India’s Defence Production Optimisation Problem

The Caravan has an excellent in-depth story on the Rafale controversy. Beyond the specifics of the current controversy, the investigation throws light on the problems in defence production that continue to haunt India’s strategic ambitions.

On the face of it, defence production suffers from an acute case of what I had referred to earlier as hyper multi-objective optimisation. My argument was that the reason some government policies in India fail is because they try to optimise several objectives simultaneously, ultimately creating a solution that meets none of the objectives.

Now defence procurement is essentially an oligopsony i.e. it is a market where only a few buyers exists — only a few nation-states in the world have the financial muscle to buy 10 submarines or 100 multirole aircraft for example. My argument is that this oligopsony makes the optimisation problem even worse. The government believes that because it has more weight in the market, it has the luxury of optimising many more objectives in the process.

Let us look at what the government is optimising when it sets out to purchase defence equipment today.

  1. defence preparedness: primarily determined by the end users i.e. the armed forces
  2. costs: both explicit and opportunity costs
  3. strategic value: every defence purchase from foreign players raises the question that should we buy from existing trade partners or not
  4. creating an indigenous defence-industrial complex: this is further divided into two sub-goals. One is sustaining the ailing government-owned public sector companies. The second one is spurring investment from private Indian entities.

Now, even without any prior background, optimising all these objectives appears to be a herculean task. But even while India’s procurement processes were notoriously lethargic, new objectives were being added. The fourth objective was explicitly added  through an offset policy in 2005 and more recently through a strategic partnership model in 2016. And quite naturally, it is this fourth objective that has become the main sticking point in the Rafale controversy.

So with the government’s flagship reform failing, we are back to the starting point: what should be the mechanism to address India’s defence requirements? What principles should govern procurement and purchase?

One of the ways to resolve hyper multi-objective dilemmas is withdrawal. The government could let go of the aim to indigenise when it is looking to make a specific defence purchase. Get rid of the offsets policy altogether for a few years. The indigenisation problem should then be targeted at a later point of time. This is just one method. There could be other variations of choosing objectives that can work better but what is clear is that the current method needs a complete and urgent shakeup.

 

 

What Explains the High Demand for Low Paying Government Jobs?

We are increasingly seeing the phenomenon where there are an enormous amount of applicants for a few government postings. Take this story where a million people applied for 700 clerical postings in Telengana. Or where there were 302 applicants for each posting of railway gangman:

On 17 September, 1.9 crore applicants will appear for the Railway Recruitment Board (RRB) examination to fill 62,907 vacancies at ‘Level 1’, earlier called ‘Group D’.

That is, 302 applicants for every job — jobs that are at the lowest level in the railways, including posts such as gangman (those who maintain tracks), gateman, pointsman, helper in electrical/mechanical/engineering/ signal/telecommunications, porter etc.

A majority of applicants for these jobs are graduates, post-graduates and even engineers, according to RRB sources.

Or take this case:

3,700 PHDs, 50,000 graduates, and 28,000 PGs have applied to fill 62 messenger posts in UP Police; position like this requires the minimum skills and has the lowest bar of eligibility.

Stories such as these have become all too common and are perhaps the most accurate reflection of India’s ongoing jobs crisis.

The big obvious question here is regarding the inexplicably high demand for low paying government jobs by apparently overqualified job seekers. My hypothesis is that this can be explained by three factors:

