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Tuesday, July 17, 2018

Building State capacity for regulation in India

by Shubho Roy, Ajay Shah, B. N. Srikrishna, Somasekhar Sundaresan.

When India embarked on market oriented reforms in 1991, there was a desire to break with central planning; with detailed government control of entry barriers, product design and processes within firms. This is not synonymous with deregulation: there are market failures in many industries that require addressing. This led to the establishment of regulators. While the Reserve Bank of India has existed since 1934, there was a wave of establishment of new regulators after SEBI was created in 1988.

Regulators were to have legislative powers, to write subordinate legislation which would embed intricate knowledge and change rapidly with the evolution of fast-paced private industries. They were intended to have executive power in licensing and investigations. They were designed to shield transactions (licensing, investigation) from political interference. They were expected to achieve greater State capacity when compared with departments of government improving upon processes such as human resource policies.

The early optimism about shifting from central control to specialised regulators has given way to concerns about the working of regulators. Regulators have also been plagued by poor State capacity.

Regulators have too often veered into controlling as opposed to regulating, with creation of entry barriers and micro-management through regulations. Firms and groups of firms actively seek to co-opt regulators in their business objectives, which has given a return to the political economy of central planning. Entry barriers have sprung up with irrational and arbitrary decisions in licensing. Enforcement of regulations, and substantive law making, is selective and weak. This has induced large costs upon the economy. There is arbitrary power to initiate investigations and punish, and a climate of fear where private persons are afraid to criticise regulators. India of 2018 is uncomfortably similar to the India of 1991.

It is hence important to review the Indian experience, diagnose the sources of failure of existing regulators, and envision how high performance regulators can be obtained. We have a new paper, which is forthcoming in Regulation in India: Design, Capacity, Performance, edited by Devesh Kapur and Madhav Khosla, Oxford: Hart Publishing, 2019 (forthcoming). This article summarises and introduces this new paper.

There are two blind alleys in the quest for State capacity in regulators. It is possible to focus on one episode of a mistake by a regulator, and undertake analysis and advocacy about solving this problem. While a great deal of knowledge can be produced through case studies of failure, it is important to go upstream, to ask questions of incentives and information that lie at the source of repeated regulatory failure.

The second non-solution is a focus on personalities. When institutions are weak, the character of the institution is determined by its staffing. There is, then, a clamour to recruit great men, and then give them all power to do as they like (i.e. extreme regulatory independence). It is important to look deeper, to build institutions that have impersonal capability. For any change to be more than skin deep, it cannot be an idea in the minds of certain individuals; it has to be about the formal structures of governance, accountability, and processes.

Conversely, individuals working in regulators sometimes take criticism personally. However, the failures of an organisation are primarily induced by the design of the organisation. The same individuals would deliver superior outcomes if placed in a better designed organisation.

The focus must be on the incentives of the individuals who man the regulator. If regulators are merely given arbitrary power, public choice theory and the Indian experience shows that this power will be used poorly. What is required is systems of accountability, and checks and balances, through which the individuals working inside regulators have incentives to do the right things. This requires seven elements.

Clarity of purpose. Accountability for an organisation requires clarity on its goals. Every regulatory organisation must have a compact and clearly understood objective. Sprawling mandates, and particularly conflicting mandates, yield poor performance.

Role and composition of the board. The board must be dominated by non-executive members, through which the board can play the role of the Principal vis-a-vis the management which is the Agent. The board must control the organisation design, including organisation diagram, internal process manuals and the budget process. The board must control the legislative function.

Legislative process. When Parliament places law-making power upon unelected officials in a regulator, this calls for commensurate checks and balances in the process of regulation-making. The regulation-making process must start from the board. The staff must document the problem that is sought to be solved, the proposed intervention, and conduct a cost-benefit analysis. This packet must be put out for public comment. After this, the staff must address the public comments on the draft and make appropriate modifications to the draft regulation, and bring the draft back to the board for a discussion. Finally, only the board should have the power to issue a regulation.

Executive process. Sound processes are required in licensing and investigations, which protect citizens from arbitrary power. The non-award of a license causes harm for the applicant, and should use processes similar to those employed when punishing a citizen.

Judicial process An administrative law department should contain administrative law officers, who play no role in legislative or executive functions. This would yield an element of separation of powers. A hearing must take place before an administrative law officer, where the prosecution leads an argument and the defendant is given an opportunity to argue her case. This should lead to the drafting of a reasoned order as a structured document which shows the state of law, the facts of this case, demonstrates that law has been violated, or explain why this conclusion cannot be reached, and uses proper reasoning to determine the penalty. Orders should be published. There should be the possibility of efficacious appeal at a court or tribunal against the order. These three stages of due process (internally, at the administrative law officer, and externally, through publishing orders and at the appeal) create pressure upon the investigation and prosecution staff of regulator to produce high quality work, and protect citizens from arbitrary power.

Reporting and accountability. Regulators should be obliged to release statistical details about their functioning. Reporting should not concern the broader economic environment, e.g. the fluctuations of the stock market index, but should focus upon the actual work of the regulator, e.g. the win rate at the tribunal when orders are appealed. High quality reporting of all aspects of the working of the regulator will create the pressure of accountability, and feed into the budget process where targets can be set and incremental resources allocated in a way that pursues those targets.

The role of the department. Alongside the creation of well structured regulators, there is a need to clarify the role of the department of government, and create capacity in the functions that the department has to discharge.

These seven elements need to be coded into the Parliamentary law. This can be done at the level of one sector (e.g. the draft Indian Financial Code that envisages a single good governance framework for all financial regulators) or for all regulators in the Union government, as was done in the US by the Federal Administrative Procedures Act in 1946.

When compared with these seven elements of the design of a regulator which foster high performance, the present Indian landscape contains large gaps. The regulators of today are defined by skimpy laws, which give arbitrary power to the management, and lack a Principal-Agent perspective upon the working of the regulator. The present legislative framework is grounded in the notion that regulators are good people and will work towards the welfare of the people. This creates poor incentives for good behaviour by regulatory officials.

The FSLRC, chaired by one of us (Justice Srikrishna) drafted the Indian Financial Code, from 2011 to 2015. This draft law embeds the key ideas of this paper. Across the Indian landscape, many experiments are now taking place in building State capacity in regulators. This paper provides a conceptual framework, and 140 sections in the draft Indian Financial Code provides the draft law, for this journey.

