SK – Page 137 – Pertinent Observations

What should we do about the falling rupee?

So the more perceptive of you would have realized that the rupee is falling. And fast. At the beginning of the year, fifty four rupees bought a dollar. Now you need over sixty rupees. That’s a fall of over ten percent in half a year.

People argue based on differences in interest rates and interest levels between India and the United States, and India’s current account deficit, that the rupee deserves to depreciate. Some argue that the rupee should actually trade even lower. That is correct. What makes the fall of the rupee worrying, however, is that it has happened so quickly. No theories on trade imbalance or rates imbalance or inflation can account for the fall of ten per cent in half a year.

The issue, of course as everyone knows, is to do with capital flows. While India has run a persistent current account deficit, the continuous inflow of foreign investment into the Indian markets (either direct or indirect) had ensured that the rupee was relatively stable over the years. With India maintaining a high growth rate in the GDP over the noughties, the inflow was persistent. Things aren’t so good now, however.

India’s GDP is slated to increase at a paltry 5% this financial year. The growth story is seemingly over. And that is not all. Things aren’t looking great in other parts of the world also. Due to this concept of margin financing, sometimes when some of your holdings lose value, you are forced to liquidate other holdings in order to comply with “margin requirements” (we will not go into the technical details here). So with markets around the world not doing great, and India’s growth not as spectacular as it used to be, and with the country’s muddled policies (check out how difficult the government has actually made it to invest in India – irrespective of your nationality), investors started exiting. With some investors exiting, asset values dropped and the rupee dropped. Consequently other investors exited. And so forth. It did not help that there was nothing inherent in India’s government policies to hold them here.

So that’s the story so far. Question is what we should do going forward. As I mentioned earlier, there are two levers that can help shore up the rupee – the capital account and the current account. Within the current account there are two components – imports and exports. What normally happens when a currency depreciates is that exports become more competitive and go up further. Imports become costlier and thus reduce. On the current account front, thus, we have what is called as “negative feedback”.

Notice that in the past whenever an economy staged a recovery, it was generally preceded by a devaluation of the local currency. So since our currency is already devalued the stage is set for recovery, right? Unfortunately it’s not so simple. While it is true that our exports are now likely to be more competitive, fact is that Indian industry is not well placed to capitalize on that. Investment bottlenecks, labour laws and bureaucracy means our entrepreneurs haven’t been able to move fast enough to take advantage of the falling rupee and up exports. This can be borne in the fact that the Reserve Bank of India, which normally shies away from controlling exchange rates (as long as they are not too volatile), has issued several public statements on this matter in the recent past, and taken steps to prevent further fall in the currency levels. That the Central Bank has had to step in to protect the currency shows that we are in extraordinary times. The natural corrector to a falling exchange rate (increase in exports) is absent.

Matters are not helped, of course, by the fact that one of our largest imports is an asset – gold. Thing with asset prices is that unlike prices of “normal goods”, the demand for assets increases with price. When asset prices increase, people see “momentum” in the asset and want to get on to the bandwagon. So there goes part of another natural corrector to a falling exchange rate (less competitive imports).

So coming back to where we started off with – what should the Government do? While this is going to be a time-consuming process, what the government needs to do is to ensure that exporters can exploit the falling rupee. Reforms in this direction are not easy of course – since they require significant efforts in removing bureaucracy and making it easier to do business – which means we need significant administrative reform. There is also the small matter of possibly having to reform labour laws (while on the matter of labour laws, check out this paper by Takshashila Scholar Hemal Shah, who presents some easily implementable reforms in the labour law). While these are difficult things to implement, the fact that there is a crisis gives the government an alibi to push ahead with the reforms. PV Narasimha Rao had done that once in 1991. The problem now is that the government may not have political will given that elections are less than a year away. In this context, it would be advantageous to have early elections, for a new government with a fresh mandate might be more prone to taking tough short-term measures.

