258 / May 10, 2024

What UPSC Books Won’t Teach You – Public Policy 101, Mumbai Mafia Backstory, & On-Ground Reality

67 Minutes

258 / May 10, 2024

What UPSC Books Won’t Teach You – Public Policy 101, Mumbai Mafia Backstory, & On-Ground Reality

67 Minutes
Listen on

About the Episode

What UPSC Books Won’t Teach You!

In India, public policies surround the circumference of our daily lives.

Despite their omnipresence, citizens of the country adopt a rather nonchalant attitude of ‘Jo dikhta nahi hain, woh hume affect nahi karta.’ (What we don’t notice won’t affect us.)

The government in India makes, enforces, and changes laws without much scrutiny from its people.

The elite tend to overlook the government’s actions because they no longer expect the unexpected.

On the other hand, less privileged groups seek immediate gains from the government instead of asking for lasting solutions.

Nonetheless, neither side is fully satiated and seldom have time to think about how public policies affect their lives.

Watch this educational masterclass of a conversation with Pranay Kotasthane, Deputy Director at Takshashila Institution.

The episode is about India’s policy making since the colonial era, what entails policy making in India, how it affects each of us and what role the government plays in your life… Tune in NOW!

Watch all other episodes on The Neon Podcast – Neon

Or view it on our YouTube Channel at The Neon Show – YouTube

[Pranay Koshpane] (0:00 – 0:51)

Many people who appear for say UPSC, they have a very idealized view of what they will be doing once you get inside. But when they go in, they realize, man, like this is not what I signed up for. If you want India to be a bigger, better power, you will need to get our government fixed.


The salaries that people in government get are some of the highest in the world. Actually, governments care immensely about what elites think of it as an income pyramid. At the lowest income level, they have disproportionate influence on who gets elected.


At the middle income strata, they have disproportionate influence on what gets discussed. And at the upper level of income, they have a disproportionate influence on what gets done. Today, governments still run more than 1,500 companies, including sandal soap and things like that.


Our question should be, why are they doing that?


[Siddhartha Ahluwalia] (0:51 – 0:59)

How did the underworld mafia in Mumbai get created because of a few infamous policies of Moraji Desai?

[Siddhartha Ahluwalia] (1:00 – 1:34)

Hi, this is Siddhartha Ahluwalia. Welcome to The NEON Show.


I am your host and also founder of Neon Fund, a B2B SaaS focused venture capital fund that invests in the most enterprising SaaS companies coming out of India, selling globally. Today, we are going to discuss public policy, the most hotly debated topic, as we are in the midst of the general elections in India. And what role do citizens play?


What role does the state play in public policy? I have one of the experts on public policy in India today, Pranay Kotasthane. Welcome to The NEON Show.


[Pranay Kotasthane] (1:34 – 1:35)

Thanks, Siddharth. Thanks for having me here.


[Siddhartha Ahluwalia] (1:36 – 2:20)

And Pranay, you have been in public policies for a long period of time. You are Deputy Director at Takshila. It’s one of the think tanks of India in public policy.


You are the co-host, co-author of Puliyabazi podcast, which we all enjoy and listen to. And you are the author of these two wonderful books. I love this book especially because it dives into the recent episodes in public policy in India that we are going to discuss on this podcast right now.


And the other one also. So Pranay, before we dive into the podcast, I want to make sure that our audience understands the basics or something. So for example, let’s start with what is public policy?


[Pranay Kotasthane] (2:20 – 4:00)

In short, public policy is essentially a study of the actions that all arms of the government do, which is legislature, executive, judiciary. So an analysis of that, the aims and objectives of what the government is trying to do, and then analyzing whether those methods which are used to achieve those aims and objectives, what are the problems? Are they able to achieve their goals?


Essentially, it falls under the realm of public policy analysis. So that’s what we do. And public policy, as I said earlier, there was a lot of apathy.


But now I think public policy has become a spectator sport, just like politics, right? So we already have chosen our favorite government or our favorite political party. And then we are trying to rationalize whatever governments are doing on that basis.


That’s what we want to challenge in our books, because public policy also has some framework, some core ideas, some ways to anticipate the unintended. So for example, every government policy has trade-offs, there will be unintended consequences. But governments often say, no, overall things were good.


So why do you care? Like demonetization happened, right? There were a lot of unintended consequences, but many of those unintended consequences could have been anticipated.


So that’s what a public policy analyst will do, right? So not just say one policy is good or bad, because my favorite government or my favorite leader has said so, but you will go deep down, understand what are the unintended consequences, can you anticipate them and put that in front of the people and in front of the government, so that the governments do not take you for a ride, you know, that’s essentially.

[Siddhartha Ahluwalia] (4:00 – 4:06)

And why should common citizens need to be aware and care for public policy?


[Pranay Kotasthane] (4:06 – 4:10)

Yeah, because literally the word public is there in public policy, I always say that.


[Siddhartha Ahluwalia] (4:11 – 4:15)

But they have survived for 75 years without caring about it.


[Pranay Kotasthane] (4:15 – 5:04)

Yeah. So if you, if that’s why the Indian government governance is where it is. So if you want India to be a better, bigger, better power, you will need to get our governments fixed, right?


What that means is, see, we are in the 21st century, but our governance is still in the 19th century, right? So the idea is, can we bring the government to today’s stage? That means several things, right?


For example, governments are spending, our government, we have this perception that government is very big, it is large, but it is not so in India’s case. If you normalize India’s government to, USA’s population to India, Indian federal union government is one half that of the US, right? So actually the US…


[Siddhartha Ahluwalia] (5:04 – 5:05)

You are talking about employees in government?


[Pranay Kotasthane] (5:05 – 5:09)

Number of employees, yes, yes. So there are far more employees in the US government.


[Siddhartha Ahluwalia] (5:09 – 5:13)

And they don’t talk about it, right? They don’t celebrate it. In India, UPSC is a celebrated thing.


[Pranay Kotasthane] (5:13 – 5:22)

Yeah, because we have weird sort of incentives, because once you get into the government, you are there for life. So the incentives are that…


[Siddhartha Ahluwalia] (5:22 – 5:23)

And in the US, it’s not that, right?


[Pranay Kotasthane] (5:23 – 5:57)

Yeah, it’s not. The US has a revolving door policy, you come in, go out, and you have a life outside that. In most countries, it is that way in where, but in some developing countries, we have continued with that colonial era mechanism where once you get in, cross that gate called UPSC and enter into the government, you’re there for life.


And one more surprising stat is that at the lower levels of government beyond, apart from the IAS, etc, the salaries that people in government get, that is some of the highest in the world.


[Siddhartha Ahluwalia] (5:57 – 5:58)

In India? Yeah.


[Pranay Kotasthane] (5:58 – 5:59)

So for example, teachers…


[Siddhartha Ahluwalia] (5:59 – 6:01)

But the government often complains about their salaries.


[Pranay Kotasthane] (6:02 – 6:02)



[Siddhartha Ahluwalia] (6:02 – 6:03)

They are not equal to private.