  1. The number of private jobs available are obviously too few. Job creation has stagnated and even receded in the private sector. Thus, industry does not have the capacity to absorb the large number of graduates and post-graduates who are passing out of the system. Since supply of labour far outstrips the demand for labour, employees have increasingly stringent qualification requirements. Only the best of the lot get a good, high paying job in the private sector.
  2. There is also an obvious skills mismatch. A lot of the students who pass through the Indian education system are not as qualified as their degrees tend to signal. A typical Post-Graduate often has the skills of a person who has passed the 12th grade and thus, cannot obtain or at least retain a high paying job which would require the skills of a Post-Graduate (One report, for instance, finds that nearly 80% of the engineering graduates in India are unemployable as their skills set do not match the requirement of the industry). What further complicates this issue and turns it into a vicious cycle is the fact that a lot of individuals end up studying due to the lack of job opportunities. These are students who enter into an educational programme solely due to the signalling value and to differentiate themselves from the nearest competitors. However, while the degree gained has some signalling value, the skills gained are inadequate for industry standards.
  1. A person who has gained a degree but not the appropriate skills cannot get a job in the private sector which will assure a reasonably high salary and job security. The private sector option is typically a low paying job, which can be lost at any time and with no benefits. Given this scenario, a government job that is assured of job security, even at the cost of lower salary seems attractive.

 

Copping out on Privatisation

The recent bank merger between Bank of Baroda, Vijaya Bank, and Dena Bank is essentially a move of cowardice, and not the bold reformist step it is touted to be. The original plan (for reforming the banking sector) was to have just 6 public sector banks, and while Modi has reduced the number from 26 to 19, there’s still a far way to go. Further, the plan was not to achieve the reduction in numbers by merging all of the public sector banks into 6 mega banks that are still in government control, but to privatise them eventually. However, the traditional governmental dislike for privatisation and the lack of political will in an election year resulted in this sub-optimal solution of merged banks.

The merged entity is set to become the third largest Indian bank, however the size is hardly important. In fact, it would actually deter any real progress in reforming the banking sector. Another move of cowardice was in giving the assurance that no jobs would be lost due to merger. Thus, the banks cannot really cut cost and achieve economies of scale in this aspect.

The history of such mergers is not reassuring. The merger of New Bank of India (NBI) with Punjab National Bank (PNB) in September 1993, of Global Trust Bank with Oriental Bank of Commerce in 2004, and the spate of merging the associate State Banks with the main State Bank have all worked poorly. The strong bank in the merger eventually ends up suffering considerable losses. The editorial in The New Indian Express comments:

“When a strong and weak bank merge, the combined entity loses competitiveness and the merger is counterproductive. An RBI working group recommended avoiding such events without first restructuring weaklings—a step now being bypassed.”

Failures are the essence of capitalism, so before gaining size, we need measures that allow banks to fail safely without causing systemic shocks like Lehman Brothers. No math can correct errors made out of lack of self-discipline, and as we still fight the last NPA war, rather than planning for the next one, it’s time to act bold, taking haircuts and ceding control to private parties. For, in a growing economy, banks should lend without worrying about provisions or sacrificing profits at the altar.

 

Employment Elasticity of Growth in India

Recently, there have been a spate of articles on employment elasticity of income in Indian newspapers and how important that is to job creation in India. The Hindustan Times has a series on India’s job challenge, Mint’s editorial discussed quality of jobs created, and the Economic Times cautions against India mimicking China’s strategy in creating jobs.

But what exactly is employment elasticity? And why is it important?

According to an RBI working paper by Sangita Misra and Anoop K. Suresh, employment elasticity is a measure of the percentage change in employment associated with a 1 percentage point change in economic growth. It indicates the ability of an economy to generate employment opportunities for its population as a per cent of its growth or developmentprocess.

An employment elasticity of 1 denotes that employment grows at the same rate as economic growth. Elasticity of 0 denotes that employment does not grow at all, regardless of economic growth. Negative employment elasticity denotes that employment shrinks as the economy grows.

This is crucial as it is commonly believed that economic growth alone will increase employment. However, as we examine the data, we see that despite India’s impressive economic growth, employment has not grown alongside. Ideally we would like to see an employment elasticity >=1, but, from the Misra and Suresh paper, we see that employment elasticity in India declined from 0.44 in the first half of the decade 1999–2000 to 2004–05, to as low as 0.01 during second half of the decade 2004–05 to 2009–10.

YearsEmployment Elasticity
1999-2000 to 2004-050.50
2004-05 to 2009-100.01
2009-10 to 2011-120.18

Similar trends have been witnessed at the sectoral level. In agriculture and manufacturing, employment elasticity between 2004-05 and 2009-10 has been negative.