Currently, the government is trying its best to shore up on the other levers. Gold import is being curbed – except that it will be hard to implement since they will simply get diverted to the black market. The Finance Minister is traveling the world putting up a roadshow to get investments to India. That, however, is akin to putting lipstick on a pig since there is little in India’s fundamentals and current economic scenario to attract foreign investors. Even if some of these measures succeed, they will only lead to temporary respite to the currency. Fact is that for sustainable improvement in currency, tough reforms are mandatory.

The Problem with Smaller States

I’m a fan of smaller states. I think our states are currently way too large and we could do with more states since that could lead to greater administrative efficiency and federalism. So yes, I’m fully in support of the Telangana movement – only because I think AP is too huge and unwieldy a state (42 parliamentary constituencies) to be managed from one place.

I have one concern, however. I was thinking of the case of Karnataka and the possible demand by areas of North Karnataka for a separate state. While I support this demand (Karnataka again I think is too huge and unwieldy to be managed from Bangalore which is in a corner of the state) I was suddenly worried about power supply.

From what I last remember, Karnataka’s biggest source of power is the Raichur Thermal Power Station in Shaktinagar. Assuming that it breaks away from “Mysore” as part of a new “north Karnataka” state, what will happen to the energy security of Mysore (the smaller southern portion)? I guess there might be some agreements and long term power supply contracts put in place, yet the loss of this massive captive power source would significantly hurt Mysore.

My concern is that if the demand for a separate North Karnataka grows, the government of undivided Karnataka would be loathe to invest much in any area that may fall under a part of the state that wants to “break away”. And this could lead to concentration of investment in areas that are close to the seat of power, and further skew the development of different parts of the state. Power supply is just one example that I took here – it could be any other massive government investment – say SEZs or large industrial plants and so forth.

There is another issue with smaller states but I think this is a problem for which a solution has been found and is under implementation. The problem with having too many states is that we will end up with too many inter-state boundaries and thus too many “checkposts”. However, the proposed Goods and Service Tax regime (if/when it were to get implemented) will ensure that India would become a common market and inter-state commerce would become more seamless. Nevertheless it is important to get the GST regime in place before we get too many more new states – for it also means less stakeholders to deal with!

Poverty and distributions

No, this post is not about the distribution of poverty. This is a rather technical post about probability distributions. Just that it has something to add to the poverty debate. And like the previous post, this is a departure from the normal RQ-type posts – there will be no graphs, no tables. Just theorizing.

So in the last week or two a lot of op-ed space in India has been consumed by what is described as the “poverty debate”. A recent survey by the National Sample Survey Organization (NSSO) has revealed that poverty levels in India have declined sharply in the last couple of years. And it only accelerates a sharp decline that started after a similar survey in 2004-05. Now, you have the “growthists” and the “distributionists”. The former claim that it is high economic growth in this time period that has led to the fall in poverty. The latter think it is due to redistributionist policies such as the National Rural Employment Guarantee Act (NREGA). Both sides have their merits. However, I’m not going to step into that debate now.

I ask a more fundamental question – how well can we trust the numbers that the NSSO has put out? My concern is this – that the poverty numbers have been gleaned out of a survey. I don’t have a problem with surveying – in fact surveying is a rather well-studied science, and I’m sure people at the NSSO are well-versed with it. My concern is that in this particular survey, the results may not have been properly extrapolated.

Most surveys rely on what is known as the “law of large numbers” and the “central limit theorem” and assume that the quantity being surveyed (people’s consumption expenditure as per this survey) follows a normal distribution. Except that we know that incomes (at least at the upper side of the scale) don’t follow a normal distribution. Instead, it has been shown that they follow what is called as a Power Law distribution.

While I don’t doubt the general quality of scholarship at the NSSO, I want to ask if they have actually studied the real distribution of incomes and used the appropriate one, rather than using a normal distribution. It could be that incomes at the lower end of the scale actually do follow a normal distribution, in which case standard sampling techniques might be used. If not, however, I expect and hope that the NSSO has used a sampling and extrapolation technique appropriate to the distribution incomes actually follow.