[Pranay Kotasthane] (6:03 – 6:29)

No, yeah. So that’s what, if you look at IAS, etc, let’s say IAS, if you compare with the CEO of a company, they will be earning less. But if you compare at the lower level, say a teacher, for example, in a government school, there are lots of studies on this where Indian teachers, government teachers, they are some of the most well paid, normalized to our GDP and all that.


So the incentive is that once you get into the government, you will have a good life.


[Siddhartha Ahluwalia] (6:29 – 6:31)

Safe, permanent job.


[Pranay Kotasthane] (6:31 – 6:49)



And that’s why people, there is that mismatch of demand and supply. But anyway, so largely, if we don’t care about the government, we’ll get a government which is now, which is spread out, but not doing the kind of things it needs to do, which is health, education, public health, education.


[Siddhartha Ahluwalia] (6:49 – 6:50)

Because they are not popular things.


[Pranay Kotasthane] (6:50 – 6:52)

Yeah. These are tough things and…


[Siddhartha Ahluwalia] (6:52 – 6:55)

They can’t be solved in one year or even a decade.


[Pranay Kotasthane] (6:56 – 7:02)

Yeah. You can make some changes in four, five years. So for example, Indore has become a cleaner city when it…


[Siddhartha Ahluwalia] (7:02 – 7:04)

But that’s the effort of the last 30 years.


[Pranay Kotasthane] (7:04 – 8:22)

Not 30 years. I’m from Indore. I mean, it started in 2014-15, where there were motivated civil servants with support from the state and over 10 years, it has improved significantly.


So anyway, the idea is, we need to understand that if we don’t ask the right things from the government, we will get what it is currently doing. And that affects all of us. It affects investors, for example, if our infrastructure doesn’t improve, if our tax policies are poor, if our trade policies are poor, no one is going to invest it beyond, you know, just giving, doing something because there’s an incentive or a production-linked incentive at play.


But if you want sustainable growth, you need the state to do what it should be doing rather than the current state. So we have a term for this in this book called omni absent. We call the state as, in the sense that the state is doing what it shouldn’t be doing, it is not doing what it should be doing.


And that is one thing. I often, from an expenditure point of view also, it is important. I always ask this question in my public finance classes.


So if you look at India’s economy, what percentage of India’s economy, roughly, do you think is spent by all governments combined?


[Siddhartha Ahluwalia] (8:23 – 8:24)

I read the books. 28 percent.


[Pranay Kotasthane] (8:24 – 8:27)

25, roughly, right? And what is it for the US?


[Siddhartha Ahluwalia] (8:28 – 8:28)



[Pranay Kotasthane] (8:28 – 8:57)

Yeah, correct. Exactly. 38 percent.


So that is the mismatch, right? Like we generally think it’s a capitalist economy. So the US must not be spending such a part of their GDP, so the US government must not be spending such a big part of their GDP in their government.


But it’s exactly not true, right? In fact, there is a very well known result that as your GDP per capita increases, the government spending as a percentage of GDP also increases. So there’s almost a very established correlation.


[Siddhartha Ahluwalia] (8:57 – 8:59)

Pakistan is at 21 percent.


[Pranay Kotasthane] (8:59 – 9:18)

Yeah, the poorer the country, you will see they are lesser. But what is the difference, right? We do not, the US, the government, US or any rich country, the government will be spending a lot more, but they will be doing a lot less.


So they will pick up certain areas and spend a lot in those areas.


[Siddhartha Ahluwalia] (9:18 – 9:18)



[Pranay Kotasthane] (9:19 – 10:44)

Yeah, where there are market failures. So we know, for example, that public health is something which you have, you need governments to do because there will be a market failure. There are, what, my actions do not have a negative externality.


So in order to balance that, you need government action. R&D spending, for example, is a well established thing that the private sector will under invest in R&D because the gains from R&D will not accrue to my company. So governments have a role in that spending.


So all these are established principles and frameworks of public policy through which we understand where government action is warranted and where government action is undesirable. Now, that is how US spending is 38 percent, but it is very concentrated on health, education, defense, external affairs, and R & D. These will be the big chunks.


Whereas in India, if you look at it, we have 25 percent of our GDP, 2 percent of it is on defense, around 4 to 5 percent is on health, on education, all levels of government combined, and then another 1.5 to 1.4 percent is on health. So this is a total of 8, 9 percent. Where is the remaining, what, 30 percent going, right?


So there are a lot of subsidies, there are governments, there are running companies. Today, governments still run more than 1,500 companies, including sandal soap and things like that, right? So you have this idea that…


[Siddhartha Ahluwalia] (10:44 – 10:46)

And the government is bleeding money on all these 1,500 companies?


[Pranay Kotasthane] (10:46 – 11:32)

Yeah, they are, not all, some of them are profit making also, but largely they are at loss. But that is not the right question because our question should be why are they doing that? Because remember, state capacity is limited, right?


The number of people in government is limited. The energy that they can devote to it is limited. If you are going to take them and get them to run PSUs, they will obviously not be able to spend energy, time thinking on health care, education, judiciary, where we have a big problem, law and order in general.


So all the developmental arms of the Indian state are anemic, right? They do not have the capacity. So that is why we should care about it, right?


If we do not care about this, governments will do what they have been doing till now and it will hinder the progress that India can make.

[Siddhartha Ahluwalia] (11:32 – 11:43)

Let us say, even middle class, upper middle class, people like you and me, keep on asking these questions, but we are not the majority of the vote bank. Why will the government care about our questions?


[Pranay Kotasthane] (11:43 – 11:53)

Yeah, actually governments care immensely about what elites think, okay? Because elite opinion is what drives policy across the world. It is not.


[Siddhartha Ahluwalia] (11:53 – 11:54)


Can you give me an example?


[Pranay Kotasthane] (11:54 – 12:25)

Yeah, so for example, see a person, there is a difference between policy and there is a difference between what governments do close to the elections, right? Manifestos, promises, etc.


But the, if in any society, it is the elites who will have the intellectual capacity, time, energy to spend on things related to the government, thinking about how, what government should do, right? Because if you are barely making two ends meet, you are not going to be thinking of how the governments will do.


[Siddhartha Ahluwalia] (12:25 – 12:26)

I need survival.


[Pranay Kotasthane] (12:26 – 13:22)

Yeah, exactly. So your ask will be from the government to just give me whatever you want. It is true across the world.


It is not new to India. But it is the elite, if the elite is invested in that country, they will spend time on looking at, spending on their energy to improve their state, market, society, to make the governments a better place. And then once you have that in mind, then governments actually change policy.


So we in fact have a pyramid, think of it as an income pyramid. So at the lowest income level, right, they have disproportionate influence on who gets elected, okay? At the middle income strata, they have disproportionate influence on what gets discussed, right?


Because you and I are the people who are doing podcasts, reading op-eds and things. And at the upper level of income,


[Siddhartha Ahluwalia] (13:22 – 13:23)

Ambanis and Adanis.


[Pranay Kotasthane] (13:23 – 15:34)

they have a disproportionate influence on what gets done by the government. So this is a framework to think about, right?