Thursday, July 12, 2018

Interesting readings

Three reforms that marked C.S. Rao's Irdai term by Deepti Bhaskaran in Mint, July 10, 2018.

Economic preferences across states in India by Anirudh Tagat in Mint, July 10, 2018.

Project Sashakt: Several steps backward by Debashis Basu in Business Standard, July 9, 2018.

Formalisation of the economy is a form of coercion by Shruti Rajagopalan in Mint, July 9, 2018.

Will Trump Be Meeting With His Counterpart - Or His Handler? by Jonathan Chait in New York Magzine, July 8, 2018.

In Memoriam Peter Christoffersen by Francis X. Diebold in Francis Diebold's Blog, July 5, 2018.

Why Sebi's 'advice' to ICICI Prudential AMC is troubling by Mobis Philipose in Mint, July 5, 2018.

Informational Autocrats by Sergei M. Guriev and Daniel Treisman in SSRN, July 5, 2018.

A little bit of IDBI Bank in my LIC policy by Monika Halan in Mint, July 4, 2018.

The great firewall of China: Xi Jinping's internet shutdown by Elizabeth C Economy in The Guardian, June 29, 2018.

The study of India in the US, by Devesh Kapur, June 29, 2018. Also see.

Photo Finish on Futility Closet., June 19, 2018.

Swachh Bharat Mission: A remarkable transformation by Sudipto Mundle in Mint, June 14, 2018.

OpenStreetMap Should Be a Priority for the Open Source Community by Glyn Moody in Linux Journal, June 11, 2018. Also see.

The right age for leadership roles: How Old Are Successful Tech Entrepreneurs? by Pierre Azoulay, Benjamin F. Jones, J. Daniel Kim and Javier Miranda in Kellogg Insight, May 15, 2018.

Why replacing politicians with experts is a reckless idea by David Runciman in The Guardian, May 1, 2018.

Media censorship and stock price: Evidence from the foreign share discount in China by Rong Ding, Wenxuan Hou, Yue (Lucy)Liu and John Ziyang Zhang in Journal of International Financial Markets, Institutions and Money, March, 2018.

Persuasive Language for Language Security: Making the case for software safety by Mike Walker.

The worrying rise of militarisation in India's Central Armed Police Forces by Devesh Kapur in The Print, November 29, 2017.

The Wooden Firehouse by Andrew Myers on Wordpress, June 17, 2015.

Saturday, July 07, 2018

Sequencing issues in building jurisprudence: the problems of large bankruptcy cases

by Ajay Shah.

Sequencing in the construction of State capacity in the bankruptcy process: an abstract argument


A big idea in the field of State capacity is that of learning to do simple things before doing difficult ones. Applying this wisdom, in the early days of the Indian bankruptcy reform, it made sense to bring smaller cases into the fledgling process. At an early stage, bringing 12 big cases was problematic.

This is based on a relatively abstract argument:

The stakes are highest with big bankruptcies. The persons who face large losses owing to the working of the bankruptcy process will hire high powered legal teams, and spend money on all means fair and foul, to push the loss to someone else.

A tangible argument


Josh Felman has a tangible argument of how things go wrong when large cases are brought to a fledgling bankruptcy process.

Sophisticated thinking about procedural law is based on thinking about the overall system of incentives, and the overall outcomes, that flow from a certain element of law. The danger lies in looking at an individual case and trying to do justice. Doing justice in an individual case may often harm justice on a larger scale.

The most important innovation in IBC was the 180 day limit for the Committee of Creditors (CoC). If they are not able to make up their minds within 180 days, the company goes into liquidation. Given the difficulties of banking regulation in India, banks have an incentive to delay matters indefinitely, and claim that an asset is worth Rs.100 when in fact it is worth Rs.40. The threat of value destruction in liquidation within six months (where the realisation will be Rs.20) solves the wrong incentives of poorly regulated and poorly governed Indian financial firms.

For this to work, we must have sanctity of process. A default takes place, the CoC is setup, it has 180 days to make a decision, and then the firm goes into liquidation. There should be no possibility of reopening the matter at a later stage.

In any individual case, it may be the case that there are gains from delay, or from reopening the matter after the CoC has made a decision. This may result in increased value realisation in the small (in the one case that we are looking at). But it harms the performance of the bankruptcy process in the large.

Consider the problem of reopening the CoC process after a decision has been made. Once the NCLT makes it known that it is open to such possibilities, it is efficient for a bidder to not participate in the insolvency resolution process (IRP), see the outcome there (e.g. Rs.40) and then go to NCLT promising Rs.41. This would harm the incentives of anyone to participate in the IRP.

What will happen when such situations arise in front of the judge? Suppose there is a Rs.10 million case, where sacrificing the process yields a value gain of Rs.1 million. In this case, it's easier for a judge to be more intellectual, to say that it is a small cost of Rs.1 million for one person in front of him versus the larger gains to society from sanctity of the process.

But if there is a Rs.1 trillion case, the judge will find it harder to be intellectual. She is more likely to be swayed by an attempt at subverting the process in return for a value gain of Rs.0.1 trillion. Once a few cases shape up like this, in favour of justice and not the rule of law, the body of law will be contaminated.

Conclusion


The right way to build State capacity for the bankruptcy reform is to first bring a large number of small cases to judges. At the time, judges are themselves new to this field. A few small mistakes will be made, but jurisprudence is more likely to build up in the right direction: to look for the performance of the overall bankruptcy process rather than to do justice for one plaintiff. This jurisprudence will value the rule of law, and the sanctity of process, over immediate notions of justice. It will induce justice in the large by sometimes sacrificing justice in the small.

If, on the other hand, at a fledgling stage, a large transaction of Rs.1 trillion is brought in front of a judge. This judge is herself relatively unsure about the ideas of the bankruptcy process, and is not adequately guided by prevailing jurisprudence. In this case, the judge is more likely to succumb to the temptation of doing justice in the small, even if this does harm to the rule of law. This will harm the sanctity of process, and contaminate the working of the bankruptcy process.

Wednesday, June 20, 2018

The LTCG tax will increase the cost of investment in India, but not by much

by Gaurav S. Ghosh.