Let me illustrate the issue with an extreme example. Let’s say that one of the names drawn as part of the NSSO’s “random sample” for Mumbai is one Mr. Mukesh D Ambani. Assume that there are 99 other persons in Mumbai who are drawn in the same sample, and each of them has an annual household income of Rs. 1 lakh. What will be the mean income of the group? Assuming Mr. Ambani earns Rs. 10 Crore a year (number pulled out of thin air), the mean income of the group of 100 will come out to be close to Rs. 11 lakh!

This is the problem with estimating incomes using surveys and standard extrapolation techniques. While the above example might have been extreme, even in smaller groups of population, there will be “local Mukesh Ambanis” – people whose incomes are much higher than their peer group. Inclusion or exclusion of such people in a standard survey can make a massive difference.

I will end with an example and a request. I remember reading that any family in India that earns over Rs. 12 lakh a year (i.e. Rs. 1 lakh a month) is in the top 1% of all families in India! My family (wife and I) earn more than Rs. 12 lakh. But do we consider ourselves rich? By no means! Why? Because people who are richer than us are much richer than us! That is the problem with quantities that follow a power law distribution.

Now for the request. Can someone instruct me on the easiest way to get the raw data out of the NSSO? Thanks.

Inefficiency of Restaurant Reservations

Quartz reports that restaurant reservations have been taken over by bots in San Francisco. Certain restaurants in that city are incredibly hard to get reservations at, so people have started letting lose bots that check for availability every minute and grab the table as soon as it’s available. In fact, there are enough bots out there that at a particular restaurant which opens reservations at 4 am, all tables are taken by 4:01. Every day.

In Kannada, there is an idiom that says “gubbi mEle brahmAstra”, which means using the weapon of Brahma (widely recognized in Hindu epics are the most powerful weapon) to annihilate a sparrow. Using a bot for restaurant reservations is a solution that falls under this category. However, that someone had to think up of this solution shows that there is something wrong with the restaurant reservation market. And it is not just in San Francisco (I guess this solution was first implemented there thanks to the penetration of online restaurant reservations and the high number of techies in the city. Bangalore fails on the first count).

The problem with the way restaurant reservations currently work is that the option is priced at zero. And thus gets allocated on a first come first served basis. Suppose I want to go out on a date tonight but am not sure what cuisine my wife is craving today. Anticipating crowds, given that it is a Saturday, I will make reservations in four different restaurants serving four different cuisines. There is nothing that currently prevents me from doing that. And it costs me nothing (apart from the cost of four phone calls).

A restaurant reservation is essentially an option to occupy a table of a certain size at a certain restaurant in a particular time period. If you show up at the restaurant at the appointed time, the restaurant is obliged to offer you a table. However, the way it is currently implemented is that you are not obliged to show up at that restaurant at that particular time. If you don’t show up, the table the restaurant had “reserved” for you will go empty for that evening, thus resulting in loss of business.

How can a restaurant handle this? One idea is to overbook. If you have 10 tables, allow 12 people to make reservations, in the hope that on an average day, 10 or less will show up. While this may lead to higher occupancy, problem is when all 12 show up. You then run the reputational risk of making a reserved guest wait, or worse, turning them away. Another option is to book only a fraction of the tables. If you have 10 tables, give out reservations only for 8, and let people know that you are open to walkins (if someone calls after the 8 are taken, you can say “I’m sorry, but we can’t take any reservations. However, we have some unreserved tables. You can come and check it out. If you’re lucky you’ll get it”). That way, by keeping yourself open for walkins, you can prevent loss of inventory- except that if you are a high end restaurant you are unlikely to get too many walk in customers.

Another option (which I believe is a method online retailers in India use for cash-on-delivery customers) is to maintain a list of people who called you along with their phone numbers and whether they showed up. That way, you can deny habitual offenders a reservation. However, considering that if you are a high end restaurant people are unlikely to visit you very often this may not work either.

The ideal economic solution, of course, would be to charge for reservations. People pay a small deposit when they make a reservation. If they do show up, this amount gets adjusted against their bill. However, given that most reservations happen over the phone (except in SF), you have no way to charge for it. So is the solution that you move your reservations exclusively online, so that you can charge for it? Then you could lose out on customers who are uncomfortable with making reservations online.