So middle or, I mean, we are actually amongst the top decile of India, definitely top 10%. But in general, if you say, as with economic growth, the middle class or classes is concerned, will have a disproportionate influence on what gets discussed, what gets written in newspapers, and that moves the Overton window. Overton window is another concept which says that in a democracy, we have this idea that the politician might, in general, we have this idea that politicians come up with ideas and then it gets implemented.


But it is not so mostly, right? It is about us, there is a window of political possibility. It is called the Overton window.


So on any policy, there will be a range of opinions, but only some of them are politically feasible. For example, let us say you are talking about education. So saying that you should have the right to education falls within the Overton window.


Like if a politician goes and says it, it will not be thought of as radical and you are trying to upset the status quo. No politician wants to be seen outside that political window because they are democratic, they have democratic accountability. Finally, they have to go and battle.


But if let us say you say a politician says we should privatize entire education, that will be outside the Overton window, that will be a political suicide, right? So the idea is that there are some things which are in the Overton window, some things are out. But with public opinion, that Overton window can move over time and that has moved, right?


Whether it is on let us say LGBTQ rights, the Overton window has moved, right? It was not where it was in 2008, 9. So if people are invested and interested in public policy, and people like us will have time, energy to do this systematic study, then you can move the Overton window to get what you want the government to do, right?


So that is why it is very important.


[Siddhartha Ahluwalia] (15:34 – 15:37)

How do you get government help by doing these podcasts or writings?


[Pranay Kotasthane] (15:37 – 17:07)

Yeah, so governments have various ways of interacting. Now, for example, many of the laws or many of the policies are put into the public for draft comments. So let us say the Ministry of Electronics has made a policy, they will put it generally into the public domain for draft comments.


Anyone can respond to it, you know, you and I, we can just respond to it. There are many organizations which are trying to bring together people to systematically respond to these draft comments. So that is one way.


The other way is there are standing committees that the parliament has. On each of these ministries, there will be an equivalent standing committee which will question the, it is a check and balance where the legislature will question the executive that defense, for example. So it will be a standing committee of defense where there will be people from the opposition parties and the ruling party, they will ask questions from the Ministry of Defense that why didn’t you do this?


So you can respond to those. There are, you can depose before a parliamentary standing committee. Then more indirectly, the idea is just our theory of change is to just flood the system with good ideas.


So at Takshashila, what we are doing is just writing a lot, writing policy papers which make the argument to move the overton window in the direction which we think is an Indian national interest and let those ideas be there in the public domain. Over time, those ideas do move the window. We have seen it in many cases.


[Siddhartha Ahluwalia] (17:08 – 17:08)

Can you give an example?


[Pranay Kotasthane] (17:09 – 18:24)

So for example, space reform, India privatized space in 2020. So before that space was the domain of ISRO only. But we now know that you need a very robust private space.


I think a lot of good things are being done by SpaceX and the likes which are not in the government. So now some of us at Takshashila had written a document long ago which said that you should privatize space, you should privatize space. We keep doing that.


It is not as if the change happened because of us. No one can say that in public policy. But once this idea was expressed enough in many forums, many other people also spoke about it, it was no longer outside the overton window.


It became, okay, we can think about it and over time the government did do it. It happens like even in the 1970s, 80s, the fact that the government should get out of the way and economic liberalization was outside the overton window. By the 1980s, it had already changed and 1992 when the liberalization happened, it was not a radical idea at all.


So many of these things happen when you are able to put these ideas into the public.


[Siddhartha Ahluwalia] (18:24 – 18:49)

So just to summarize it, what you are saying is, you are saying the good policy that the government will make in the future or is making right now, these are the things that have been discussed over the last decade. And some of these things would have captured the masses’ attention and thereby captured the government’s attention that, hey, the timing is ripe right now to make it happen.


[Pranay Kotasthane] (18:50 – 21:21)

Absolutely, yeah. It might not have captured the masses’ attention, that’s the only correction I’ll make. But largely, arguments would have been made.


So that’s why, you know, for example, Ajay Shah and Vijay Kelkar, who also have a very good book on public policy called, In Service of the Republic, they talk about the idealized policy pipeline. You know, how does change happen in India? So first, they have around seven steps, not going to discuss all of them, but the first step starts with having good data on that particular area.


So, for example, health, you should know what is the problem in public health in India. So first, you have a good statistical system in place. The next thing is, once that statistics is largely accepted, then there will be the role of think tanks and where you then propose ideas that, okay, this is a problem, this is the way to go about it.


Some others will have completely other, you know, opposing ideas. That’s fine. There is that intellectual sparring as a natural selection of ideas takes place, right, just like in biology.


So, people will argue, etc. People will write in opinion pieces or discussion documents. Some of them, ideas will go away.


Then comes the role of committees. So, from outside the government, we think of committees in a very cynical way, that the government has made a committee, so change will never happen. But most of the changes that have happened in government are often because of a committee recommendation.


So, what the committee will do is they will take all these ideas, which are there in the ether of public opinion, and then they will, you know, wean off some of the most radical ones or politically unfeasible ones and then committees write reports. So, this gets ready. Finally, when, you know, a crisis happens, it’s not as if governments come up with a new idea when the crisis happens.


What happens is they pick up an idea which is already there, two, three committees have said and that they’ll pick one of those when, say, a crisis or one urgency comes up, and then the change happens.




So, ideas, if you don’t have good ideas in the public domain right up front, the crisis will never lead to that kind of change. For example, in health, COVID-19, COVID-19 happened.


Did you see any change in our health policy? No, because that policy pipeline is not prepared. We don’t have a good set of ideas in the public domain about what we should do for Indian health, you know, we have very few ideas.


But on some other things we had, like, I’ll give you the example of space, about economic reforms in 92, that policy pipeline was already established. So, that’s why it’s important.


[Siddhartha Ahluwalia] (21:21 – 21:34)

So, what you are saying is, people like you, me and all the listeners of this podcast, we should try to create at least a policy pipeline. And some of them over a period of time will be picked up by the government and will go in the government’s pipeline.


[Pranay Kotasthane] (21:35 – 22:03)

Absolutely. Yeah. So, first, equip yourself with fundamentals of public policy, because otherwise we’ll not understand what the government should do.


Once you have, then you can sharpen your demands. That was one of the reasons why we wrote the book. Sharpen your demands, ask from a very systematic perspective about what the government should be doing, and more importantly, what the government should not be doing.


Then, as you said, articulate those ideas, the window might move, and then change happens. That’s how it is largely in most democracies.

[Siddhartha Ahluwalia] (22:04 – 22:12)

And we have carried a lot on the policies, on the way a government operates from the colonial era. You have written about it, would love to hear your thoughts.


[Pranay Kotasthane] (22:13 – 22:53)

Yeah. So, I mean, lots of people have written about this, that once you transitioned from that state, which was colonial to this state, which was republic, democratic republic, at least the frame that was supposed to execute some of these policy changes was still carried over from the past, right. So, just the fact, for example, in Karthik Muralidharan’s latest book on accelerating India’s development, he says, for example, why do we have this weird thing that government officials keep getting transferred every two, three years, right?