Sector1999-2000 to 2004-052004-05 to 2009-102009-10 to 2011-122004-05 to 2011-121999-2000 to 2011-12
Agriculture1.09-0.39-0.44-0.41-0.08
Manufacturing0.80-0.271.740.100.33
Mining & quarrying0.870.20-1.76-0.140.34
Utilities0.67-0.277.601.421.17
Construction0.881.63-0.251.121.01
Trade, transport, hotels0.45-0.020.540.130.25
Finance, real estate1.400.34-2.32-0.450.06
Other services0.46-0.112.960.480.47
All sectors0.500.010.170.060.20

The negative employment elasticity in agriculture indicates movement of people out of agriculture to other sectors where wage rates are higher. This migration of surplus workers to other sectors for productive and gainful employment is necessary for inclusive growth. However, the negative employment elasticity in manufacturing sector was a cause of concern particularly when the sector has achieved 6.8 per cent growth in output during Eleventh Plan. It did bounce back during 2009-10 to 2011-12, but the average employment elasticity in manufacturing between 2004-05 and 2011-12 was still only 0.10.

 

References:

Misra, S., & Suresh, A. K. (2014). Estimating Employment Elasticity of Growth for the Indian Economy. Reserve Bank of India.

Planning Commission, India. (2013). Twelfth Five Year Plan, 2012-2017. Sage Publications, India.

Why Bangladesh Matters: Yet Another Illustration

I have argued earlier that the vacillating nature of India’s neighbours need not overly worry Indian foreign policy makers.

beyond the security domain, there is very little that small states in India’s neighbourhood can do in India’s pursuit of prosperity for its citizens in the immediate future. As we enter a world economy that is getting increasingly protectionist in nature, international trade will become increasingly difficult. Fortunately, India’s big, relatively young, and diverse population means that greater domestic consumption alone can help us maintain high economic growth for the next 10 years or so. Barring Bangladesh, no other Indian neighbour has economic prowess that India cannot substitute domestically. So, in the short run, the economic benefits accruing from small states in the neighbourhood will continue to be marginal. [INI, April 7 2017]

A news report in Business Standard today gives an example for why Bangladesh is an exception.

The value of two-wheeler exports from India to Bangladesh jumped 50 per cent in FY18 to $277 million (Rs 19 billion), making it India’s biggest export market, ahead of Sri Lanka. The value of shipments to Bangladesh has more than doubled since FY16, when it was just $128 million…

Bangladesh is estimated to have exported readymade garments worth $29 billion in the calendar year of 2017. Riding on robust economic growth, the nation’s demand for motorcycles soared 50 per cent in 2017 to an estimated 360,000 units. The high double-digit growth continues in 2018 as well. [Business Standard, 20 Jul 2018]

In essence, India’s relationship with Bangladesh is strategic for multiple reasons. It can directly impact the peace and prosperity of a large number of Indians. The opportunity costs of not having Bangladesh on your side are far higher compared to our other neighbours.

Anticipating the Unintended Consequences of Regulating Cinema Halls

Movie-watching in Indian cinema halls has become a highly politicised commodity. First, a few state governments capped movie price tickets. An unintended yet easily anticipated consequence followed. The prices of complementary goods —  popcorns, soft-drinks, and snacks — rose.

And now, the Maharashtra government has gone one-step ahead. IT also wants to tackle the rise in prices of these complementary goods. The Food and Civil Supplies Minister said this on the floor of the Maharashtra Legislative Assembly:

There is no ban on patrons carrying outside food to multiplexes and if the multiplex authorities prohibit it, they could face action.

Not to be outdone, the Karnataka government has said that it will soon follow suit.

I’ll leave the discussion on entitlement and endowment effects for another post. For now, let’s anticipate the unintended consequence of this latest move.