Even if all your reservations were online (like in SF), there is a problem in charging for reservations – you wouldn’t want to be the first restaurant doing that. One thing high end restaurants pride themselves on is their reputation, and charging for reservations can make them appear “cheap”, and they wouldn’t want to do that unless it is the done thing.

So how are restaurants managing the situation now? My take is that they are adjusting for it in the price. They are not overbooking, but assuming the cost of empty tables (as a result of no shows) in their overall pricing. This way, customers who are honouring reservations are effectively subsidizing those that don’t. While the market “clears”, the implicit subsidy towards customers who don’t honour their reservations leads to dead weight loss. There is also moral hazard – since desirable customers (the ones who show up) are subsidizing the un-desirable (the ones that don’t).

Is there a solution to this? One way to look at this would be for restaurants to centralize their reservations. I’m surprised no one has done it yet. You can have a website and a call centre from which you can take reservations for a large number of restaurants. The restaurants will pay for it since it will mean that they don’t need to have someone by the phone taking and managing reservations. And given that the same call centre manages bookings for multiple restaurants, they can identify duplicate bookings and overbook accordingly. Customers can be incentivized to use the same ID for booking for multiple restaurants by introducing a multi-restaurant loyalty card. And then – once there is a large number of restaurants that have moved their reservations to this call centre, they can start thinking of collectively moving towards a system of penalizing for unfulfilled reservations.

There – I’m giving a business idea away for free!

Me, all over the interwebs this week

Firstly, on Tuesday, I got interviewed by this magazine called Information Week. Rather, I had gotten interviewed by them a long time back but the interview appeared on Tuesday. I spoke about the challenges of election forecasting in India and the quality of surveys.

Again on Tuesday, and again on Wednesday, I wrote a pair of articles for Mint analyzing constituencies and parties. On Tuesday, I analyzed constituencies whose representatives have always belonged to ruling parties in the last 4 elections. There are 34 such constituencies. Then on Wednesday I wrote about the influence of states in the Lok Sabha, analyzing the proportion of MPs from each major state that was part of the ruling coalition.

If I had forgotten to mention earlier, I have a deal with Mint that lasts till next October where each month I’m supposed to write 3 articles on election data. You can find all my articles so far here.

Then, today, Pragati published my review of the book Why Nations Fail by Acemoglu and Robinson. More than a book on economics or institutions, it is an awesome history book. Get it.

And in the midst of all this, right here, I wrote a “worky” post about the pros and cons of having a dedicated analytics team.

And if you didn’t notice, this website now has “new clothes”. It was a rather long-pending change and the most important feature of the new layout is that it is “responsive”, and thus looks much better on smartphones. I’ve heard a couple of issues with it already, and do let me know if you have any more issues. And for the first time last night I opened this blog on an iPad and I find that it looks fantabulous, thanks to the OnSwipe plugin I use.

Kabaddi, Jesus Navas, Digvijaya Singh and Modi Bhakts

Writing during the last FIFA World Cup in 2010, I mentioned a concept that I named after the Spanish (and now Manchester City) winger Jesus Navas. It was the strategy of one guy breaking off separately from the rest of his teammates, and ploughing a lonely furrow in a direction different to what his teammates were working on. So when the rest of the Spanish team played tiki taka and relied on a slow build up based on intricate passing through the middle, Jesus would come on and run away on his own down the right flank. It was a useful distraction for the Spanish team to have, for now the opposition could not mass its defences in the centre.

In the same post, I had mentioned that it is similar with Kabaddi. When a team is “defending” all but one person in the team form a chain and try to encircle the attacker. The other guy works alone, and his job is to lure the attacker deep into the territory so that the chain can close in around the attacker. This way, the lone ranger and the team work together, towards a common objective, just like Jesus and the rest of the Spanish team.

