Category: Non-Quant

Moeen Ali and the counterfactual

There has been much furore in the cricketing world over the last couple of days after the ICC (International Cricket Council) appointed match referee for the ongoing England-India Test match censured England player Moeen Ali for wearing wrist bands in support of Gaza. One the second day of the Test match, when he batted, Ali wore wristbands that said “Free Palestine” and “Save Gaza”.

While the England and Wales Cricket Board (ECB) absolved him of any wrongdoing claiming it was his personal beliefs, the ICC has been less kind to him stating that this is in violation of the ICC code that prevents cricketers from making political or racial statements on the field. Ali has been asked to play the rest of the game without the wrist bands, and might face a fine for the violation of the Code of Conduct.

Source: NDTV

What has complicated matters, however, is that during the third day of the Test match, the English players (including Ali) all wore a “Help for Heroes” message on their shirt collars. Help for heroes is a UK military charity and the symbol on the shirts was meant to commemorate a century of the start of the Great War. As expected this supposed “double standards” by the ICC (allowing the England team to wear a message in support of a charity but not allowing Ali to wear a message in support of Palestine) has drawn attention from commentators about double standards by the ICC.

While it is true that the ongoing undeclared war between Israel and Hamas has been largely one-sided in terms of casualties, and that a large number of Palestinian civilians have been collateral damage in the conflict, we should look at Ali’s wristbands as some kind of a positioning with respect to an (undeclared) ongoing war. And in order to determine whether his message was appropriate, we should use the “flip test”.

What if instead of supporting Gaza, a player in the ongoing Test (Virat Kohli, say, without loss of generality) wore wrist bands supporting Israel? What if Kohli wore bands that said “Save Israel” or “Free Israel”? Would the ICC have reacted similarly? And if the ICC had reacted similarly would commentators have reacted the same way as they have now, censuring the ICC for its stance?

I’m not trying to take sides here, and whether Ali’s wristbands were to be banned is a complex issue beyond the scope of this blog. All I’m trying to say here, however, is that a decision on a case like this should be agnostic of the side that the possibly offensive player is taking. A political statement is a political statement, and whether it falls within the limits of the code of conduct has to be determined irrespective of the side that it is taking. That is the only way regulation can be impartial.

Caste, socialism and social capital

Some new research by Dan Ariely (of Predictably Irrational fame) and co shows some interesting correlation between a socialist/communist upbringing and attitude towards lying (The Economist reports this research under the headline “Lying Commies“). While I’m not particularly convinced about the research methodology (sample of 250 respondents under a simulated environment – but then most behavioural research suffers from this problem) I find this research interesting since it supports another hypothesis that my wife and I came up with a few days ago – that India’s low social capital is a consequence of the caste system.

I’ve long maintained that the Indian caste system is perhaps the earliest example of a socialist economy. Assuming that reproductive rates across different castes were similar (there is no reason to believe otherwise) what the caste system ensured was that the relative supply of labour across different occupations remained constant even in small geographical areas, and consequently the relative prices of goods remained broadly constant. We can thus think of the caste system as an instance of a socialist model where each one’s profession is determined at birth, and relative prices are fixed. I will go as far to say that there is no better example of a planned economy than the ancient Indian caste system.

One of the inherent problems of Indian society is the lack of social capital. To use my co-INI blogger Nitin Pai’s framework, Indians value Swaartha (self-interest) over Paraartha (interest of others) to an extent that is far beyond the optimal level. The hypothesis goes that there is an optimal mix of Swaartha and Paraartha that should enter one’s objective function while making decisions in everyday life. For example, do you allow the other car to pass before you so that you avoid the traffic jam or do you rush ahead just because there is space in front of your car? Do you over-graze the commons just because it is there or do you consume it in moderation so that others have something to consume, too? A society with a high degree of social capital gives a higher weight to Paraartha in these objective functions, and people in such societies cooperate more and collectively take decisions that make more sense at the societal level.

Now, societies where life is tough (due to geographical or environmental factors) generally face a higher degree of social capital than those where life is easier. One way to experience this would be to drive from Punjab to Himachal Pradesh. On the wide roads of the Punjab plains, it is dog-eats-dog on the road – people overspeed, overtake like crazy and don’t give too much consideration to others on the road. Once you enter the hills of Himachal Pradesh, though, the whole equation changes. Here, a confrontational paradigm doesn’t get you too far – the narrow roads and winding curves mean that drivers need to cooperate more in order to get their way. Social capital in such societies is naturally higher.

