create a lot of, you know, free sales and tenant holdings that will just directly move to certain kinds of money lenders and things like that. And then the Secretary of State said that we will have one right of preemption, which is the landlord's right of preemption. Okay. So in 1928, this amendment comes in, tenants can sell freely, but the landlord, you know, gets involved, there are some rules brought in of the kind of transfer fee, the transfer fee has to be five times the amount of annual rent, blah, blah, blah. The trouble is everyone underreported the rents and payments because of taxes. So this again caused a secondary problem of valuation of land. Then in 1938, this transfer fee was abolished. The landlord lost this preemption right completely. And the legislature just handed this right to the co-owners. Now in 1955, finally, we're in the post-colonial period. The Act in West Bengal added a neighbour to justify consolidation of small holdings. And this is so insane because they spent the previous decade from 1945 to 1955 doing land reform to reduce concentration of landholding. So now they bring this back, right? And since 1955, this crazy rule has existed. The sharecropper was added in 1981, right? So these amendments are just causing havoc. Now, why am I looking at one? particular statute in a law that runs into many, many dozens of pages, because this is the what the fuck nature of Indian policy, right? It starts out as who could possibly be against land reforms, right? We are, I mean, I run the 1991 project, I like reforms, right? So it starts with something benign like that at the top policy level. Then it's like, oh, who could be against land consolidation? Don't you want people in a