All the IAS officers…


[Siddhartha Ahluwalia] (22:53 – 23:07)

But that was the reason that, hey, no government official could have so much power in one district or a region, so that they can continue to juice their influence by means of bribes or unethical means.


[Pranay Kotasthane] (23:07 – 23:34)

Correct. So, the idea came from the colonial state. So, the idea was that the colonial state was not so interested in the development of those people.


So, it was, okay, you are extracting revenue and when you extract revenue, a lot of corruption also used to happen. So, to minimize that corruption, you keep moving and you keep doing it. But your main role was as a revenue collector.


That is why a head is called a collector, right? He is supposed to do development.


[Siddhartha Ahluwalia] (23:35 – 23:35)

That is how the term collector came in.


[Pranay Kotasthane] (23:36 – 23:53)

Yes, the DM is called the collector, district magistrate. So, the collector is actually the revenue collector. So, that was a primary responsibility.


And that is why you have a system where you keep transferring the, but in most of the countries which are more advanced, this is not how it operates.


[Siddhartha Ahluwalia] (23:53 – 24:06)

Most of the countries like Singapore were colonies, right? The other developed countries have been colonies. We do not see such an overhang of colonization in those countries.


[Pranay Kotasthane] (24:06 – 24:13)

See, no, actually in many of the post-colonial democratic countries, you will see something similar. So, I mean, Pakistan, Bangladesh.


[Siddhartha Ahluwalia] (24:13 – 24:17)

They are, I think they are all parts of India. So, forward parts of India.


[Pranay Kotasthane] (24:17 – 25:43)

Yeah. So, that, but many, even in Africa, you will see the same issues cropping up. So, what is the difference between Singapore and India?


See, in India, we established the fact that there will be a democratic republic right at the outset. So, that was unique. And you had a constitution which came into being and it has survived.


That was unique. And in the imagination of the people, they said that the constitution will be a vehicle, not just for political revolution or economic revolution, but also a social revolution. This was very different.


Political revolution, how everyone got a vote, you know, many states, even until that time, it is very unique for India to have adopted that part that every single person had a vote, even many, some of the European states also women got a vote later, you know, and, but India at the outset promised that. Economic revolution was the transfer of resources from the colonies, from the colonial administration to people in India, then there was also land reform, etc. But there was a social revolution also.


So, the state became the primary vehicle through which social change also has to happen. Now, this has positive and negative aspects. A positive aspect is that, yes, India was a deeply divided society at the time when we got independence. So, you needed


[Siddhartha Ahluwalia] (25:43 – 25:46)

Some had what, 400 plus princely states.

[Pranay Kotasthane] (25:47 – 27:04)

Yeah, that was 500 plus to get them together. But just the social inequities, right, the caste divides, the language divides, etc. So, you needed someone to, also the gender issues, right.


So, you needed a vehicle to bring change. So, the state became the primary vehicle. Now, the positive aspect of this was that we moved forward on a lot of those things.


And that is genuinely a success that we should be proud of. But at the same time, there is also a trade off. So, the negative aspect has been that we thought of the state as being the primary provider for anything that we want to do, because it is a vehicle of social revolution, right.


So, you have to do everything that I want you to do. So, you have to do things related to language, you have to do things related to things which can be done by the society as well. But once that happened, the interesting paradox was that the administrative arm was still colonial in nature, because the structure was still that way.


But we added more demands from the state. So, the state became more coercive. And we spread the state too thin, trying to do everything in our lives without building the capacity and its energy to actually make things happen.


[Siddhartha Ahluwalia] (27:04 – 27:33)

So, that is where I will give you an example. I come from Meerut, a town near Delhi. So, if you go to any MLA’s house, member of legislative assembly, or any MP’s house, member of parliament, or even let us say, a superintendent of police or senior superintendent of police there, I do not know about cities, but every morning they will start with having a queue of people.


Jansunwai. If this is not colonial, what is?


[Pranay Kotasthane] (27:34 – 27:40)

Yeah. So, I mean, people often say that, you know, we are like, we are not citizens.


[Siddhartha Ahluwalia] (27:40 – 27:41)

I am talking about 2024.


[Pranay Kotasthane] (27:42 – 28:05)

Yeah. So, citizens not subjects. That is the paradox of this because you made the state so powerful.


Without the capacity to do that, the only way to get things done from the state is to know someone who can get things done for you. And that is where you end up with this idea that you need the state role, but no one, the state cannot get things done. So, you need someone to know your influence.


[Siddhartha Ahluwalia] (28:05 – 28:26)

And the common people there are sitting on the floors and the executive or the politician or the policeman is sitting on a large chair. And the divide is quite evident. You hardly get a few seconds to voice.


You get a letter from somebody influential to give it to them. It is pathetic.

[Pranay Kotasthane] (28:26 – 29:27)

Exactly. So, that is where we are. That is the thing which when I said we are in the 21st century, but governance is often in the 19th century.


I would say that I would qualify by saying in all those things, things have improved. So, if you look at all the data, the improvement is there across these. So, education, gross enrollment ratio, for example, at one point of time that was our challenge, schools.


Now, the challenge has shifted from inputs, outputs to outcomes. So, now we are talking about learning outcomes.


So, it is okay, almost everyone is now in schools, we have school buildings, but what are they learning? If a child is in standard 5, can they read things which they were taught in standard 2? Those are learning outcomes.


So, the state has done something which has improved things, but you are also now questioning how much is that improvement? What is the next jump you can do?


[Siddhartha Ahluwalia] (29:27 – 29:39)

But are our officials, the government aware of that, that the public policy which they have right, the collector system, the Sunwai system, are they trying to break it apart right now?


[Pranay Kotasthane] (29:40 – 29:45)

So, there have been a lot of government committees again, committees and commissions are important, so they have done the work.


[Siddhartha Ahluwalia] (29:45 – 29:49)

But you are asking the powerful to make policies to take power away from them.


[Pranay Kotasthane] (29:50 – 30:26)

Exactly. So, that is where I was coming to, there are good reports on this, there are two administrative reform commissions which have analysed this, recommended it. But you know, see the policy change, the one model of policy change again is called, you know, policy window, policy window John Kingdon schema changes happen when three things merge.


There is a policy problem, there is a well-defined solution, and then there is something which makes it urgent or something which is politically favorable. So, this has, this particular problem is stuck in the last one, right, because why will the government change anything when you are the beneficiary of that?


[Siddhartha Ahluwalia] (30:26 – 30:39)

This is like the government back in the 1950s or 40s, when we got independence, the government asking princely states to give up their powers, and they did not give up their powers, it had to be snatched away with brute force.


[Pranay Kotasthane] (30:40 – 30:45)

Yeah, not in all cases, some of them agreed. So in similar case but


[Siddhartha Ahluwalia] (30:45 – 30:56)

Again, how can, if given a choice to the princely state if the government was not formed, they would have kept on operating in the same way. So, you are asking the government to change, give up powers.


[Pranay Kotasthane] (30:57 – 33:36)

Yeah, yeah. So, that is why the role of the middle classes and elites, we have to make that argument consistently . This will benefit yourself, you know, because even now people in government also want to do great things. So, for example, many people who appear for, say, UPSC, they have a very idealized view of what they will be doing once you get inside.