Social capital is sticky in one way – if a particular generation in a particular location has high social capital, it is extremely likely that the preceding generation also had high social capital. The reverse, however, is not necessarily true – social capital can sometimes be destroyed in double quick time (think, for example, of the Lebanese Civil War between 1975 and 1990). Thus, the fact that social capital in India today is low could either be because it was always low, or because there was a particular event that destroyed social capital. Since it is unlikely that there was one event which destroyed social capital in the entire country, it seems more likely that social capital in India has always been low.

Social capital is important in a society where there are no rules – if you have a traffic signal at an intersection, for example, the lights will ensure that there is no jam. However, in the absence of rules (or lights) high degree of cooperation is necessary between drivers in order to lead to higher throughput from the signal. One way of combating a society with low social capital is to have lots of rules – these rules rather than social conventions can then drive the society. The converse is also true – in a highly rule based society there is no real need for social capital, and thus social capital can wear off down the generations.

As explained earlier, the caste system meant that the ancient and medieval Indian society was highly planned and rule based. Complex caste rules ensured that there was a rule for any possible social occurrence which might otherwise require cooperation. A brahmin’s cart and a shudra’s cart on the same one-lane path? There was a rule regarding right of way. Two people reaching the river at the same time to bathe? A rule governed who might swim upstream. And so forth.

My hypothesis is that the rule-based society ancient India had due to the caste system meant that there wasn’t much need for social capital. And thus India has never been a high social capital country (except of course for tracts such as Himachal Pradesh where life has been difficult). To put it another way, we see that a socialist economy from the past ages has led to consistently low social capital.

Which is not that far off from what Ariely et al say in their paper.

Reforming Air India (yet again!!)

Being a PSU, Air India faces a unique set of constraints. In order to maximize its performance, the airline should take the most optimal decisions that satisfy these constraints. 

On Monday I had to go to Mumbai on some work and I flew Air India. Normally I prefer to fly either Jet or Indigo, but given the short notice at which I had to plan my trip, and the fare difference between Air India and the other two (leaving aside some airline I don’t trust), I decided to go for the national carrier. Overall it wasn’t an unpleasant experience – my onward flight was late by ten minutes or so, while my return flight was on time. There was plenty of leg space, the food was good and online check in was hassle free. Yet, it looked like there was plenty of scope for improvement.

Now for a digression. The difference between club football and international football is that in the latter you cannot buy players (not strictly true – Spain got Brazilian born Diego Costa to play for them on account of 1. his Spanish passport, 2. that he had never played for his native Brazil, but this is an extreme assumption). To use a cliched term, in international football you need to play the hand that you’re dealt. Thus, the job of a manager of an international football team is to organize his team’s strategy and tactics according to the personnel available to him, rather than the other way round. For example, Dutch manager Louis van Gaal is known to favour a possession based passing game. However, given the set of Dutch players available to him, he has set them out as a counterattacking side.

Given the lack of degrees of freedom in running PSUs, it can be argued that running a PSU is closer to managing a national football team than it is to managing a club team. Government ownership and consequent pay structures, combined with the lack of a good lateral entry system to the Indian public sector, mean that it is hard for a PSU to “buy” personnel like private companies can. On the other hand, sacking PSU employees is a politically charged activity, and not easy to administer, so it is hard to get rid of deadwood also.

The traditional argument is that given these restrictions that PSUs face, it is impossible for them to perform at the same level as comparable private sector units. While this argument is well taken, what we need to be careful is to not let this mask any degree of poor performance by a PSU. The question, instead, that we need to ask is if the PSU is actually making best use of the “hand it has been dealt”. What we need to check is if the PSU is optimizing correct given the resources and constraints at hand.

Coming back to Air India, one of the stated causes of its poor performance is that it is overstaffed – it far exceeds its global peers in terms of the number of employees per aircraft (normally assumed to be a good metric of staff size). This was fully visible at the boarding gate on Monday, for there were four personnel with the task of barcode scanning the boarding passes. Most other airlines have two staff doing this. A clear case of overstaffing. While it may not be under the management’s control to downsize (see constraints listed above), what irked me was that they were not being put to best use.

Just to take a simple example, if you have twice the number of required staff at the boarding counter, all you need to do is to put in an additional barcode scanner and run two boarding lines instead of one – which results in doubling the pace at which the plane is boarded. This doubling of boarding pace means planes can have a much faster turnaround time at each airport – which means the number of flights that Air India can run given its stock of aircraft can increase significantly!