  1. The movie-watching experience can be expected to be less than satisfactory. Movie halls will be littered with homemade food. There will be fights over dietary habits. If the governments go further and cap food and beverages prices as well, theatres will have even lesser avenues to run profitably.
  2. Demand for substitute goods will increase. At the margin, people will decide to choose something else over watching movies at cinema halls. This works well for the likes of Netflix, video pirates, and theatre plays.
  3. Prices of other complementary goods will rise. One can expect an increase in the parking charges at movie theatres or a charge (instead of a refundable return) for the 3D glasses.

In short, I’m not going near a cinema hall anytime soon.

 

 

Who gains from the new Maternity Benefit Act Amendment?

The new Amendment will harm the women working in the formal sector more than those in the informal sector.

There was a recent uproar about the new amendments were made to the Maternity Benefit Act of 1961, which extended the paid maternity leave to 26 weeks from 12 weeks. Although the move sounds positive at first glance, it holds negative repercussions for the women in the workforce.

One of the most obvious criticisms for the Act is that it would make it costly for the employer to hire women whom they would now have to give a paid leave for 28 weeks. Team Lease did a study titled “The Impact of Maternity Benefits on Business and Employment” which stated that 11 lakh to 18 lakh women will face difficulty in finding jobs in the Small and Medium Scale Industries. 

The second and the less discussed repercussion is that the amendment would impact women employed in the formal sector more than ones employed in the informal sector. There are two broad reasons. First, the formal sector is scrutinised more than the informal sector. Second, women in the formal sector are paid higher than in the informal sector. This makes the maternity leave a more expensive affair for the formal institutions.

To grasp the magnitude of the problem, we need to start with some basic facts:

  • Number of women working in the informal sector in India (2018): 90%
  • Gender pay gap in India (2017): 20%
  • The difference between the male and the female employment ratio (2017): 79% – 27% = 52%

As women in the informal sector are already cheap labour and the regulatory oversight is limited, the chances are higher than the employment rate for women in the informal sector would remain the same. Meanwhile in the formal sector, where even after the wage gap, providing a 26 week paid leave would be an expensive affair for the firm. With the formal contracts in place, the higher regulatory oversight also ensures that the employer would rather hire a male employee than overlook the new amendment. The final outcome of this would be that we will see a decline in the female labour employed in the white collar jobs, even if the status stays the same for their informal counterparts. Leaving us with the question of who is the actual beneficiary of the Act.

Instead of increasing the cost of hiring women, one of the key solutions is to make more jobs formalised. This initiative need not be just for the women. With just  6.5 per cent of the jobs formalised, the regulatory reach of the State is several limited. Increasing the formal net would allow more people to access the safety benefits provided by the state and ensure better working conditions for more people. One of the other key impacts would, of course, be that it would help empower more women to seek their rights.

Scott Alexander, Bryan Caplan and Nitin Pai on fighting crime (feat. Matt Levine)

The basic idea is that coming down hard on a small number of high-profile crimes can have disproportionate effects in terms of curbing crime

It all started with the pseudonymous blogger Scott Alexander, in what seemed like a justification of outrage. Or maybe it started earlier – with a post by Bryan Caplan deploring outrage. Caplan was commenting about the propensity of people to jump on to bandwagons deploring seemingly minor crimes while not caring enough about worse crimes that were not in the public spotlight already. Caplan had then written:

I can understand why people would have strong negative feelings about the greater evil, but not the lesser evil. But I can’t understand why people would have strong negative feelings about the lesser evil, but care little about the greater evil. Or why they would have strong negative feelings about one evil, but yawn in the face of a comparable evil.

Now, while “Alexander”‘s response seems to justify outrage (and I’m no fan of online outrage), he did so with an interesting analogy, on how to curb crime when the police has limited resources. He writes:

[…] the police chief publicly commits that from now on, he’s going to prioritize solving muggings over solving burglaries, even if the burglaries are equally bad or worse. He’ll put an absurd amount of effort into solving even the smallest mugging; this is the hill he’s going to die on.