Having observed Indian politics for a while now, I realize that the Indian National Congress has successfully adopted this strategy, while the BJP has failed to keep up. Now, the reason you want to use a lone ranger in politics is slightly different, but on the same lines. Sometimes, there can be disagreements within a party on certain issues. For political reasons, the party can officially adopt only one of the two possible paths. Yet, they know that by sticking to this official path, they might lose out on some support. How then can parties tackle this issue of giving out the “dissenting judgment” while still appearing united?

This is where people like Digvijaya Singh come in. Digvijaya is a known loose cannon, and has mastered the art of taking a line different from the mainstream Congress line. In case he turns out to be right, later on the party can claim that he was right all along – and quietly bury the official party line. In other cases, the party can publicly castigate him, and distance itself from his claims. In a way that I can’t fully understand, the Congress has mastered the art of managing the loose cannon, such that they “recognize” his statements when he is right and unceremoniously ditch him otherwise.

The opposition Bharatiya Janata Party (BJP), however, hasn’t got its act together. The biggest problem with the BJP is that there is no one loose cannon with whom an agreement can be struck on the lines of what the Congress possibly has with Digvijaya. At different points in time different party leaders espouse views that are out of line with the party’s official line, and this being hard to control, the party gives off an image as being disunited. The matter is made worse by the thousands of online fans of Gujarat Chief Minister Narendra Modi, who like to voice their personal opinion which may not tally with the party line, but whom the party cannot publicly dissociate from.

It is in this particular issue that the BJP significantly lags the Congress when it comes to media management. As a BJP supporter mentioned on twitter yesterday, Digvijaya can say whatever and the Congress can get away with it, but whatever a Modi Bhakt says gets attributed to the BJP. It is this differential handling of fringe elements that leads to significantly worse press for the BJP than for the Congress. The answer lies in appointing an official lunatic whose job it is to make outrageous statements and be prepared to get censured by the party frequently.

Too many fringe elements, all of them shooting off in different directions, weakens the core, and weakens the focus of the attack. One can be managed, and is useful. More is the problem.

Should you have an analytics team?

In an earlier post a couple of weeks back, I had talked about the importance of business people knowing numbers and numbers people knowing business, and had put in a small advertisement for my consulting services by mentioning that I know both business and numbers and work at their cusp. In this post, I take that further and analyze if it makes sense to have a dedicated analytics team.

Following the data boom, most companies have decided (rightly) that they need to do something to take advantage of all the data that they have and have created dedicated analytics teams. These teams, normally staffed with people from a quantitative or statistical background, with perhaps a few MBAs, is in charge of taking care of all the data the company has along with doing some rudimentary analysis. The question is if having such dedicated teams is effective or if it is better to have numbers-enabled people across the firm.

Having an analytics team makes sense from the point of view of economies of scale. People who are conversant with numbers are hard to come by, and when you find some, it makes sense to put them together and get them to work exclusively on numerical problems. That also ensures collaboration and knowledge sharing and that can have positive externalities.

Then, there is the data aspect. Anyone doing business analytics within a firm needs access to data from all over the firm, and if the firm doesn’t have a centralized data warehouse which houses all its data, one task of each analytics person would be to get together the data that they need for their analysis. Here again, the economies of scale of having an integrated analytics team work. The job of putting together data from multiple parts of the firm is not solved multiple times, and thus the analysts can spend more time on analyzing rather than collecting data.

So far so good. However, writing a while back I had explained that investment banks’ policies of having exclusive quant teams have doomed them to long-term failure. My contention there (including an insider view) was that an exclusive quant team whose only job is to model and which doesn’t have a view of the market can quickly get insular, and can lead to groupthink. People are more likely to solve for problems as defined by their models rather than problems posed by the market. This, I had mentioned can soon lead to a disconnect between the bank’s models and the markets, and ultimately lead to trading losses.

Extending that argument, it works the same way with non-banking firms as well. When you put together a group of numbers people and call them the analytics group, and only give them the job of building models rather than looking at actual business issues, they are likely to get similarly insular and opaque. While initially they might do well, soon they start getting disconnected from the actual business the firm is doing, and soon fall in love with their models. Soon, like the quants at big investment banks, they too will start solving for their models rather than for the actual business, and that prevents the rest of the firm from getting the best out of them.