To take another example, Air India probably has the best leg space in the economy class among all Indian carriers – this is probably driven by the fact that a large number of government officers and ministers travel mostly by Air India, and holy cows mean that they are forced to travel  “cattle class”, the airline offers some comfort. Now, while this means each plane has one or two rows of seats less than that of other carriers, it constitutes a massive marketing opportunity for the airline! Given the leg space and comfort and meals (!!), Air India can very well position itself as a premium carrier and try to charge a premium on tickets!

On an absolute basis, the recommendations above may not be optimal – it might be well possible to make more money by sacking boarding gate employees than by cutting boarding time, or it may make more business sense to add an extra row of seats than try to enhance legspace. However, given the constraints the carrier faces, these are possibly the “second best decisions” that the carrier can take. And by not taking these decisions, the carrier is not making as much money as it can make!

The long-term effects of government failure

In a good blog post on FirstPost, R Vaidyanathan writes that one of the possible reforms for the new government to take up would be to invest massively in electricity and water supply infrastructure and ensure 24 x 7 supply of these two commodities throughout the county. In his post, he explains that a move such as this will help Indian households (especially “middle class” households) and industry save a sum total of Rs. 1 lakh crore per year. While his numbers are not particularly convincing, his point is well taken – that irregular supply of basic infrastructure leads to additional private investment in such infrastructure which is an unnecessary cost. Electricity and water supply have “natural monopolies” and it helps to have a single supplier (in a local area at least) supply these goods rather than people making their own private supply arrangements.

Setting aside the problem of creating capacity for 24 x 7 universal power and water supply (priced at marginal cost, I assume), the problem reform such as this is likely to face is that there will be entrenched players who have a vested interest in such reform not taking place. And the  reason such vested interests exist is because of past government failure.

In the absence of reliable public supply of infrastructure, private companies have come up to fill in the gaps. You have, for example, companies that manufacture invertors (to store and supply electricity in times of power failure), those that manufacture diesel generators, companies that supply water in tankers when there is none in the pipes (or worse, pipes don’t exist) and so  forth. None of these companies will like the reform that Vaidya has proposed – for reliable supply of water/power will put them out of business! Hence they can be expected to lobby against such reform! Notice that the primary reason such companies exist is because of past government failures. Had past governments intervened and invested at the right time to provide reliable power and water supply, there would have been no gap in the market for such companies to fill.

Power and water supply are only two of several examples. Take for example the basic public good of law and order (strictly speaking power and water supply are not public goods). The lack of effective law and order enforcement by the state governments has led to a mushrooming of private security agencies. Every apartment building, every office building, malls and hotels are all now patrolled by a heavy posse of private security guards. In the presence of effective policing, these agencies have no business being in business (except perhaps in very limited cases)!

The point I’m getting at is that government failure at a particular point in time can lead to continued government failure. When we encounter policy paralysis, it is not just a temporary slowdown in decision-making and policy-making we face – it can lead to significant long-term consequences.

Here is an old related blog-post on my personal blog on private supply of what should be provisioned by the government.

 

Biometrics for Aadhaar reflects a lack of social trust and law enforcement

As far as I’m concerned, the primary purpose of Aadhaar is for targeting subsidies. Right now we have a regime where subsidies are targeted on a household basis, which is incorrect and inefficient. What we need is a methodology to target subsidies to individuals, and for this purpose, we need a way to uniquely identify individuals.

Hence, we need a unique identification mechanism. The problem with existing IDs, such as the passport, driving licence and permanent account number (PAN) is that there is no guarantee of de-duplication. There is nothing that prevents one individual to hold multiple of these – though it might be illegal to do so. There is no formal mechanism of de-duplication in any of these – and the rather unstructured form of Indian names and addresses means that it is going to be extremely difficult to weed out duplicates of these at scale.

This is only my conjecture, but this might be the reason why the government decided to create a completely new ID, which one could obtain only if one were to give their biometric details. The argument here is that biometrics uniquely identify a person, though there are counterarguments to this which argue that it is possible in extremely rare cases (which is not rare enough, given India’s size) for two people to have biometrics that are considered identical by the de-duplication system.

India is not the only country to have aspired to issue a unique identity card for its residents. What sets India apart is the size and the fact that sharing of biometrics with the issuing agency is a necessary condition for issuing the ID card. That we have to resort to a system based on biometrics is a reflection of both the lack of social trust and the lack of law enforcement in India. That we have lack of social trust is indicated by the fact that people aspire to hold more than one “unique identity proof” – such as a PAN or a driving license or a passport. That we have weak law enforcement is indicated by the fact that existing punishments for holding duplicate IDs is not deterrent enough for people who aspire to hold multiple cards.