Suppose you’re a mugger, deciding whether or not to commit the first new mugging in town. If you’re the first guy to violate the no-mugging taboo, every police officer in town is going to be on your case; you’re nearly certain to get caught. You give up and do honest work. Every other mugger in town faces the same choice and makes the same decision. In theory a well-coordinated group of muggers could all start mugging on the same day and break the system, but muggers aren’t really that well-coordinated.

The police chief’s public commitment solves mugging without devoting a single officer’s time to the problem, allowing all officers to concentrate on burglaries. A worst-crime-first enforcement regime has 60 crimes per day and solves 10; a mugging-first regime has 30 crimes per day and solves 10.

And then it is again Caplan’s turn to respond. I’m bad at detecting satire, so I’m not sure if he is being serious (I don’t think he is). But he proposes a “sure fire way to end all crime”:

Step 1: Credibly announce that all levels of government will mercilessly prosecute the first crime committed in the nation each day.

Step 2: There is no Step 2.

But then, I’m sure that Nitin Pai is being serious in proposing a similar method to curb the spate of violent crime in India based on WhatsApp forwards. In his piece for the Quint, he writes:

the Home Ministry ought to use its considerable powers to tackle the problem. It’s not hard either. One well-advertised arrest, prosecution and sentencing will deter the cowards that comprise lynch mobs. Three high profile arrests and prosecutions – and see how quickly lynchings stop. The smallest police station in the remotest village can stop lynchings if the local sub-inspector has received clear political messages against it.

Finally, the reason why I figured Caplan’s “solution” is satire is because of this passage from Matt Levine’s excellent Money Stuff newsletter (likely it’s behind a Bloomberg paywall, but it’s free if you subscribe by email). Commenting about high frequency trading, Levine writes:

But the answer in actual U.S. market structure is, come on, there is no such thing as “the same time.” Do you know how many nanoseconds there are every single second? (A billion.) The odds that each of us would hit the “Buy” button at the exact same nanosecond are infinitesimal. So if I put in my order to buy the stock at 10:45:06.543210876 a.m., and you put in yours at 10:45:06.543210987 a.m., then I got there first and I win.

Is this a good answer? It has a simple appeal. It just gets rid of the question “who gets the stock if we put our orders in at the same time?” It replaces an economic question about how to allocate the stock with an empirical question of who got there first.

So the problem with fighting the first crime of the day, or year, or whatever, is that a criminal will know fully well, given a reasonably high enough crime rate, that the probability of his crime being recorded as the first in the year or day or whatever is less than one. And the higher the crime rate, the lower the probability that his crime will be recognised as the first one. And so there is a high chance he can get away with it.

And that is where Nitin’s idea scores. Rather than going after the “first crime”, pick a few crimes arbitrarily and “go after them like hell”. Since in this case most of the people who are forwarding dangerous forwards are “ordinary people”, this will likely shake them up, and we’ll see less of these dangerous forwards.

 

Which States are Financially Underdeveloped in India?

Which states are the least (most) financially developed in India? To answer this question, I construct a Financial Deprivation Index (FDI); the higher the FDI, the less financially developed a state is. FDI is based on three dimensions: branch coverage, deposit mobilisation and credit disbursal. The first dimension relates to the financial infrastructure, other two are the variables relevant for the long-term saving, consumption smoothing and investment.

To construct the FDI, deprivation scores are calculated by dividing the population of each state by the number of reporting branches, total deposits and credit outstanding as on 31st March, 2017, respectively. A simple average of these scores would be misleading as they carry different units. To get around this problem, the scores are centred about the mean and normalised by dividing by the range. Finally, a simple average of the normalised score is calculated which serves as the Financial Deprivation Index.

So much for the data and methodology. As for the results, they are depicted in the map shown above. The least financially developed states in India are Manipur, Bihar, Assam, Nagaland and Uttar Pradesh.

The most financially developed states/UTs in India are Chandigarh, Goa and NCT of Delhi. Given the level of urbanisation, this is hardly surprising. Among the larger units, Punjab, Kerala, Haryana, Karnataka and Maharashtra are the most developed states. Somewhat surprisingly, hilly states such as Uttarakhand, Sikkim and Himanchal Pradesh have fared well.