Then there is the jargon. You say “I fitted a multinomial logistic regression and it gave me a p-value of 0.05 so this model is correct”, the business manager without much clue of numbers can be bulldozed into submission. By talking a language which most of the firm understands you are obscuring yourself, which leads to two responses from the rest. Either they deem the analytics team to be incapable (since they fail to talk the language of business, in which case the purpose of existence of the analytics team may be lost), or they assume the analytics team to be fundamentally superior (thanks to the obscurity in the language), in which case there is the risk of incorrect and possibly inappropriate models being adopted.

I can think of several solutions for this – but irrespective of what solution you ultimately adopt – whether you go completely centralized or completely distributed or a hybrid like above – the key step in getting the best out of your analytics is to have your senior and senior-middle management team conversant with numbers. By that I don’t mean that they all go for a course in statistics. What I mean is that your middle and senior management should know how to solve problems using numbers. When they see data, they should have the ability to ask the right kind of questions. Irrespective of how the analytics team is placed, as long as you ask them the right kind of questions, you are likely to benefit from their work (assuming basic levels of competence of course). This way, they can remain conversant with the analytics people, and a middle ground can be established so that insights from numbers can actually flow into business.

So here is the plug for this post – shortly I’ll be launching short (1-day) workshops for middle and senior level managers in analytics. Keep watching this space 🙂

Ramzan Walks

Seven Arabic years ago, when I was still vegetarian, and a rather squeamish one at that, a friend had regaled me with stories of going on a “meat walk” on Mumbai’s Mohammad Ali Road, savouring delicacies (I took his word) like ox’s tongue and cow’s udders. It was Ramzan, he said, and it was the time of the year when delicacies which were otherwise hardly available would make their way to the markets. He was going to make it an annual ritual to “do the meat walk”, he had said. I’m not sure about him, but I know that people who accompanied him on that walk do make it a point to repeat it annually.

I might have documented elsewhere about my transition to a carnivore back on our vacation to Greece two summers ago. At a streetside cafe there, the vegetarian stuff looked insipid while the meat looked succulent, and I converted. “If I’m to lose my religion I’ll lose it completely”, I had decided and started my meat eating career with some beef souvlaki. In the intervening two years (mostly in the last one year), I’ve tried several species, and nothing makes me queasy in terms of the source of my food – though I might change my mind after I complete the holiday I’ve been planning to the Far East.

My first “Ramzan walk” was in Bangalore two Arabic years ago. These walks (in each city) have their own ritual to it. In Bangalore, it starts at Albert Bakery on Mosque Road in Frazer Town, then proceeds across the road to Fatima House where they procure Haleem (flown in daily from Hyderabad). Then round the corner on to Madhavaswamy Mudaliar Road for some kebabs and then across that road for chaat and kulfi. I’ve done the exact ritual twice over already, and have quite enjoyed it (though the first time around I didn’t get down to eating Albert’s famed Brain Puffs). But people had so far told me that I hadn’t done “the real thing” until I did a similar Ramzan Walk on Mohammad Ali Road.

So this evening I made amends to that particular deficiency in my meat eating career. A bunch of people from my client’s office were planning their annual visit to the famed road for this evening, and I tagged along. I write this on a sugar high, after having stuffed myself with sweets through the evening.

The waiter at Tawakkal Sweets, off Mohammad Ali Road, reminded me of the priests at Mantralaya (of the Raghavendra Swami fame, in Andhra Pradesh). Priests and temple officials in Mantralaya are famed for their “maDi”, and their way of keeping themselves clean is by not touching anyone. So you have this ritual where one of the monks there gives you a stole, but in which he throws it over you from about a feet above your shoulders to prevent touching you. I don’t know if the waiter at Tawakkal had similar constraints in terms of keeping himself clean, but he kept plonking our sweets from about a few inches above the table, just enough to make sure that the Mango Malai (something like mango souffle with condensed milk) didn’t arrive on the table perfectly set. But I’m sure I ate more than my fair share of the Malai that arrived at the table, thus giving me the sugar high, which persists.