Section 33 is one of the more talked-about provisions of the Finance Act, 2018. This is the section that reintroduces a tax on long-term capital gains (“LTCG”), where the LTCG arises from the transfer of “an equity share in a company or a unit of an equity-oriented fund or a unit of a business unit” (Ministry of Law and Justice, 2018). Under the new law, a tax of ten percent will be liable on all LTCG exceeding INR one lakh, where the LTCG arises from the sale of assets described above held for over a year (Income Tax Department, 2018).

The LTCG tax has come in for scrutiny and criticism in the financial press. Some commentators have predicted negative consequences for small investors (Arora, 2018; Sampath & Thomas, 2018). Others have noted that the tax will lead to double taxation because some securities transactions will bear both the LTCG tax and the already existing securities transaction tax (Sampath & Thomas, 2018; Business Today, 2018). Yet others have pointed out that there is a lack of clarity about the application of the LTCG tax to specific transaction types, including share inheritances, mergers, and initial public offerings (Upadhyay, 2018). The central government has defended the tax by pointing out that it reduces distortions in investment incentives by reducing discrepancies in tax rates across asset classes (The Hindu, 2018; The Telegraph, 2018).

The opinions have been manifold and heterogenous but have been, in the end, no matter how well reasoned, only opinions. There has been a shortage of quantitative economic analysis of the LTCG and its effect on the Indian economy. In this article, we address this gap by presenting our estimates of the impact of the LTCG on the cost of investment in the main sectors of the Indian economy and at the all-India level.

Intuitively, one would expect the LTCG tax to increase the cost of investment since it increases the hurdle rate – the minimum return that an investment project must earn for financial viability – of a project. Consider a simple example where an investment project is financed only by equity and dividends are not distributed. Suppose the investors expect a 7.0 percent post-tax return from the project. Before the LTCG tax, the project would be feasible if it had a pre-tax return of 7.0 percent. Under the LTCG tax, the project feasibility would require a pre-tax return of at least 7.7 percent: 7.0 percent for the investor as capital gains and 0.7 percent for the government as the LTCG tax. The LTCG tax has thus increased the project’s hurdle rate from 7.0 percent to 7.7 percent.

In the example above, the cost of investment increased by the full extent of the LTCG tax. This is not true for a real-world investment whose tax cost is a function of all the taxes associated with the investment, macroeconomic conditions, and the structure of the investment itself. Apart from the LTCG tax, other taxes affecting the investment cost are the corporate income tax and indirect taxes. There are also tax incentives, which may be asset- and sector-specific, that reduce the tax cost of investment. The investment will have a particular distribution of assets – some investments require more transportation assets, others more machinery assets – and this structure too affects the tax cost of investment. This is because each asset has a different tax treatment: if highly taxed assets are a major cost of investment, then the tax cost will be high and vice versa. And macroeconomic conditions like inflation affect the value of benefits like depreciation allowances, and therefore affect the tax cost of investment.

Given the complex relationships that define the tax cost of investment, it is not feasible to predict with certainty what the relationship between the LTCG tax and the cost of investment might be. But two hypotheses might be formulated on the basis of the discussion above. First, the LTCG tax will increase the tax cost of investment; after all, it does increase the cost of project finance. Second, the impact of the LTCG tax will be minor; considering the wide array of factors affecting the tax cost.

Measuring the tax cost of investment requires an adequate modelling framework. The framework should at least have the three following characteristics. First, it should be flexible enough to model the impacts of all taxes and tax incentives on the cost of investment. Second, the model should be well targeted, i.e. it should measure the tax impact on investment, but not non-investment activities. Finally, the model should allow aggregation, such that firm-level data can be used to estimate tax costs at the sectoral or national levels.

One model that meets these criteria is used to measure Marginal Effective Tax Rates (“METRs”). This model uses firm-level and macroeconomic data to estimate the tax wedge on investment, the difference between the pre-tax and post-tax rates of return earned by a marginal investment project. By construction, the METR model only focuses on marginal investment to the exclusion of other aspects of a firm’s business. The METR itself is a function of all taxes and tax incentives levied. These include direct taxes on businesses and investors, indirect taxes on capital purchases, and incentives like accelerated depreciation and tax credits. And the model allows for aggregation from firm-level METRs right up to one national level number.

We have estimated the tax cost of investment using the METR model, which we have developed for India and discussed earlier on this website (see Ghosh & Mintz (2017)). Specifically, we have estimated the tax cost of investment before and after the implementation of the LTCG tax. A comparison of the before and after values provides an estimate of the impact of the LTCG tax on the tax cost of investment.

Figure 1: METRs before and after implementation of the LTCG tax

Source: Own calculations

METRs in the main sectors of the Indian economy and at the overall all-India level are shown in Figure 1. These sectors together comprised 96.5 percent of all investment in the Indian economy in FY2015-16 (Prowess, 2018). Each sector in Figure 1 has three data points. The left-hand column is the METR before the LTCG tax was reinstated, i.e. LTCG tax rate = 0.0 percent. The right-hand column is the METR after the LTCG tax was reinstated, i.e. LTCG tax rate = 10.0 percent. The line shows the change in the METR after the imposition of the LTCG tax.

The results indicate that the LTCG tax has increased the tax cost of investment – as measured by METRs – in all sectors of the Indian economy. The only exception is the agriculture sector, which is the beneficiary of multitudinous direct and indirect tax exceptions. These combine to ensure that the LTCG tax has no effect on the agriculture METR.

Overall, at the all-India level, the METR has increased from a pre-LTCG-tax value of 20.3 percent to a post-LTCG-tax value 21.1 percent: implementing an LTCG tax of 10.0 percent has yielded a 3.9 percent increase in the METR. This is equivalent to an elasticity of 0.03 in the neighbourhood of the LTCG tax rate. One may infer that the METR is barely sensitive to the LTCG tax rate.

The minimal response of the METR to the LTCG tax is confirmed by the result in Figure 2, where a METRs are plotted for a sequence of the LTCG tax rates. Increasing the LTCG rate from zero to 20.0 percent only increases the METR from 20.3 percent to 21.9 percent, an increase of 8.1 percent. The relationship between the LTCG tax and the METR is roughly linear (the relationship is slightly convex, but this is not very evident in Figure 2).