One surprising finding of the analysis was the extent of heterogeneity in the North-Eastern states. Assam, Manipur and Nagaland figure among  the least financially developed states in the country; Arunanchal Pradesh, Mizoram and Sikkim show decent performance in terms of FDI. Understanding the reasons of uneven development may provide valuable lessons for policy formulation.

Vulnerability in jobs in India

India has been infamous for the magnitude of informal jobs in the country. Though a significant issue, informality is just a part of the bigger issue, i.e, the increase in the number of highly vulnerable jobs. Vulnerable jobs usually include own-account workers and family members working informally. Basically anyone who does not have a stable contract or flow of income, and are open to exploitation. All informal workers are vulnerable to an extent since they aren’t on any payroll or have a formal contract.

This long standing problem has become significant as the number of vulnerable employees has been increasing in the past few years. As per International Labour Organisation (ILO), 77 per cent of workers in India will have vulnerable employment by 2019. In a country where 92 per cent of the employed population is in informal sector, it is a concern if the ratio of vulnerable jobs increase.

 

Source: World Employment Social Outlook2018, International Labour Organisation

The ILO report also pointed out that

“a significant portion of the jobs created (in India) in the services sector over the past couple of decades have been in traditional low value added services, where informality and vulnerable forms of employment are often dominant.

It is no solace that the problem is global in nature,

Globally, the significant progress achieved in the past in reducing vulnerable employment has essentially stalled since 2012. In 2017, around 42 per cent of workers (or 1.4 billion) worldwide are estimated to be in vulnerable forms of employment, while this share is expected to remain particularly high in developing and emerging countries, at above 76 per cent and 46 per cent, respectively. Worryingly, the current projection suggests that the trend is set to reverse, with the number of people in vulnerable employment projected to increase by 17 million per year in 2018 and 2019.

This is not a surprise as 80 per cent of the casual workers and 31 per cent of the regular/salaried workers in 2016 earned less than the national minimum wage of Rs 66 / day. If looked at on the basis of gender, 95 per cent of women working as casual labour got less than the minimal wage as against 74 per cent men. Lower wages make workers more susceptible to being caught in the low income trap. With income not enough to save and invest, people earning low wages are unable to earn or multiply their money and get stuck at living at basic sustenance levels. The only way to move from the equilibrium is by earning a higher amount and saving it.

With low income levels in the country and substantial number of informal workers, India needs to look at vulnerability within jobs as a criterion in itself while assessing jobs problem. In order improve the conditions, the jobs created in the country need to assure a certain level of stability and redressal mechanisms. More than skilling, the government needs to create avenues for job creation. A good starting point would be to modify the labour laws and reduce the cost of doing business in the country.

Putting Salary Reform into Perspective

This is a guest post by Karthik Krishnan. It is a rejoinder to our guest post earlier today by Suman Joshi, ‘The Unintended Consequences of Basic Salary Reform’.

A lot is being said about the government move to cap basic income + allowances at 50% of Gross Salary.  Some are calling it an overreach, some are talking about reducing the disposable surplus, and others are calling it a method to bring in more funds into EPFO, thus reducing the social security burden of the country.

A lot of what is being said on this account does not take into consideration the actual practice on the ground. Amazingly, the cap proposed by the government is more benign that the interpretation EPFO enforcement officials have taken.

For example, consider this simple query in the forum for HR professionals where an enforcement officer has decided that 65% of Gross should be PF eligible salary. Or this news from 2014 about how the EPFO is going after firms where the Basic is below 50% . Based on my experience of managing payroll and EPFO officials across five industries and six different states, they tend to demand that the PF Wages be 60% of the Gross minimum. Sometimes they achieve this by coercion; sometimes by issuing an evasion notice: the dreaded Form 7.

