No sermons, no carrots, only sticks

The Reserve Bank of India on April 6th prohibited banks from:

dealing in Virtual Currencies or from providing services for facilitating any person or entity in dealing with or settling Virtual Currencies.

This is not strictly a ban on people from mining bitcoins or possessing them. Perhaps, it’s not even possible for RBI to enforce that ban given the decentralised nature of cryptocurrencies. Nevertheless, prohibiting banks from dealing with any cryptocurrency is symptomatic of how quickly governments resort to blunt policy instruments in India.

Carrots, Sticks, and Sermons has a wonderful classification of policy instruments. It argues that any government primarily has three policy instruments available to it: information (moral suasion, transfer of knowledge, communication of reasoned argument, advice, and persuasion etc), economic instruments (grants, subsidies, charges, fees etc), and regulation (absolute bans, prohibition with exemptions, obligation to notify etc).

Now, which of these three policy instruments should governments choose? The book has this to say:

All other things being equal, in most cultures at least, the use of coercive power is more alienating to those subject to it than is the use of economic power, and the use of economic power is more alienating than the use of information and exhortation. Or, to put it the other way around, exhortation and information tend to generate more commitment than economic instruments, and economic instruments more than regulatory instruments.

The book says that even politically, it is rewarding if these three instruments are applied in a sequence:

politicians have a strong tendency to respond to policy issues (any issue) by moving successively from the least coercive governing instrument to the most coercive. The idea is that over time a policy problem is tackled in three different ways: first by the provision of information such as uttering a broad statement of intent, subsequently by the application of selective incentives, and lastly by the establishment of regulations accompanied by the threat of sanction. The underlying notion is that in solving social problems the authorities employ instruments of increasing strength in successive stages.

But is this order followed in India?

It would take a thorough study to investigate this. But if the regularity of prohibitions is taken as an indicator, it appears that even if this order is adhered to, the predilection in Indian policymakers is to pick the coercive option fairly quickly. And this says a lot about India. It can be taken as a proxy for how liberal political philosophy is stillborn in India. A liberal society would default to a minimal constraint principle – cause as less trouble to the populace as possible. Policy instruments are ends in themselves as they determine the style of policymaking in a polity. So, a high number of bans and prohibitions indicates that at the margin, greater government control is the default in India. Seen through this lens, the RBI note does not surprise.

Inefficiency in Toilet Construction

There have been a series of infographics that have been circulated to show that the NDA government has performed better than its political rival, the UPA. One of these images deals with the number of toilets constructed and the amount of money spent on toilet construction.


According to its own data, the NDA government has spent nearly 3.5 times more for construction of one toilet.

If the data is true, the NDA government has clearly done better on both counts. However, what the numbers betray is that the NDA has also spent more money per toilet, thus indicating inefficiency or worse. The UPA has spent Rs.1750 per toilet and the NDA has spent nearly 3.5 times more per toilet – Rs. 6176.

Quebec is getting TASMACs for Marijuana

Quebec is pulling a leaf out of Tamil Nadu’s playbook for legalising marijuana. Quebec will be procuring marijuana in bulk from six suppliers and then operating the entire supply chain. Quebec will not only levy an ‘excise’ tax, but also sell marijuana out of government-owned dispensaries. In other words, Canadians will be buying their weed from a Canadian style TASMAC!

Hydropothecary Corp, Canopy Growth and Aphria Inc are among six companies that have signed agreements with Quebec’s liquor board to supply the province with marijuana when Canada legalizes its recreational use this year, the companies said in separate statements on Wednesday.

Canada’s senate is set for a final vote on legalizing marijuana on June 7, with sales expected to start in the fall. Provinces, including Quebec and Ontario, plan to open government-run stores, while others such as Alberta and Saskatchewan will allow private ones. British Columbia plans to have both.

[The Globe and Mail, April 11, 2018]

Back in India, this is what a government dispensary of marijuana looks like. Canada must do better.

Government authorised Bhang shop, Jaisalmer, Rajasthan, India.

Banning Cryptocurrency is a Terrible Idea

The RBI released a notification recently on virtual currency. In essence, the central bank is trying to ban cryptocurrency in India:

In view of the associated risks, it has been decided that, with immediate effect, entities regulated by the Reserve Bank shall not deal in VCs or provide services for facilitating any person or entity in dealing with or settling VCs. Such services include maintaining accounts, registering, trading, settling, clearing, giving loans against virtual tokens, accepting them as collateral, opening accounts of exchanges dealing with them and transfer / receipt of money in accounts relating to purchase/ sale of VCs.

For those who are already engaged in the practices mentioned above, the RBI has given them three months to exit it.

This form of blanket ban has been feared for sometime. There were whispers that such a daft move would be done and the RBI didn’t want to disappoint. They have carried out the ban in order to protect consumer interests, market integrity and to prevent money laundering.

There are several problems with this:

  1. Ineffective: Such a ban will be completely ineffective. By its very nature, and as the name suggests, cryptocurrencies are hard to track and provides anonymity for its users. How does the government actually plans to ban it?
  2. Loss of control: By not banning it, RBI had a better chance of regulating some aspects of cryptos. Now, it has lost all control and all the transactions will go underground. Those who want to use Bitcoins will continue doing so by using cash, or other discreet financial instruments to trade. And as Rahul Matthan says in his editorial, “The only people who abide by the terms of a ban are those who always intended to use the service for legitimate purposes”.
  3. You can’t have one without the other: The government, it seems, is quite keen on developing and using blockchain technology for various public purposes, such as maintaining land records, public health records, etc. However, the best use case of blockchain is cryptocurrencies. By banning one, there will be no innovation and test cases of blockchain in India.

It will be interesting to see how this pans out. My guess is that RBI will soon realise that it has no control over this and will backtrack on this move. However, it might have already set a bad precedent and the narrative that these are inherently dangerous and risky.