Figure 2: Relationship between the METR and the LTCG tax

Source: Own calculations

Coming back to Figure 1, we see heterogeneity in the METR change at the sectoral level where – not counting agriculture – the change in METRs range from 1.8 percent in the “other” sector to 7.8 percent in manufacturing. The largest [smallest] METR changes are in the sectors with the lowest [highest] METRs. In other words, the LTCG tax has the greatest [smallest] impact on METRs in sectors where investment is least [most] burdened by taxes. The sectors most affected by the LTCG are manufacturing and transportation, which have the lowest METRs. Manufacturing has a low METR because of generous tax depreciation allowances on machinery. The low METRs for the transportation sector depend on firms charging GST under the forward charge mechanism. If the reverse charge mechanism were used, then the METR is much higher because of significant blocked input tax credits. The least affected sectors – “other” and finance” – are also those with the highest METRs. These sectors suffer high METRs because of adverse asset compositions. Overall, it seems that the LTCG tax reduces tax load discrepancies across sectors by a small amount, and thereby contributes marginally to a levelling of the playing field for investment.

In summary, the following can be said about the impact of the LTCG tax on investment incentives in the country. First, the overall relationship between the LTCG tax and the tax cost of investment (as measured by the METR) is positive, but weak. Since the LTCG tax does not change the METR in any significant way, one may infer that it will not affect investment decisions to any significant degree. Second, there is some heterogeneity at the sector level, with sectors with hitherto low METRs worse affected by the LTCG tax change than sectors with high METRs. The LTCG tax therefore makes a (very) small contribution in levelling the playing field for investment. This second result provides weak support for the government’s contention that the LTCG tax will reduce investment distortions (The Telegraph, 2018), although the mechanism differs from that suggested in the referenced article.

Bibliography

Arora, I. (2018, Mar 14). Government receives requests to drop planned long-term capital gains tax.

Business Today. (2018, Feb 05). How LTCG tax affects mutual fund investors.

Ghosh, G., & Mintz, J. (2017, Nov 23). Measuring the pre and post GST tax cost of investment.

Income Tax Department. (2018). Tax on Long-Term Capital Gains, Income Tax Department, Ministry of Finance, New Delhi.

Ministry of Law and Justice. (2018). The Finance Act, 2018 (No. 13 of 2018), Ministry of Law and Justice (Legislative Department), New Delhi.

Prowess. (2018). [cross tabulation of data].

Sampath, A., & Thomas, S. (2018, Feb 09). Long-term capital gains tax on equity: Will it scare away small investors?.

The Hindu. (2018, Feb 06). For more equity: on long-term capital gains tax.

The Telegraph. (2018, Feb 06). LTCG exemption for equities was a risk for small investors, govt says.

Upadhyay, P. (2018, Feb 19). Union budget 2018: Long-term capital gains tax - the unanswered questions.

 

Gaurav S. Ghosh is an economist and Senior Manager at Ernst & Young LLP

Friday, June 15, 2018

Interesting readings

The Centre's approach to Insolvency and Bankruptcy Code has costs by Bhargavi Zaveri in Mint, June 14, 2018.

Going on a hike by Ila Patnaik in The Indian Express, June 13, 2018.

The need for a term money market by Harsh Vardhan in Mint, June 11, 2018.

A wake-up call for promoters by Suharsh Sinha in Business Standard, June 10, 2018.

Carte blanche to notify law requires reform by Somasekhar Sundaresan on Wordpress, June 9, 2018.

As good as a random walk: Inflation forecasting in emerging market economies by Roberto Duncan and Enrique Martínez García in Vox, June 8, 2018.

The best way to save the planet? Drop meat and dairy by George Monbiot in The Guardian, June 8, 2018.

The Millionaires Are Fleeing. Maybe You Should, Too by Ruchir Sharma in The New York Times, June 2, 2018.

Try bankruptcy for Air India's sale in The Economic Times, June 1, 2018. Also see.

Data in a post-truth age by Sonalde Desai in The Hindu, May 30, 2018.

This Isn't Just About Paytm – Laws on Government Access to Data Need to Change by Madhulika Srikumar in The Wire, May 28, 2018.

How nations come together by Andreas Wimmer in Aeon, May 24, 2018.

Chatbots were the next big thing: what happened? by Justin Lee in Growthbot, May 6, 2018.

Love Story by David Brooks in The New York Times, May 1, 2018.

Social Ties in Academia: A Friend Is a Treasure by Tommaso Colussi in The MIT Press Journals, March 2, 2018.

Tech Platforms and the Knowledge Problem by Frank Pasquale in American Affairs Journal, 2018.

AI winter is well on its way by Filip Piekniewski on Piekniewski's blog.

Power Causes Brain Damage by Jerry Useem in The Atlantic, July-August, 2017.

How to eat: bread, rice.

Wednesday, June 13, 2018

Do digitised land records mirror reality?

by Sudha Narayanan, Gausia Shaikh, Diya Uday and Bhargavi Zaveri.

The World Bank's EoDB rankings estimate that it takes 53 days to register a property transaction and update the revenue records in Mumbai, and that the costs of such registration and updation aggregate to 7.6% of the property value. The corresponding numbers in OECD countries are 22.3 days and 4.2% of the property value. These rankings evaluate India's land administration systems on several parameters, such as the quality of the infrastructure for maintaining land records, the transparency of information and the dispute resolution mechanism. They rank India in the bottom quartile on these aspects.

Weak infrastructure for land record administration undermines property rights (DeSoto (2000)), and has an overall impact on growth (Deininger and Feder (2009)). Building sound infrastructure for maintaining land records assumes great significance in developing countries like India, where land accounts for a significant proportion of a household's asset portfolio. To improve the quality of such infrastructure, the central government rolled out two (2) centrally sponsored schemes across India in the late 1990s. Through wide-scale digitisation, the schemes aimed to achieve more accurate land title records and better service delivery to the citizen. The schemes were merged in 2008 and subsequently renamed as the Digitial India Land Records Modernisation Program or DILRMP. Such state-led interventions to define property rights in land have often been termed simplistic. Equally, they have been criticised for compromising local realities and existing institutional arrangements (Easterly (2008)). At the same time, the benefits of such approaches in allowing better enforcement of property rights and the consequential easier access to credit and capital, have also been widely acknowledged (Deininger and Feder (2009)). The jury is, therefore, out on the impact of a top-down approach towards improving land titling.