In Kannadiga Brahmin functions, I’ve never understood the concept of adding plain (unsweetened) milk to the sweet obbatt (aka hOLige). “Why add something that is not sweet to a sweet dish”, I’ve reasoned. After tonight I begin to suspect that the concept of obbatt with milk is borrowed from Malpoa with Malai. I used to think that the Malpoa is something like the “kajjaya”/”athrasa” but here at Tawakkal and elsewhere it seemed like a reconstructed French toast – where wheat flour is mixed with eggs and sugar to make a batter that is deep fried. And it is served with unsweetened thick cream – which perhaps my ancestors adopted as obbatt with plain milk. It is possible that all my previous encounters with Malpoa have been at vegetarian sweet shops, and hence the absence of the egg.

We wouldn’t be done after the Mango Malai and the Malpoa. There was still space left for food in our stomachs and sugar in our blood streams for us to eat mango phirni (kheer made with mashed rice and mangoes). And it wasn’t even the first time in the day that we were eating sweets. The Mumbai equivalent of Albert bakery is the brightly lit Suleiman Usman Bakery, with boards everywhere claiming it has “no branches”. Except that round the corner at EM Road (perpendicular to Mohammad Ali Road) there are at least two other shops which call themselves “Suleiman Usman Bakery”, and which too prominently display that they have no branches.

We began the meaty part of our walk at EM Road (the one with the two Suleiman Usman Bakeries (with no branches). To celebrate the occasion of the holy month, the street was extremely brightly lit, and shops had put out makeshift tables and chairs under a canopy on the road to accommodate the extra crowds (normally, like at other Muslim establishments, food is cooked at the entrance but served inside the shop). Maybe to add to the effect they had strung up what looked like pieces of chicken in psychedelic colours, and for further effect, displayed cages with little chicks even!

Chicken has taken over the world. Traditionally, Muslim establishments are known for their mutton, and sometimes beef. In certain circles (again primarily Muslim) it is considered beneath establishments to offer chicken. But this particular establishment on EM Road only seemed to serve chicken, apart from the odd mutton dish. It’s not really worth writing home about. And the lack of a regular menu means that people who look like tourists are likely to be overcharged.

Soon we were back on Mohammad Ali road for the main course, which was at Noor Mohammadi. Nalli Nihari was consumed with Tandoori Roti and onions, and washed down with Thums Up. This is one of those old style establishments, and one that doesn’t get bells and whistles for Ramzan. There is this ancient Hussain painting hanging on the walls, and next to that is a large board with the menu. Service was quick and efficient and one was reminded of Bangalore’s Vidyarthi Bhavan as the waiter pronounced the bill without much thinking and with great accuracy.

I’ll probably do a formal comparison after I experience Fraser Town sometime later this month, but in terms of sheer numbers (of people) and atmosphere, Mumbai definitely trumps Bangalore. In terms of food, though, I’m not so sure. Those little paper plates of kebabs you get in that corner shop across the Mosque on Madhavaswamy Mudaliar road seem much better than anything Mumbai serves up. But then, your mileage might vary.

Why Cash Transfers Should Not Replace Midday Meals in Schools

Admin Note: This is not a typical RQ post, in that this has no numbers. Yet, since this is policy related I think it makes sense to put it here

I’m normally a big fan of cash transfers. I’m glad that the Indian government has started implementing it for things like fuel subsidies and certain other benefits. After all, by simply providing the subsidy in cash (market price minus intended “subsidized price”) the government achieves the subsidy while not really having to bother about managing the supply chain. I would have been less unhappy with the Food Security Bill had it been designed as a cash transfer scheme, rather than giving further responsibility to the much-maligned Public Distribution System. With the midday meal system in schools, though, I make an exception.