But when they go in, they realize, man, like, this is not what I signed up for, right? Because you have the same problem, every two, three years, you are getting transferred, you are at the whims and fancies of the politician. If you are in police, you will, you are even at the whims and fancies of your district magistrate and all that.


So, now, if you have a state which is actually doing that, no one goes into the government thinking they want to do it, many of them are genuinely thinking we want to do something good. So, if you, you have to make an argument for in favor of the people who are within the government or who want to go into the government that these kinds of changes will benefit them, they will have a more fulfilling career in the government, they will be able to do things that they really want to, right, developmental outcomes, which people care about genuinely instead of just going and doing things by bits and pieces.


So, yeah, it is a tough thing, I do not say it will happen, but as I said, overton window does move over time, there are countless examples and we have to keep making that argument. Another surprising stat, for example, people often think China is a very centralized country, but actually it is extremely decentralized in operation. So, a large percentage of their government spending happens at local levels, our government is exactly opposite, out of the 25 percent I told you, roughly 2-3 percent happens at the local government level, otherwise it is centralized by roughly 13 percent at all union governments and roughly 12 percent at all state levels, right, so, though that is the split, whereas in China, it is a lot at the local government, same with US etc. So, now we have to make the case that you have to decentralize powers, you need people at the local levels to be able to decide their destinies much more, right, mayors, what do you know is the mayor of Bangalore, I do not know, right, so, it is, whereas those were the systems which work in many of the states. So, anyways, these are the arguments for reforming the state that need to be made and hopefully those changes will happen.

[Siddhartha Ahluwalia] (33:36 – 33:43)

And why have not we learned in the last 75 years that hey, we need to give the state or the city more power to develop itself?


[Pranay Kotasthane] (33:43 – 35:08)

Yeah, again, this is, if you look at it as a complex adaptive system, initial conditions matter a lot, right, in this, the initial condition for India’s independence was that again too many divisions, you need a strong centralized state which will be able to keep the country together, right, so, that is why the architecture which came up was this very strong union government in place, even though we had roles of the state and all defined in 7th schedule, we all still had a very predominant, people often call it a quasi-federal state or a federal state with unitary characteristics and things like that, so, that was probably needed at that point of time. But with over time, that realization should have come that you need more decentralization, again, decentralization is also one of those wicked problems, it does not happen, who will give their own powers away, right, but in some places, realization has come in say now state governments do play an important role, for example, one thing again people might not appreciate is 60 percent of all government spending expenditure happens at the state level. So, and a lot of the core things we, you and I worry about health, education, law and order, the primary constitutional responsibility of them is for the states, not the union government.


[Siddhartha Ahluwalia] (35:08 – 35:13)

So, you are saying this budget is given to the state government by the union government to work on education and health?


[Pranay Kotasthane] (35:14 – 36:16)

No. So, there are two things, one is there is a constitutional division, like for example you pay GST, there will be a SGST and there will be a CGST, right, so, that SGST directly goes into the state’s money. So, it is constitution, the union government does not give, it is their right according to the constitutional division of powers, that is one and then union governments run certain schemes when state governments like Sarva Shiksha Abhiyan, so, for that union government gives some portion of the money and state governments give some portion of the money, but the implementation of all these is done at the state level. So, if you want India to jump to the next level, if you want India to progress, you need strengthening of the states, of the local governments and then for the union governments to do what it should be doing, which is defense, external affairs, etc. But so, that is the conceptual jump we have to take.


It has happened in China, in extremely centralized systems where there would have been no incentive to, so, it can happen in other places as well.


[Siddhartha Ahluwalia] (36:16 – 36:39)

So, just to summarize it, what you are saying is, if we have to improve the quality of life of common people in India, the spending of the government should, let us say, go from 25% to 30% at least, or 38% to match that of the US, because the percentage spend of the government is directly proportional to the quality of life.


[Pranay Kotasthane] (36:39 – 37:23)

I would actually disagree, I would say that, that is the second step, that will happen naturally because what happens is, once you become richer, you have more demands from the government, you will pay a Mediclaim, you have medical insurance, etc. and then the government spends. So, the real thing we need is, we want the 25%, which is currently the spend, to be spent on areas where the government should be spending, that is the first step.


So, get governments to improve our law and order, that is, the police system is broken, our judiciary is broken, those are the areas where you want the government to spend on. Then, what are the other areas for spending, will increase automatically.

[Siddhartha Ahluwalia] (37:23 – 37:52)

Pradeep, I want to discuss a few things on the cause and effect that, you know, public policy and the government, the state has led to, and some of its consequences, that took like decades and huge amounts of public spending, maybe billions of dollars. So, the first case study I want to discuss today is, how did the underworld mafia in Mumbai get created, because of a few infamous policies of Moraji Desai.


[Pranay Kotasthane] (37:52 – 40:50)

Yeah, correct. So, again, we need to think of governance and public policy not as a linear system, but as a complex system, right? In a complex system, small changes can have very disproportionate effects.


The butterfly effect.


Yeah, exactly. Butterfly effect is an example of a complex adaptive system, an articulation of a complex adaptive system.


So, that is how it happens in governments also. And oftentimes, we do not, out of good intentions, governments do something, there is large public support, but the consequences of that will be very, very negative. So, that is why we say, the way you judge policy is not by their intentions, but by their outcomes.


So, good policy and good intentions are very different things. So, in fact, some of the worst policies come out of good intentions. This is one example.


So, the idea was, okay, there should not be alcoholism in the 1950s and there was this prohibition which came on alcohol. So, Moraji Desai was, I think, the CM of Bombay State back then. So, he banned alcohol.


Now, naturally, you know, demand for certain things does not go away. So, this is, you will still, people will get access to it in one way or the other. And once, how will you get access to it if it is banned?


The only way you will get access to it is if someone has to do this in an illegal way. And that is how the origin of a lot of the underworld mafia came into being. And you first started with smuggling alcohol.


Once you start smuggling alcohol, you have to put that money somewhere or the other and you cannot channel it very easily into the formal system. So, you start engaging in some other illegal activities which encourage that. And simultaneously, after a few years, Moraji Desai also had, because at that time we had foreign exchange issues, etc.


So, there were a lot of gold people used to buy and smuggle. So, there was another ban on gold imports and very tight controls, essentially, on gold. So, then the people who were doing these alcohol related things, they shifted, added a new vertical to their business, which was to gold smuggling.


That led to gold smuggling, etc. So, and then you had a very strong mafia created, which had been a conglomerate with many, many business interests. And eventually, that is why in the 80s, 90s, you had this very strong Mumbai mafia that we have had many movies about, Haji Mastan


Yea, Haji Mastan in the 1970s, but then you had Dawood Ibrahim and the likes.


So, all that government action at one level created incentives for such a thing to emerge and operate.


[Siddhartha Ahluwalia] (40:50 – 40:57)

So, why did this model or repercussions never happen in Gujarat, which has banned alcohol for a long period of time?


[Pranay Kotasthane] (40:57 – 42:57)

Yeah, no, prohibition always generates these kinds of actions. So, there will be a lot of other things. In a complex system, there will be other enablers also.