The biggest risk of a centralised approach towards digitisation is that the digitised records will not reflect reality (Bromley (2009)). In May 2017, we undertook a field study to ascertain the extent to which the DILRMP had been implemented in Maharashtra (link, link). One of the main purposes of the field study was to ascertain the extent to which the digitised records mirrored the ground reality on recording aspects such as parcel size, land use, ownership, possession and encumbrances. In this article, we summarise our findings from the field study on this specific question.

We find that for the sample land parcels under study, the records largely accurately reflect the names of the owners as well as the purposes for which the land was being used. However, there are greater disrepancies with respect to the parcel area recorded in the digitised record and the actual boundary area of the parcel. We also find disrepancies with respect to the encumbrances recorded in the digitised records and those purporting to actually exist with respect to a given parcel. Finally, we find low levels of public awareness of the digital means available to obtain or rectify property records. These findings hold insights into the aspects of the land record digitisation initiative that need to be improved for true impact.

Methodology

We studied 100 parcels spread across five villages and two Tehsils. The selection methodology is explained below:

  1. We selected two sample Tehsils, namely, Mulshi and Palghar, for this leg of the study. These Tehsils are mainly peri-urban locations with relatively high land transaction intensity and some prevalence of land litigation.

    Given our focus on the DILRMP, the sample tehsils are those where the programme had been implemented, in part, if not in full. While both Mulshi and Palghar fit these criteria broadly, they also differ in significant ways. Mulshi has been the focus of intensive effort by the state government, designated as a model tehsil where twelve (12) villages were selected for pilot implementation of the entire bouquet of interventions relating to digitisation. In contrast, Palghar tehsil represents a somewhat typical tehsil in terms of implementation attention.

  2. Within these two tehsils, we first randomly selected five (5) villages from the roster of census villages. Within each village, the goal was to pick ten (10) parcels that were not located in abadi, industrial areas, forest or wastelands. The parcels would be at least 0.3 hectares in size in rural areas, and at least 500 sq m in urban or peri-urban areas. Our goal was to ensure that some of these parcels were transacted in the past two (2) years.

    In reality, not all the villages we picked had a transaction intensity desirable for the project. We, therefore, selected five (5) villages each in Mulshi and Palghar, which, according to the department, had seen a lot of transactions in the past twelve (12) months. Where we did not get enough parcels per village, we included more villages. Often, parcels of the desired size were not available. Nor was it the case that the owners of all the parcels we picked were willing respondents. This meant that the final selection of parcels for the survey departed from our original stratified random sampling methodology. Given that the purpose of the survey is to garner insights into the implementation of the DILRMP, the sample parcels offer adequate material for the purpose, with the above caveats.

What did we corroborate?

For all the parcels in the sample, we recorded information about the parcel from the revenue records (i.e. 7/12 extracts) on the following five aspects: (1) ownership; (2) possession; (3) encumbrances; (4) area; and (5) land use. We then went to the parcel to corroborate the information so recorded.

Four of these five parameters were verified on the ground via personal interviews through a structured questionnaire and local inquiries. The verification of the fifth parameter, namely area, was done by measuring the parcel using e-Trex GPS devices as well as ETS by trained staff. The e-Trex involves a perimeter walk around the parcel, the ETS uses laser technology to mark corners of the polygon representing the parcel.

For those parcels which had been transacted in the last five (5) years, we also surveyed the respondents about their experience with interfacing with the department and their own perceptions of the current system and how citizen experience can be improved. We supplemented individual respondent surveys with focused group discussions (FGDs) in the premises of the sub-registrars in both Mulshi and Palghar.

What did our sample look like?


Our individual respondent sample is described below:
Percentage of respondents who
Are females 24
Are the owners themselves 92
Are the relatives of the parcel owners

4

Acquired (purchased/inherited) in the past 3 years 62
Percentage of samples which
Are agricultural land 93
Are encumbered 28
Have multiple owners 61

We conducted FGDs with a fairly wide variety of stakeholders, including:

  1. Residents : Residents of both Mulshi and Palghar Talukas were interviewed to gain a practical understanding of how processes work in the relevant Taluka, inefficiencies in these processes and the effect of digitisation, in their interaction with various sections of the revenue and land administration.
  2. Revenue Officers : Revenue officers were interviewed to understand the status, good practices and deficiencies in the system, before and after digitisation initiatives.
  3. Other Stakeholders : In addition to the above cohorts, we also interviewed lawyers, brokers and agents, and land surveyors. While lawyers were asked specific questions with respect to the effect of digitisation on legal processes associated with land transactions, the questions to brokers and agents focused on the efficiency of land transaction processes, before and after digitisation. The questions to surveyors focused on the efficiency, accuracy and hardships involved in measurement, re-survey and drawing up of maps.

Findings

Table 1 summarises our findings on the extent of corroboration between land records and ground reality. The first row indicates the total number of land parcels studied. The subsequent rows indicate the number of parcels for which the land records reflected the ground reality.

Table 1: Concordance between land records (RoR) and ground reality
Attribute Mulshi Palghar All
Total number of parcels

50

52

102

Ownership

49

52

101

Possession

48

48

96

Encumbrance

27

17

54

Land use classification
Agricultural land in both RoR and on-ground

44

47

91

Agricultural land in RoR but non-agricultural or mixed
on-ground

2

1

3

Non-agricultural land in both RoR and on-ground

2

2

4

Non-agricultural uses but agricultural in RoR

1

2

3

Table 1 shows that with respect to ownership, we saw a high degree of concordance between the information on the land records and the on-ground reality. In all except one case, we were able to identify an owner who was mentioned in the revenue records, and in 92% of the cases, we interviewed the owner. As with ownership, for the sample parcels, the land records, by and large, accurately reflected the actual possession. In general, with respect to shared ownership, except for parcels which have been sub-divided by an order of a revenue authority, possession of specific areas is not reflected in the revenue records.

We did not find the same level of concordance as regards encumbrances. The encumbrances reflected in the land records did not match the parcel holder's response of the encumbrance on the land parcel. The revenue records only reflect encumbrances associated with loans. We also saw a general reluctance to share financial information (28% of the respondents did not respond to encumbrance related questions, 1% of them explicitly stated they did not want to share this information, and around 8% did not seem aware of any encumbrance).