Following the tragedy in the Bihar school this week, people have called for the government to scrap the midday meal scheme in schools and provide students a cash subsidy instead. Some people have argued against it quoting economies of scale (for example, ISKCON, under its Akshaya Patra scheme, provides midday meals to children in Bangalore schools at the cost of Rs. 6 per child per day, and that amount cannot but much food in the market). That aside, there is a fundamental economic argument against providing for children’s midday meal in the form of cash.

Every year, during Christmas time, journalist Tim Harford (of Financial Times, BBC Radio 4, etc.) writes an article that states that gifting induces a net weight loss, and the economically ideal way of gifting is to gift cash. For example, if I give you Rs. 100 in cash, you can do whatever you want with that cash. Instead, let us say that I use the Rs. 100 to buy you a gift (let’s say a pen). Now, irrespective of how much value you see in the pen, you don’t have the option any more of spending that Rs. 100 on anything except the pen I’ve got you. So you are in effect poorer than you would be had I simply given you the Rs. 100 rather than buying you the pen.

The question now is whether I want you to buy more pens or less. If for some reason I believe that buying more pens is good for your health, I can do my bit in encouraging that behaviour by gifting you pens rather than gifting cash. If on the other hand I don’t have a view on whether pens are good for you, I will gift you cash.

Government subsidies work the same way. If the government wants to encourage consumption of a particular good or service, it subsidizes it directly. If, on the other hand, the government doesn’t have a particularly strong view on whether a citizen should consume more or less of a particular good, but only wants the citizen to be able to afford that particular good, it provides cash. With the current form of the food security bill (where the government has promised to give foodgrain at subsidized prices) the government is implicitly stating that it wants to encourage people to eat more foodgrain (which flies in the face of data which shows that most Indians already eat too much cereal and too little of other nutritious foods). If the intention were only to ensure that people can afford food grains, a cash transfer would have sufficed. Similarly, by moving to a cash transfer scheme for cooking fuel, the government has signaled that it doesn’t particularly encourage the use of cooking fuel, but it simply wants to make it affordable for whoever wants to consume it (without distorting markets).

While the stated aim of many states in implementing the free mid-day meal in schools is to encourage attendance, there is a more fundamental reason to it. It is in the country’s interest to ensure good health and nutrition of children, in order to enhance their possible contribution to the economy when they grow up (studies have shown that malnutrition and poor health leads to lower educational attainment which leads to lower capacity to contribute to the economy). In this light, it is in the country’s direct interests that children are well fed, and the school is a location where children gather and can be fed (this is where the economies of scale bit comes in). That it encourages attendance is only a positive externality.

Now that it has been established that it is in the country’s interest for the child to be well fed, and that the midday meal in school is a good opportunity to thus feed the child, this presents a classic case for giving a “direct subsidy” rather than a cash transfer. That meals served within school premises are not tradable goods and hence won’t distort markets is a bonus.

Difficulty of Indian Education Boards

With the IITs now having a requirement that students should have scored in the top 20 percentile of their respective boards in order to qualify for admission, we have a chance to evaluate the relative difficulty of various Indian boards.

The IIT Delhi website has the cutoffs for each board. These cutoffs represent the “80th percentile scores” for each board, i.e. if you were to rank all students who took that particular board exam, these are the marks scored by students 80% from bottom. If you have written any of these board exams and got more than the corresponding 80%ile score for your board, you are eligible to join IIT (provided you score sufficiently in the JEE-main and JEE-advanced, of course).

This plot shows the cutoffs (80th %ile score) for various boards:

Source: http://jee.iitd.ac.in/percentile2013.pdf

Note that the four southern states are on top. These states are reputed to have high educational attainment. Could this be a consequence of easier board exams in these states? We don’t know.

Also, interestingly, these four states are followed by ISC and CBSE, before other state boards. Interestingly, the cutoff for ISC is higher than that for CBSE, which flies against conventional wisdom that CBSE is “easier” than ISC.

Also, if you look at the data, some states have more than one board, and the JEE council has used separate cutoffs for each of these boards. For purpose of my analysis I’ve arbitrarily chosen one board for each state – typically the one whose total is the “roundest” number.