So, Mumbai was a big business hub, a lot of people were there, so the interests were aligned for this kind of action. But because of the prohibition in Gujarat, I am sure there are many negative consequences, which you might not see at the surface. But you know that there will be some smuggling going on, there will be some people underworld, some mafia will be taking charge to provide this to other people.


In fact, Bihar also has prohibition now, for example, and many states have had prohibition. The learning from that has been that it does not work. It leads to all these kinds of problems.


Your state capacity, which is limited, goes into policing for the thing that you need to prevent people from drinking alcohol, whereas you need to invest in literally policing. Again, I can give you the example of Bihar. After Bihar, you know Bihar has severe state capacity problems, broken at many levels.


You would imagine that that state would invest, if they have more money, and they will have money to give to policing, they will give up on creating a stronger police, a law and order. Literally they have hired more people to enforce in the department, but to catch people who are found with alcohol or people who are selling alcohol. Now, is this the right use of state capacity?


So, this is the kind of thing which has happened repeatedly. It will be happening in Gujarat also. And of course, there is also a revenue loss to the state, that is one source.


But for example, Andhra Pradesh had a prohibition, they overturned it. Many states tried and failed, but some states can try to do this and hope for a different result, whereas we know that results will be similar in one way or the other.


[Siddhartha Ahluwalia] (42:57 – 43:02)

So, when did Mumbai lift the ban on alcohol, which decade or which year?


[Pranay Kotasthane] (43:02 – 43:19)

I do not know actually, I do not remember when exactly they did. But by the 80s, 90s, there was a realization that this is not a policy we want to go back to either. So, that change did happen.


And subsequently, many states also tried and learned the same lesson.


[Siddhartha Ahluwalia] (43:19 – 43:43)

Got it. And when Mumbai became the hub for immigration, because earlier it was Kolkata that was the hub of commercial activity, which was replaced by Mumbai and when trading in black starts happening, first is unorganized, unorganized, imagine the alcohol market and the gold market. And when the crime starts organizing itself, then it becomes a problem for the state.


[Pranay Kotasthane] (43:43 – 43:49)

Exactly. So, then it became such a big problem that it threatened the government and the state government.


[Siddhartha Ahluwalia] (43:49 – 43:53)

And you do not know who is involved, either the police, the politicians, it is like a conglomerate as you said.


[Pranay Kotasthane] (43:53 – 45:51)

Yeah, and it completely, you know, I think that was one reason why Mumbai is not the most aspirational city for a young Indian today. There are many things broken in that period, which Mumbai is trying to get itself up again.

But again, another Mumbai story is the Rent Control Act.


So, again, Rent Control Act, we have written about it in this book as well. Again, good intentions that rent control, if you put, then rents will be low and people will be able to live happily. But what happened because of that?


Once you put controls on rent, the person who is building that area has no incentive to maintain it or build any additional capacity, because I am not going to get money out of it. So, what it led to eventually is a decline in available housing capacity. And because of that housing capacity, you will see now in many areas in Mumbai, there are, you know, 50, 80 year old buildings which are in a dilapidated state.


And since the overall capacity, housing capacity or housing units are low, you will have very high rents. But then rent control does not enforce that? Again, the government has good intentions, good policy.


But if I tell you boss, if you want to live here, you better give me this in black or in some other way, you will comply without letting the government know. So, you need to have, if you have very strict controls, such things like bans, you need an amazing amount of capacity to be able to enforce it without you going this other way, which oftentimes no state has. I mean, even if the US had enforced prohibition, then they realized it is not right.


So, these things happen. And then, that is the one reason why in Mumbai, the housing, rents, etc. are through the roof.


No startup can literally think of having a great office in the initial period. And that is how Mumbai lost out.

[Siddhartha Ahluwalia] (45:51 – 45:58)

Mumbai lost out economically. And the other story which I would love to learn from you is the Sandalwood story. How did Veerappan get created?




[Pranay Kotasthane] (45:58 – 47:45)

So, this is something we call Dastan e Sandal in the book. So, again, this is a Netflix movie also, right, I guess, a movie or documentary on Veerappan. And again, that looks at this idea about what he did or was he doing good things for the people in that area, I think.


But no one thinks about how it is connected to the state. Again, there is a very important role of the state here, which we need to know. For example, now, Sandalwood, around 90% of the Sandalwood, the one which we want, was found in the three states of Karnataka, Tamil Nadu and Kerala.


So, we are actually abundant in this particular resource. And Sandalwood right from the 1700s was an important thing, you know, it is used for religious functions, for making incense sticks, not just in India, but in China and all also. So, there was huge demand for this, it was a precious commodity.


In 1792, it was declared a state tree.

200 years back.

So, it was declared a state tree that this is a…


The British would have declared it, right?

No, this was during the Tipu Sultan period. So, out of good intentions, because he also did not want to trade with the Britishers, where the British was a colonial power, etc.


But out of good intentions, again, you trigger a series of events like in the butterfly effect. So, what happened with that is, it became a state resource, so the trading with Britishers or trading anywhere stopped and declined. Once that happened, then Britishers took over after 1799, 4th Anglo-Mysore war, they continued to hold.


So, it was a monopoly of the state. You cannot sell it, you cannot buy it, only you can buy it.


[Siddhartha Ahluwalia] (47:45 – 47:47)

And this is because Tipu Sultan measured state reserves.


[Pranay Kotasthane] (47:48 – 48:08)

Yeah. So, it started with that, out of good intentions, but this is how. Then, after independence, you would have thought the government would change policy, but then again, the new government also continued.


So, you had a fascinating situation where the government is monopolized. So, even if a sandalwood tree grows in your compound, it is the resource of the state.


[Siddhartha Ahluwalia] (48:08 – 48:09)



[Pranay Kotasthane] (48:09 – 50:43)

Okay, it did not belong to you. In fact, in any state, the forest officer would come and say that, you know, if there is, I can give you 75% of the value, I determine. You can see how corruption will happen there.


Secondly, if you were found to be in possession of more than 20 kg sandalwood, you could be punished, you could be jailed. It is almost like a drug. Yeah.


So, essentially, you had all, and if the sandalwood went missing from your compound, you would be held liable. So, you have a situation where this is a private property violation. So, your private property is right over that was not respected.


And you had all the responsibility to maintain the tree, but you cannot extract any benefits out of it. Now, this is a classic thing when you do not protect property rights. We know from economic reasoning that people do not have any incentive to grow that.


So, what happened is by 1965, India was producing close to 4000 tons of sandalwood. By 30-40 years later, that had dropped from some 4000 to a meagre 600 or so. So, what has happened is over the years, no incentive, why will I grow this painful tree, which the government will anyways take away and so, essentially, the production declined.


And the only production that was available was in government run forests, which were Tamil Nadu, Karnataka, Kerala, where governments were doing this. Now, prices of sandalwood rise because production is falling. So, what happens, right, those people again, entrepreneurial minds will think that some like the Veerappan, etc. was involved in ivory tusks smuggling and all that. Then he added another line of business, which was that I can get more gains by actually smuggling sandalwood. So, he added that.