Overall, 95% of the land conformed to the land classification and use as reflected in the revenue records. Only six parcels did not so conform - three were designated as agricultural land in the revenue records, but were either non-agricultural or mixed use in reality and three others were deemed non-agricultural in the revenue records but were being cultivated in reality.

We found significant discrepancies in the area recorded in the 7/12 and our measurement of the actual land parcel. Although the ETS is deemed to have greater accuracy than the hand-held GPS device, for both measures, about half of all the sample parcels showed a deviation of more than 20% of the area mentioned in the revenue records. Table 2 summarises our findings on the extent of concordance between the parcel area recorded in the revenue records and the actual area. As with Table 1, the first row indicates the total number of parcels surveyed and the subsequent rows indicate the percentage of deviation from the area recorded in the revenue records.

Table 2: Concordance between recorded and actual area of land parcels
Margin of difference with hand held device
Number of parcels

50

50

100

within 1%

1

2

3

within 3%

8

6

14

within 5%

12

9

21

within 10%

21

11

32

within 20%

28

21

49

Margin of difference with ETS device
within 1%

8

2

10

within 3%

12

5

17

within 5%

18

7

25

within 10%

20

14

34

within 20%

27

25

52

Reasons for the disrepancies

Our report shows that the digitised records do not mirror reality with respect to recording encumbrances and area of land parcels. There are several reasons for this. For instance, we find that while banks and other credit institutions diligently inform the revenue records office of the creation of an encumbrance, the details of satisfaction are not communicated as regularly. Also, the revenue records reflect the loan amount for which the land parcel is encumbered. The repayment of installments of the loan are not communicated to the land records offices, which is one of the reasons for the discrepancy between the details of encumbrances recorded in the land revenue records and in reality.

A natural answer to the above problem is providing incentives to creditors to update details of encumbrances in the revenue records. Borrowers generally do not update the details of the encumbrances on their land owing to a variety of reasons such as the difficulty of accessing the land records offices. This problem can be resolved more easily by incentivising borrowers to update the details of their encumbrances to the revenue records offices. For example, the ability to intimate the satisfaction of a loan electronically, may deliver quicker outcomes on this front.

The area-related discrepancies are driven predominantly by the lack of awareness of the parcel owners of the true extent of the parcel. There were several cases where the white stone markers, typically installed on the ground to demarcate boundaries, were missing. In other cases, where the parcel was a part of a larger parcel earlier, the owner mentally treated the larger parcel as the relevant one. Demarcation was not done in most cases - with multiple owners, those who were cultivators used mutual understanding of the area to cultivate their piece of the larger parcel. The same understanding seemed to prevail between neighbours in most cases. Most did not feel the need to measure and demarcate the plot. Unless there was an impending sale, it seemed that demarcation and subdivision was routinely avoided. In essence, this issue emerges as a deep concern. Several people also brought up the issue of measurement. In Mulshi, where resurveying and measurement often led to conflicts because the measure did not match the records, they resolved it informally amongst themselves.

Currently, while the settlement and survey office is in the process of conducting re-surveys in parts of Maharashtra, the re-survey exercise is time consuming and difficult, owing to a variety of factors such as constraints on the survey equipment and personnel, and disputed land. This requires scalable solutions involving regular surveys and re-surveys of land. The government should consider technological as well as outsourcing solutions, such as those adopted for surveying land in parts of Africa, for their suitability and adaptability in Maharashtra.

Conclusion

The household level field survey described in this article serves as a template for a larger audit system for assessing the effectiveness of programs such as the DILRMP. The outcomes of the survey would be richer if it also entailed questions pertaining to citizens' experiences with digitised registries and also examined questions of access. As with all good audit exercises, the findings can act as a feedback loop for the administration in the design or implementation such initiatives. The quantitative and qualitative findings generated by such surveys will go a long way in pre-empting future errors and discontent that is often associated with such top-down initiatives.

References

De Soto, H., 2000. The Mystery of Capital. Basic Books, New York.

Klaus Deininger and Gerhson Feder (2009). 'Land Registration, Governance, and Development: Evidence and Implications for Policy'. 24 The World Bank Research Observer, vol. 24 (2), 233-266.

Easterly, W 2008. Institutions: Top Down or Bottom Up? American Economic Review, Papera and Proceedings 98(2):95(9).

Danier Bromley. Formalising property relations in the developing world: The wrong prescription for the wrong malady, Land Use Policy 26 (2008) 20-27.

 

Sudha Narayanan is faculty at IGIDR. Gausia Shaikh, Diya Uday and Bhargavi Zaveri are researchers at IGIDR.

Tuesday, May 29, 2018

The economics of releasing the V-band and E-band spectrum in India

by Sudipto Banerjee, Mayank Mishra and Suyash Rai.

Internet usage in India has witnessed an enormous growth in last few years. The wireless data usage in 2017 has increased from 20,092 million GB per year from 828 million GB per year in 2014, showing a growth of more than 24 times. This increasing use of data is causing congestion in the existing bands which finally affects the quality of services provided to consumers. In order to cater to this surge in data consumption, it is essential that there should be a commensurate increase in supply of broadband internet. Perhaps the approach to the supply also needs to change. Availability of additional spectrum is an important piece of this puzzle. V-band (57 GHz - 64 GHz) and E-band (71-76 GHz and 81-86 GHz) are two microwave bands which can be useful for bridging this need for additional spectrum. Spectrum in these bands can be used for high capacity data transmissions for last mile connectivity over short distances ranging from 200 metres to 3 km. These bands can be put to a variety of backhaul (i.e. for connecting towers). V-band can also be used for access under the Wi-Gig standards.

It has recently been reported that the Department of Telecommunications is weighing administrative allocation as the method for releasing the spectrum in the E-band and V-band, and it will take the Attorney General's opinion in this regard. This legal opinion is considered necessary because of the Supreme Court's judgment in the 2G case. The allegations of irregularity in 2G spectrum allocation led to judicial scrutiny of the method of allocation and also much public discussion. The Supreme Court quashed several spectrum licenses granted due to irregularities in the manner of allocation of spectrum to licensees on first-come-first-served basis.