Their power comes from the definition of wages itself as per PF Act:

“basic wages” means all emoluments which are earned by an employee while on duty or on leave or on holidays with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash to him, but does not include

– (i) the cash value of any food concession;

(ii) any dearness allowance that is to say, all cash payments by whatever name called paid to an employee on account of a rise in the cost of living, house-rent allowance, overtime allowance, bonus, commission or any other similar allowance payable to the employee in respect of his employment or of work done in such employment;

(iii) any presents made by the employer;

Now, as per any PF enforcement official, anything not mentioned above is part of Wages, their favourites being Special Allowance, Performance Allowance, Hardship Allowance and Transport Allowance.  The EPFO office is littered with such cases where the officials have issued attachment orders against top corporates of India to make them pay PF on these components from date of inception with interest.

Moreover, except for the fat cats in Information technology and some category A companies, the bulk of the country uses the PF to be capped at statutory limit method to increase take home of employees. The current cap is Rs.15,000 (for a long time, it used to be Rs 6500 and shot up to Rs 15,000 in a single day from September 2016), so even if your salary is Rs 40,000, you pay PF capped at Rs 15,000,  so change in allowance will not make a huge difference to this segment.

Moreover some states like Telangana have defined their minimum wages as Basic+DA and not gross salary, so as such the entire minimum wages (the bulk of the country in the organised sector is at this grade only) is already subject to PF. There are many adventurous people in this space who are operating at PF wages of even 30% of the Gross, and those are the segments which are likely to be worst affected. This segment was brought into the organised sector by being a little lax on enforcement, with officials looking away from MSME-segment employers who keep the PF wages below 60%. There is no way this group is going to settle for a lower take-home, so the option before the employer is to go back to the unorganised sector and skip the whole process , which unfortunately is no more possible due to the massive data collation that the department does, so employers will be forced to increase the CTC to maintain the same take-home in most cases.

In all this, I haven’t yet spoken about the other major social security ESI cause. ESI always has been on Gross and is not bothered with classification of allowance.

So, in effect, this move by the government will not even touch the higher echelons of the salary bracket–aka people who can read this piece. It will affect the bottom-of-the-pyramid people, but not by much. Just as strict enforcement of PF has led to rapid increase in organised workforce, we will settle into a rhythm with the establishment bearing the cost.

In parting, I just want you guys reading this to know that the government is pegging the limit lower than what they have been on the ground, where they used brute force. So why the fuss?

Why Won’t You Accept My 10 Rupee Coin?

The 10 rupee coin seems to be out of favour with the general public. It is getting increasingly difficult to use it as a means of payments. Vendors and customers are refusing to accept it. The Business Line reports: “From roadside vendors to even beggars, people have started saying a polite ‘no’ to the Rs 10 coin”. The problem is that many people believe that the coin is no longer legal tender. The RBI has issued multiple circulars and notifications urging people to accept the coin and reaffirmed the legality of the coin. Even banks have begun to refuse the coin as they have no space to store them, reports The Hindu.

Fiat money works on trust. Trust in this case takes two forms – trust in the government that has issued the currency and trust that the others in the system will accept the currency as a payment method. With the 10 rupee coin, both forms of trust are rather low. Social media and Whatsapp have had its role to play in spreading rumours about the coin. The RBI even tackled this in one of its notifications:

It has been reported that some less-informed or uninformed persons who suspect the genuineness of such coins are creating doubts in the minds of ordinary people including traders, shop-keepers, etc., impeding the circulation of these coins in certain pockets of the country causing avoidable confusion.

The Reserve Bank has advised members of the public not to give credence to such ill-informed notions and ignore them and continue to accept these coins as legal tender in all their transactions without any hesitation.

Payment systems and currencies have huge network effects. It gains value with more number of people using it. A currency in circulation gains acceptability based on its intrinsic value and the expectation that a large number of people will accept it as a form of payment. There are known instances where cigarettes have been used as currency in prisons because everyone else agreed on its value. In today’s fiat money system, the currency has no intrinsic value; only a government mandate declaring it as legal tender. The currency gains value because everyone else uses it.

However, in the case of the Rs 10 coin, no amount of government (RBI) assurances and orders has managed to infuse trust. Wonder if this is another side effect of demonetisation?