It can be argued that using biometrics to ensure that each resident has only one ID is an engineer’s solution to a policy problem. It is an admission of the fact that our legal enforcement is too weak to enforce unique IDs without a technological basis. It is sad that we had to go down this route without exploring policy solutions first (or maybe we did, and they didn’t go anywhere).

Extension of nightlife in Bangalore

Finally the Government of Karnataka has bitten the bullet and announced that restaurants will be allowed to open till 1 am every night, and bars will be allowed to open until 1 am on Fridays and Saturdays. The catch, however, is that this is just a pilot move, and the government will take a decision on making this extension permanent based on feedback from various stakeholders after the pilot period.

The problems with having a three-month pilot period are several. For starters, the Bangalore city police is already over-stressed, and in three months (with only a pilot scheme) it is impossible to recruit and train more policemen who will be required to maintain law and order at the late hours. The result of this will be that the existing policemen will get over-stressed, with extended working hours, which cannot be good for policing in general. And as my colleague Saurabh points out, the police might vote to not extend the deadline beyond the pilot period.

The next problem is with the businesses themselves. A number of restaurants, I’m given to understand, were not in favour of the extension of deadline since they did not think the extended hours of working would be adequately compensated in terms of revenues. Take for example a typical “Family restaurant” (like Shanti Sagar). If most of the restaurant’s regular clientile is families, they are unlikely to provide any incremental business in the extended hours, and thus it doesn’t make sense for such restaurants to be open late in the night.

One constituency that should normally welcome later opening hours are the offshored IT and BPO workers, a large number of whom reside in Bangalore. However, in response to the early shutdown of the city, IT and BPO firms have adapted over the years, and arranged for in-house food and transport for their employees. While life should become theoretically easier for these workers with the extended hours (giving them wider choice for food and transport), three months, and that too a pilot scheme, is not enough for them to change their behaviour. So it is unlikely that these people will take advantage of extended opening hours.

Then, to be open for two additional hours in the night, bars and restaurants will need to make further investments in terms of personnel. However, if the extension in deadline is only for three months, there is no way any bar can realistically invest in the necessary personnel and infrastructure to be open in the late hours. This is likely to further mute the response to the pilot.

Finally, it needs to be noted that there are strong network effects involved in maintaining a night life. The streets of a city will be safe late at night only if they are busy. The streets of residential areas are unlikely to be busy at that hour (in fact, they are empty as early as 9:30 pm in some areas), but what we need for successful night life is a cluster of bars, restaurants, theaters and other “happening” places in small geographical areas that ensure large human traffic in those areas, which makes them safe. You wouldn’t, for example, feel safe traveling back on entirely empty streets from the pub to your home. What this implies is the need for organic growth of night-life. Abruptly shifting the deadline, and that too on a temporary basis, is unlikely to have an impact.

It appears that the three-month pilot for extension of deadlines is a policy that is designed to fail. Three months is too short a time for any of the stakeholders to make any realistic investments or behavioural changes, and given the network effects involved, it is unlikely that we are going to have a critical mass of establishments and people who will take advantage of the extended deadline for the policy change to be made permanent.

Expect the extension in deadline to be rolled back as soon as the three months of pilot are over.

Bonuses and federalism

I spent a couple of years working for an investment bank, and the way they would distribute (the rather hefty) bonuses in the organization was rather interesting. Each manager in the firm would receive two sums – the first was his own bonus, and the second was the bonus to be distributed among all his subordinates. If any of the said subordinates were managers themselves, they would similarly receive two sums – separately for themselves and for their subordinates.

This is pertinent in relation to the devolution of power between the states and the third level of government. Even though district, taluk and city governments have been empowered by the 73rd and 74th amendments, they don’t have much real power because their finances are controlled by their respective state governments. In banking terms, this is like giving a manager one pot, and asking him to divide it between himself and his subordinates. The incentive is obviously to distribute the minimum amount possible to keep the subordinates happy. And this is exactly what is happening to federalism in India today.

What we need is a strict rule-based formula of distribution of central government revenues between the central governments, states and the next level (rule can be made based on populations, etc.). What we also need is a requirement for states to enact similar rules to divide revenue between states, districts and sub-districts in a rule-based manner. Until this happens, true federalism will remain a pipe dream.