After a Presidential reference, the Supreme Court had clarified that it is the prerogative of the Government to decide the methodology of alienation of other public resources, provided the method is transparent, fair and backed by social or welfare purpose. The Court also stated that revenue maximisation need not be the sole objective while alienating public resources and in fact this is subservient to the goal of serving common good of the society. Therefore, as the Government decides to release this presently unreleased spectrum, it should consider the overall economic impacts of the alternative strategies for releasing the spectrum. On this issue, we recently published a Working Paper that provides an overview of the uses of V-band and E-band spectrum, and how we may think about choosing a suitable method for releasing this spectrum. This blogpost gives an overview of the paper.

Licensing approaches

There can be four main approaches to releasing the spectrum. First, Individual authorisation with individual licensing is the conventional link-by-link allocation involving individual frequency planning/coordination. In this method, the allocation of spectrum is usually done using traditional procedures for issuing licenses, which involves a selection process by the administration. Sometimes, the administration delegates this task to the operators, but it keeps control of the national and cross-border interference situation. Second, individual authorisation with light licensing is also a method of giving exclusive usage authorisation to certain service providers for a period of time, but the method of licensing is simpler, and may involve 'first come first served' procedures. In this method, allocating authority typically places a limitation on the number of users in a given area.

Third, general authorisation with light licensing is a combination of license-exempt use and some degree of protection of users of spectrum. There is no individual frequency coordination, but the user is required to notify the authorities with the position and characteristics of the links. The database of installed stations containing appropriate technical parameters is publicly available. Importantly, in this method, there is no limitation on the number of users. Fourth, the license exempt method offers the most flexible and low cost usage of spectrum. It does not require even notification or registration, and does not mandate any individual frequency coordination. This method has worked well in specific bands (e.g. 2.4 and 5.8 GHz used for Wi-Fi access) where short range devices are allocated, but fixed service applications may also be accommodated. Although this does not guarantee any interference protection by the regulator, alternate interference management techniques are available to deal with the issue. In addition to these approaches, there are block assignment regimes, where assignment is made through renewable licensing or through permanent public auctions, or through other allocation mechanisms.

Although auction is often assumed to be the most suitable method for allocating spectrum, studies on unlicensed spectrum suggest that such availability of spectrum can also lead to significant benefits for the economy, many of which seem to be arising out of unpredictable uses, which may not have occurred if the spectrum had been auctioned. One interesting example is the use of RFID in clothing sector. According to a study done in 2014, this use generated about USD 100 billion of annual benefits for the US economy. Arguably, if the usage of this spectrum had been restricted, this usage would not have scaled up in such manner. It is important to understand that absence of auction is not the same as giving arbitrary benefits to hand-picked service providers. If the regime is open and transparent, the spectrum can be made available for use by a variety of potential service providers and users without giving unfair advantage to anyone in particular.

Most countries acknowledge that certain spectrum bands are best left unlicensed, or may be subjected to a "light touch" licensing regime, with minimal regulation. In India also, a number of spectrum bands are unlicensed, like 2.4 GHz and 5.8 GHz spectrum bands used for Wi-Fi access; 865 MHz - 867 MHz band used by RFID devices; 402 MHz - 405 MHz spectrum band used for medical wireless devices; and so on. A number of countries have adopted license free frameworks for adopting the V-band, including USA, UK, Switzerland, Japan, Korea, China, Canada, Malaysia and Philippines. Although international experience is useful, we also need to consider Indian context, and how this spectrum may be put to use in this context. In the paper, we consider the various potential uses of this spectrum, and attempt to quantify the scale of this usage in an optimal scenario.

The potential uses of V-band and E-band in India

The context of broadband Internet in India will determine the kinds of benefits that India can get from V-band and E-band. There are certain key aspects of this context. First, in India, most users access broadband internet through wireless networks. However, wireless broadband networks has certain limitations. In densely populated areas, as more people get on to wireless broadband, the mobile spectrum bands may get congested. This necessitates more cell sites and higher backhaul speeds. Compared to wired connections, especially fiber optic connections, mobile broadband provides lower speeds and less consistent connectivity. Further, a low density of wired connections constrains the potential of developing community hotspots, where residential or business short-range networks are made available for use by other users of the network. Globally, the proliferation of such hotspots is one of the most remarkable stories in the growth of Internet in recent years. Such hotspots provide high speed, consistent connectivity, while offloading from mobile networks - a benefit that India will not be able to realise without proliferation of fixed broadband connections.

Second, a negligible percentage of the fixed broadband connections are fibre optic-based. Most of the wired connections use DSL, Dial-up, or Ethernet, all of which offer potentially lower speeds than fibre optic. This situation is very different from what is seen in developed countries, and also in comparable developing countries. Third, India has a low density of commercial Wi-Fi hotspots. Such hotspots can help augment the mobile broadband and private residential and commercial hotspots as well as mobile broadband. Use of public Wi-Fi can help offer consistent, reliable and high speed Internet to users, while decongesting mobile broadband. India has only about 36,270 public Wi-Fi hotspots. The total number of public Wi-Fi hotspots in the world is over 12 million.

In the coming years, the main challenges for internet access in India are likely to be round consistency and quality of access. To address these challenges, the intermediate policy goals for broadband Internet India should be: expanding access to fixed broadband; decongestion of mobile broadband in dense urban environments; and proliferating Wi-Fi hotspots. Achieving these intermediate goals would help improve quality and consistency of internet access in India. This will not happen automatically, and requires policy focus, which may begin with rethinking spectrum allocation methods for these spectrum bands.

In the paper, we have identified the following key uses of the V-band and E-band spectrum, and tried to quantify the scale of these uses:

  • Support proliferation of commercial Wi-Fi and Wi-Gig hotspots: these bands can help backhaul the commercial Wi-Fi infrastructure in a cheaper and quicker manner, especially in dense urban locations. These bands can also promote the proliferation of Wi-Gig hotspots. Wi-Gig networks use V-band which provides wider channels than standard Wi-Fi, resulting in significantly faster data speeds.
  • Support expansion of fixed broadband Internet in urban areas: these bands can help solve the last mile problems of getting high speed wired broadband Internet into dense urban locations.
  • Backhaul for mobile broadband: these bands can provide higher capacity backhaul for mobile broadband, thereby easing congestion.
  • Other uses: these bands can be put to a variety of other uses. These, inter alia, include: extension of local area networks between buildings within a building complex; Internet of Things (IoT); Vehicle to vehicle communication and Augmented Reality (AR)/Virtual Reality (VR) Systems among others.