And then you have this whole cycle where you spend so much energy, time and lives of people because you created this brigand, right. And the fascinating thing is even if the Mysore sandal soap, which you use most of that sandalwood oil, which is used to make is not grown in India anymore, it comes from Australia now. So, literally, you are importing the sandalwood oil from Australia and you are packaging it by a government run company and you are selling it, right.


Why? The question you should ask is, why? So, this is how state action actually created incentives for something like this to happen.


So, do not take away private property rights is the lesson from all this.

[Siddhartha Ahluwalia] (50:43 – 50:49)

Or the role of the state is to build free market economics rather than trying to ban, control.


[Pranay Kotasthane] (50:49 – 53:10)

Yeah, yeah. So, we put in government things, see, what do governments do? Largely, they can do three things in one classification.


They can produce, they can finance or they can regulate. These are the three things. Another way of looking at it is we in Takshashila teach, they can, all governments do just eight things, okay.


The eight things are one, do nothing, literally one of the steps. Second is to engage in rhetoric. So, you say something, but you do not necessarily do something.


Third is nudging the people, right. So, try to change behaviors like on your electricity bill, for example, they will say what was your electricity consumption last month. So, that is a nudge for you to reduce consumption.


The nudge, after nudge comes the umpire, right. So, the government is trying to be a regulator. If that also does not work, then you try to do marginally changing incentives, that is taxes, subsidies.


If even that does not work, then you drastically change incentives, which is making something absolutely free or banning. If that does not work, you might do, you know, change ownership. So, what happened in nationalization or the flip side of that is what happens in privatization.


So, this is a menu of eight things I have mentioned. Now, what happens is when we think of government action, most commonly people will think of taxes or bans, like you mentioned. The idea is you should not think of these as the only actions, there are a range of other policy options, which I said.


So, we need to think of those from the least coercive to the most coercive and do not think just of taxes or bans, because these, all of them have these huge unintended consequences that you cannot think of. Another example I give is how, and this Ashok Gulati is a very eminent agricultural economist who has written about it, how the MSP in Punjab and Haryana during the Green Revolution, minimum support prices. Essentially, you have an incentive to grow a lot of rice in water scarce areas that had a contribution to creating the Delhi smog.


So, again, no one imagined that would happen, but when you have a very coercive instrument where you are giving a lot of money and a lot of incentive for people and also giving free electricity and water for people to dig that and grow something, you have.


[Siddhartha Ahluwalia] (53:10 – 53:13)

Why did the government do that?


[Pranay Kotasthane] (53:13 – 55:41)

Yeah, so, it started again with good intentions, the idea was that earlier we were very short on grains. So, there was this Green Revolution idea, it was again successful in the sense that we are no longer a food scarce country, we, I mean, at least in the grains part, we do export some of it. So, it achieved that goal, but the way we did it was wrong, it was not just to subsidize fertilizers and inputs, we also said that we will promise you a price for growing certain things.


So, it was called the minimum support price, which we still have and agitations on farm laws are still happening for that rate. So, once you made that promise, what will you as a farmer do? You will grow only that.


So, you started growing rice, you started growing wheat, you, the crop diversification went for a toss. And once you start growing that, rice is a very water intensive crop. And if you do not get enough water, what will you do, will dig from groundwater, you had an episode with Vishwanath on this, right.


So, you kept extracting water, you also had subsidized electricity. So, the water consumption increased massively. So, then what happened is in 2009-10, the government realized that, boss, water consumption is increasing, we have to do something with that.


So, the Punjab government introduced something called the Punjab Subsoil Preservation Act, okay. Their idea was that, you know, this, a lot of water consumption happens in the summer months, okay. So, the idea was that, why do not we change that by actually moving the sowing season to in June instead of May, etc., where the evaporation of water is a lot more. And innocuous seems okay, let the government do that, right. But once that happens, once you start doing that, if you start sowing your crop in June-July, by the time the harvesting season comes, that is also delayed. And you have very little time between the harvesting season and the next cropping season.


So, once you have a harvest, you have very little time to actually get rid of the byproducts of that farm. So, how do you get rid of that? You burn the crop residue.


And when you burn the crop residue in a concentrated manner, a lot of farms, everyone doing that within a 15-20 year period, which happens in November-December, that leads to one important contributor to daily smog. So, this is a causal event.


[Siddhartha Ahluwalia] (55:41 – 55:50)

And when it was happening in May, it was, this is a 15-year-old phenomena, this is not an old phenomena. When it was happening in May, it would not have such repercussions.


[Pranay Kotasthane] (55:50 – 56:14)

Correct. So, if you are doing it in May, if this would have been happening in a, not in a concentrated manner, some people would be doing this in October, November, December, the effect of this would be spread out, right. Right now, you have this concentrated thing that everyone is doing this in, you know, 15-20 days of the, when the season is short and that is the, that is how it leads to daily smog.


[Siddhartha Ahluwalia] (56:14 – 56:20)

And what has been the farm agitation recently, the farm agitation laws and?


[Pranay Kotasthane] (56:20 – 58:58)

Yeah, I mean, again, there are a lot of different views on this. But essentially, see, farming is a very highly regulated activity in India. There are, the incentives of it are broken on many levels, right.


So, as I said, MSP is one, so everyone in Punjab, Haryana, who are well off are getting benefits from it. It is the same thing, the example which you gave of, how will you change a policy when someone has vested interest which benefits them? It is the same thing.


People in Punjab, Haryana are getting benefits, the rich farmers, so they do not want to have any change which they think might change this policy or have an impact on it. So, there is a resistance to that. But centrally, what we need to think of is, we need to move a lot of people out from agriculture to other sectors of the economy.


Our estimates were that there are 12 million people who graduate or become 18 every year. So, that 12 million and the, we need to take excess of around 8 to 10 million from agriculture to more productive sectors, manufacturing or services. But right now, the incentives are such that you can be in agriculture and it is a low productivity thing, right.


In, across the world, there will be one or like, let us say US, Germany, if you see one or two percent of their economy will be agriculture and only one or two percent of their population will be in agriculture. That is how it happens. Because you become very productive, you have large farms, bring mechanization and all that.


So, that is not what is happening in India. So, there are strong incentives for certain concentrated groups to oppose it. And that is why, whenever the government tries to change anything, there is strong opposition.


There is a government fault also here because they did not communicate the changes properly. For example, what they were trying to do is, in the first round, they were essentially, there was no change in MSP, right. At least they were just trying to bring, make corporations enter or for you to lease your farms to corporations easier.


But that somehow rang an alarm bell because they were not taken into confidence, right. Again, an essential part of government policymaking is to align the interests of people who will especially think they are going to lose out. You need to do that.


There is no policy without politics. So, you need to do that. That did not happen, right.


Suddenly, there was no parliamentary discussion on this issue, suddenly a law came. So, people were quite skeptical.


[Siddhartha Ahluwalia] (58:58 – 58:59)

You didn’t earn enough trust.


[Pranay Kotasthane] (58:59 – 59:01)

And that led to opposite


[Siddhartha Ahluwalia] (59:01 – 59:06)

such a huge wastage of people, resources.