An economic view of state splits

Most commentators prefer to couch the Andhra Pradesh split in emotive terms – the people of Telangana thought they were being treated in an inferior manner by the people of Andhra, and hence wanted to break away to form a separate state, and that the people of the Rest-of-Andhra (RoA) did not want the split because of reasons of Telugu pride. This is wrong, and over-complicates the issue.

Insight: When something can be explained with simple economic reasoning, looking for other (emotional/psychological/social/…) reasons is futile.

Telangana is the region of Andhra Pradesh that had been part of the Hyderabad state (RoA was part of the Madras Presidency). Due to differing standards of governance in the “Provinces” and the “Princely States”, at the time of independence, Telangana was backward compared to RoA. It didn’t help matters that Telangana was at the receiving end of brutality by the Nizam’s Razakars during the year or so when Hyderabad state was not yet part of India.

Given the vastly differing levels of development in Telangana and RoA, and the differing cultural backgrounds, I’m not sure it made economic sense to unite them in the 1950s. Potti Sriramulu’s fast and subsequent death, however, turned the issue emotive, and there was no room for rational reasoning. And a united Andhra Pradesh was created in 1956. In any case, it was consistent with the mantra of the day to have linguistic states – administrative unwieldiness be damned.

Unless there is a concerted effort, in the natural order of things, when you have a rich part  and a poor part of a particular state or country, the rich part can be expected to grow faster than the poor part – no malice here, it is simple network effects. Andhra Pradesh was no exception to this rule, and soon Telangana was much more backward than RoA.

The state splits in 2000 when Uttarakhand, Jharkhand and Chhattisgarh were formed shows that richer parts of states usually don’t mind letting go of the poorer parts. This is especially true if there is a feeling that taxes collected predominantly from the richer parts are being used to disproportionately fund the poorer parts. There might be some emotional attachment, but economics usually rules. Then, why is it that there is so much opposition to hiving off the poorer parts of Andhra Pradesh?

Andhra Pradesh has this unique situation where the capital city (and by far the biggest city) Hyderabad is located in the poorer portion. Hyderabad being the capital city saw significant investments from people from all over Andhra Pradesh, including RoA. A significant portion of RoA investment in Hyderabad is in real estate. Now, with real estate regulation being a state subject, people normally don’t want to hold too much real estate investment outside of their home states – since they will have no control over the politics of those states. So RoA investors are freaking out that their long-term investments in Hyderabad will soon be in a different state.

In a situation such as this, prudent investors might want to pull out (rather than risk their capital in a neighbouring, and possibly hostile, state). However, the problem is that none of the investors want to set off a downward price spiral in Hyderabad. Think of the situation as one where investors from RoA are invested, but know other investors are wanting to pull out any time. But you don’t want to start the process of pulling out, since that can reduce the value of your other holdings. So you stay invested. And hope that the bubble will never burst.

The attempt by people of RoA to hold on to Telangana (Hyderabad, specifically, they don’t really care about the rest of Telangana), is an attempt to save their capital locked up in investments in Hyderabad. If Andhra Pradesh doesn’t split, nobody from RoA will want to pull out their capital from Hyderabad, and the drop in value won’t happen.

It must be pointed out here that the Congress Party’s solution of having Hyderabad as a joint capital for a number of years is unlikely to be much compensation, if Telangana holds jurisdiction over Hyderabad territory anyway. The capital of RoA investors in Hyderabad will still be under risk in that case. The other option proposed was to make Hyderabad a Union Territory,  but that wouldn’t help either – since the influence of RoA in the politics of Hyderabad would still be minuscule.

To summarize, the reason RoA doesn’t want to let go of Telangana is because they don’t want to lose political control over their own investments – in the city of Hyderabad. Issues such as “state pride” and “Telugu pride” are secondary – they have been drummed up just to get the support of the non-elite who may not be economically affected by the state division. In fact, if Telugu pride were so important why in the first place would the Gults of Telangana want a separate state?

From a policy standpoint, it is important to not let the discourse of language pride get into the way of forming smaller states. The only reasons that should matter should be economics and administrative efficiency.

 

Gas credits and trading

So last week the government took a decision to increase the number of subsidized gas cylinders per family from nine to twelve per year. People say it is a move aimed at the elections, but it doesn’t impress me. It doesn’t impress me because it doesn’t affect me.

We are a family of two (wife and I), and have a subsidized gas connection. We cook at home daily, but since it’s just the two of us and we’re a “DINK” (double income, no kids) family, we don’t end up using all that much of gas. We use the cylinders strictly for cooking purposes only (not for heating water or running our car), and in the last three years or so when we’ve lived together we’ve averaged about three cylinders a year.