Given India context of high urban population density, and many urban areas with old and dense construction, the scale of usage of these spectrum bands is likely to be quite high. We tentatively find that if these spectrum bands are allowed to be used optimally, they could lead to improved speed of internet, increased consistency in internet access, and greater volume of internet usage. However, there are many potential uses of this spectrum that are difficult to predict at present. For instance, the potential for IoT is very difficult to predict at the moment, albeit a lot is being said about how far IoT can go. These are early days for the adoption of this spectrum and the allocation method should take into account this uncertainty about the potential uses.

Mapping the economic benefits arising from the uses

In choosing a method for releasing this spectrum, the focus should be on maximising the net benefit for the society as a whole. Given the paucity of relevant data and earlier studies, we are unable to reasonably monetise the economic value of these benefits. However, we attempt to map the types of uses with various types of economic benefits that may accrue from them.

If the V-band and E-band spectrum is delicensed or lightly licensed, the pass-through cost of this spectrum will be zero or very small, and only substantial cost will be installation costs. In a competitive market, ceteris paribus, reduction in costs will lead to lower prices for consumers. Given the price elasticity of demand for internet, and the rapid evolution of technology, this availability will lead to higher usage of broadband internet by consumers, allow new consumers to use broadband internet and enable innovative business models and technologies.

The use of these spectrum bands will lead to a reduction in costs and create opportunity to reach hitherto unreachable locations in dense urban environments with high speed Internet. This will lead to a shift in the supply curve, so that more quantity is made available at a given price. If the quality of Internet access improves, as is expected from the use of V-band and E-band, there may also be a shift in the demand curve, as users may be willing to pay more for the connection. Quality improvement also has larger economic benefits. For instance, if the speed of Internet usage increases, users will be able to put their connections to a wider variety of uses, especially in commercial contexts.

Following are the key economic benefits expected to arise from the uses of V-band and E-band spectrum. It should be noted that all these benefits cannot be fully attributed to these spectrum bands. Some of them, such as benefits from Wi-Gig devices, may be fully attributed to these spectrum bands, because they rely completely on the availability of this spectrum. Other benefits can be partially attributed to these bands.

  • Producer surplus due to offloading from mobile broadband: Producer surplus usually increases if the cost somehow falls without change in price charged. It can also increase if the price increases without corresponding increase in costs. The use of these spectrum bands would enable offloading from mobile broadband which will generate producer surplus.
  • Producer surplus from lower backhaul costs for mobile broadband: Lower backhaul costs could lead to producer surplus for mobile broadband service providers. This can be calculated by comparing the costs of backhaul using V-band and E-band with the cost of establishing infrastructure for a similar quality of service using other backhaul solutions, such as fibre optic cables. Most of this surplus would arise in congested areas.
  • Consumer surplus from use of commercial Wi-Fi hotspots and fixed broadband: Consumer surplus is the benefit that consumer derive from use of a service or good. A variety of sources for consumer surplus can be identified on the basis of the uses of V-band and E-band presented in the previous section: consumer surplus from commercial Wi-Fi in dense locations; consumer surplus from free Internet given by Wi-Fi hotspot providers; consumer surplus from greater use of Wi-Fi and Wi-Gig devices; consumer surplus from indoor use of fixed broadband.
  • GDP contributions: In addition to consumer surplus and producer surplus, there are also GDP contributions that may arise from the use of this spectrum. These are mostly in terms of new or improved businesses and technologies that are enabled by this spectrum band, such as usage of commercial Wi-Fi and Wi-Gig hotspots, higher speed of internet, Wi-Fi and Wi-Gig device sales, new or modified businesses and technologies (eg. IoT).

Since most of these benefits will accrue to consumers and producers, this will also create potential for the Government to extract part of this benefit as additional tax collection. For instance, sale of devices and provision of services will create opportunities for the Government to collect taxes from these activities. Further, to the extent that these activities will lead to additional profits for service providers, part of that profit will be taxed by the Government. The concern that the Government may lose out on some non-tax revenue if it chooses to delicense this spectrum may be overcome by these revenue opportunities. Further, in light licensing regimes, some fees may also be levied on the usage of the band. However, as discussed earlier, keeping the fees high may impede usage of these bands, and may discourage some types of usage that may generate significant economic benefits. The experience of Wi-Fi and RFID spectrum supports this contention.

Conclusion

In conclusion, four key takeaways emerge from this analysis. First, while choosing a method for releasing this spectrum, the focus should be on ensuring maximum aggregate benefits for the society, and not short-term revenue maximisation for the Government. Among other things, this means that the potential of these bands to help improve India's overall system of broadband Internet access should be realised. Some of the major limitations in the present system could be partially overcome by use of these spectrum bands, along with other suitable policy measures.

Second, although the economic benefits of these spectrum bands are likely to be substantial, studies on economic benefits of previously unlicensed spectrum bands suggest that the variety and scale of economic benefits may increase over a period of time if easy access to spectrum is enabled. As has happened with other unlicensed spectrum bands, innovation and competition may lead to many types of uses that are difficult to anticipate at present. Hence, it would make sense to liberalise the spectrum without any cumbersome procedures or high fees.

Third, many of the benefits are not realised by the service providers, and accrue in terms of consumer surplus and GDP contributions of businesses and technological innovations spurred by the availability of this spectrum. If the Government decides to target revenue maximisation while allocating the spectrum, it will mainly be able to extract part of the producer surplus. However, this will have effect on proliferation and therefore, on consumer surplus and GDP contributions. This may lead to significantly lower economic benefits of the spectrum for the economy as a whole. So, it may be better to not allocate this spectrum based on methods of individual authorisation. Instead, general authorisation with light licensing or license-exempt approaches may be explored. These approaches also allow the government to extract part of the economic benefits later, especially in the form of taxes.

Fourth, in thinking about the strategy to release the spectrum, it is important to align with global device ecosystems and standards, so that India can benefit from economies of scale in production of devices, and potentially become a manufacturing hub for the devices.

 

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