[Pranay Kotasthane] (59:07 – 59:19)

And the big thing is now no one is going to touch agricultural reforms for some time, even though you need that very centrally to change Indian economy structure. But now because of the breakdown of trust, it becomes difficult. So.


[Siddhartha Ahluwalia] (59:19 – 59:31)

Yeah. There’s another thing that you mentioned is right. How India got left behind China manufacturing.


Where does it come from? What are the origins and cause?


[Pranay Kotasthane] (59:31 – 1:01:25)

Yeah. Again, this lot of, again, complex systems, many causes. So it is very difficult to pinpoint one thing.


But we’d given an example of a policy where especially why India didn’t have an electronics manufacturing base. So there are two parts to this. One, for example, we had out of great intentions, we had this policy called the reservation of manufacturing for small scale industries, some weird big name like that.


But the idea was that some sectors will only encourage small businesses, they said, you can’t mechanize that sector a lot. You will, it is literally reserved. So you have the entire sector reserved for very labor intensive companies.


So, for example, if you have machinery or capital, which is up to 50% of your total cost structure, you can’t produce that. Now, again, initially with good intentions, there were some eight, nine things added. By 1997, this list had grown.


You had more than about 500, 600 items, including electronics, electrical manufacturing in that small scale. So again, there’s no incentive for you to have really small businesses which won’t scale up. And once, there is a disincentive for scale.


You do not want to scale up, you do not want to introduce capital in it. So you will barely, you will make ends meet, but you will not be very productive. Whereas those kinds of policies were not there in China, etc., which also liberalized some more earlier. Surprisingly, the last item from this policy was removed only in 2015. So there was in some form or the other it continued. But again, there were committee reports which said this is stupid and that did bring the change over time.


So that was one reason.


[Siddhartha Ahluwalia] (1:01:25 – 1:01:28)

So all these 500 item restrictions are gone now?


[Pranay Kotasthane] (1:01:28 – 1:03:23)

Yeah, now it is gone. So there is no sector which is only reserved for, and there was a fascinating study which we quote was done in 2015 that the sectors which were de-reserved, what was the impact on employment, impact on, you know, output, etc. And all those were positive.


So the initial fear was, if you introduce capital into this, the employment will reduce. But the learning was actually that, you know, young firms create employment, not small firms. So once you de-reserved, many young firms came, many firms came and then the overall employment in that sector actually increased substantially.


So that is the folly. We thought in very targeted terms that we need small firms, keep firms small, otherwise they will go out of business. But what you ended up doing is that you created a sector which was uncompetitive, you cannot produce things which match the world and you fell out.


That is one. The other thing we have always had this fascination with is that we somehow think imports are evil. We somehow still think that.


But imports are not evil. Globalization benefits a lot. A lot of production is when you import something, add value and export.


So a lot of East Asian countries did understand that. They had, for example, Taiwan, etc., had very liberal trade policies from the 1950s, which people do not see when they analyze Taiwan. They say, oh, today it has become a powerhouse in semiconductors.


But there is a causal change of policy decisions which held that. Even China had changed its policies after 1978. But we had this idea that we do not want imports to happen.


That also contributed to the fact that we were not integrated with the world. A lot of technology transfer did not happen. And that is why we fell behind in a lot of these things.


[Siddhartha Ahluwalia] (1:03:23 – 1:04:18)

Pranay, there are a bunch of questions that I have, a bunch of discussions that I have, but it requires another episode of Neon Show. So I want to discuss more things in a second episode, like how India manages the first and the second COVID waves. And now, for example, a policymaking death in the second COVID wave could have been prevented.


And we Indians have a small memory. We forget very easily. And how the colonial experience made people inherently suspicious of both businesses and markets.


And that is why the state today does not even recognize entrepreneurs as employment generators. And lastly, how did India manage demonetization? And when cricket and cricketers were hogging all the limelight in India, how did IPL turn in favor of other sports?


The second part is, do you allow me to have a conversation with you?


[Pranay Kotasthane] (1:04:18 – 1:04:19)

Sure, sure.


[Siddhartha Ahluwalia] (1:04:19 – 1:04:25)

But the first part has been amazing. I learned a lot about the nature of mai-baap Sarkar.


[Pranay Kotasthane] (1:04:25 – 1:04:57)

Yeah, yeah.

Yeah. So that is, thanks. I mean, I am happy to do this again.


But yeah, I would urge your listeners to see there are a lot of good courses on public policy now. There are a lot of good resources, good books out there. So I think reading that gives you a sense that you are well equipped to then intervene in public policy discussions.


And then we will be able to push the overton window to get the government to do things which will make India a more prosperous nation.


[Siddhartha Ahluwalia] (1:04:57 – 1:05:07)

Yeah, which would be the five books that you could say on Indian public policy, which could explain to a layman and make them effective?


[Pranay Kotasthane] (1:05:07 – 1:05:34)

Yeah, the two books are here. That I will definitely recommend. But there are many books. As I said, I will recommend two books and one paper.


So the recent book is by Karthik Muralidharan called Accelerating India’s Development. There is a book by Kelkar and Shah, which is called In Service of the Republic. And then if someone wants to just get a start, there’s a classic paper by Devesh Kapoor called Why Does the Indian State Both Fail and Succeed?


[Siddhartha Ahluwalia] (1:05:34 – 1:05:35)



[Pranay Kotasthane] (1:05:35 – 1:05:51)

Why are we able to do things like polio vaccination and Kumbh Mela? But we are, we fail in most of the other basic things. So it lies to look at this paradox.


This is a freely available paper. I think if you are equipped with some of these books, you will have a good base of understanding.


[Siddhartha Ahluwalia] (1:05:52 – 1:06:26)

I think the reason why we are struggling right now, as Indians in public policy, is our entire education system has been built for how do you get a job? And even the post, the private companies that have come, how do you get a promotion in a job? How do you scale yourself?


Nobody has thought of it, right? And I think it’s not anybody’s fault, but how to build an all-round individual that has not been an emphasis enough.


[Pranay Kotasthane] (1:06:26 – 1:07:45)

Yeah, that’s why I think liberal, social science, universities and courses are very important. That’s a weakness, right? During our times of learning, a person who will do arts will be someone who has not gotten an admission in any other course.


That was a perception. But all these disciplines are very important for a well-rounded individual, right? An engineer needs to know philosophy, needs to know public policy, needs to know sociology.


These are important elements to making a well-rounded individual. So I guess now people are thinking about that. Also, it is an endogenous function that once people become richer, we tend to think of these things as important.


And India is in a developmental journey. One of the first US think tanks was at least 100, 150 years old. Brookings, for example, is a big think tank.


It’s more than 106 years old now. So now in India, we are thinking of this. We are building institutions across India.


People are thinking of these. So yeah, if we are equipped with public policy, there is a word public. The more we participate, the more we engage with the government, we’ll get the outcomes that we want.


[Siddhartha Ahluwalia] (1:07:45 – 1:07:48)

So thank you so much Pradeep. Looking forward to our next conversation very, very soon. Thank you.


[Pranay Kotasthane] (1:07:48 – 1:07:49)


Thank you.

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