Given that we use only three cylinders a year I’m pissed off that the government has increased the subsidy from nine to twelve cylinders a year! Earlier, subsidy for six cylinders that I was getting was going waste, and now subsidy for nine cylinders is going waste! I don’t like it.

The only statistics that are out about the number of gas cylinders people use is that 90% of the population uses 9 cylinders or less a year, and 97% of the population uses 12 cylinders or less (numbers from a TV debate on the topic I watched last week). What we don’t know is the average number of cylinders consumed by a household with subsidized connection.

Given that I’m not availing of most of my subsidy, I should be allowed to trade in my subsidy for something else – subsidy on petrol maybe? If a family that belongs to the 3% that uses more than 12 cylinders a year, we should be able to strike a deal so that some of my unused subsidy can be channeled to give that family additional subsidy! This is just like carbon credit trading happens – where carbon efficient companies can sell pollution rights to companies that emit more CO2.

If you realize, what I’m getting at is that I don’t want to be “punished” (in terms of lesser subsidy) because I use less gas than the average Indian household. I want the same subsidy, too, so what if I use less gas? Perhaps the subsidy can be given in the form of an unconditional cash transfer?

While on the topic, it is absurd that LPG and all other rations are at the household level, and not individual level. We use only 3 cylinders a year because we are a family of two. Why should we get the same amount of subsidy as (let’s say) a family of twelve? Given that soon we will have universal coverage under UID, the LPG subsidy regime can be modified as follows.

Each individual (from a newborn baby to an adult) will be eligible for two subsidized LPG cylinders a year. For every LPG connection you have, multiple Aadhaar numbers will be attached – this is the list of “dependents” on that particular connection, and the total subsidy is the number of Aadhaars attached times two. Notice that the reason we have the present subsidy regime is that the Aadhaar is a necessary condition for moving to a per capita subsidy regime! Just goes to show how public services can be completely reformed once Aadhaar gets implemented.

Baptists and Bootleggers: Karnataka Edition

“Baptists and bootleggers” is a popular concept in economics. It is used to illustrate that in the absence of sound economic thinking, good intentions don’t count for much. According to this concept, baptists want to ban the sale of alcohol on Sundays because it is the day of the lord, and they don’t want people to be drinking that day. And this plays out directly into the hands of bootleggers – who make a living supplying people their booze on Sundays.

So by calling for the sale of liquor to be banned on Sundays, baptists are essentially encouraging an illegal activity and an illegal trade. If not for the baptists, people would be able to buy their liquor legally on Sundays, and bootleggers would be out of business.

There is also a social cost to policies like this – by pushing an activity (such as the sale of liquor on Sundays) underground, you encourage nefarious elements to get into business, rather than keeping it in clean hands. And this is likely to increase the overall rate of crime.

Thus, by their supposedly moral position that alcohol should not be sold on Sundays, baptists actually end up unintentionally encouraging crime!

A similar story to this has been playing out in Karnataka in the last twenty years. For whatever reason, in 1993, the government of Karnataka decided to freeze the total number of liquor licenses in the state. Since 1993, if you want to open a bar or a liquor shop, you need to purchase a license from the secondary market. Effectively, for every new liquor outlet, some outlet somewhere in the state has to close down (whether such closure is usually voluntary or not is left as an exercise to the reader). This increases the cost of liquor intermediation in the state and leads to higher prices for the consumer.

While higher prices may be desirable for “sin goods” such as liquor, there is a better way for the government to increase consumer prices – by levying higher taxes, which ensures that the additional money thus paid by the consumer flows into the government coffers. By limiting the number of licenses, however, the government doesn’t get extra revenue.

Instead what this encourages is illegal sale of liquor! That there is a limit on the number of liquor licenses doesn’t push down people’s need for liquor. And they end up buying liquor from illegal sources and bootleggers, and it becomes difficult to maintain quality and hygiene standards on such sales. And with a bar having to close down for every new one that needs to open, you might imagine the kind of characters that might get involved in the process.

Back in 2008, a friend was trying to start a lounge bar, and he mentioned that he had to pay up to the tune of Rs. 30 lakh to get his license, while the official price is about a tenth of the amount. It is obvious that not all the money he paid for his license went to the government’s coffers.

Where do the baptists come here? Because every time there is a proposal to increase the number of liquor licenses, you will have a wave of morality which protests this decision. They are the baptists who keep Karnataka’s bootleggers in business.

Also read this piece on the funny rules of Karnataka’s liquor licensing regime.