Who lends to the Indian state?

by Aneesha Chitgupi, Ajay Shah, Manish Singh, Susan Thomas and Harsh Vardhan.

Public finance researchers in India have paid great attention to debt and deficits. By now, the main messages of the field have started sinking into common knowledge: that it is good to run primary deficits in most years, so as to create space to surge the deficit once in a while when faced with a crisis. There is an adjacent field of public debt management that is equally important. Here, the strategic question is: How should the government borrow? From whom? Debt management strategy has not received the required level of interest.

Strategic thinking in debt management

A sound public debt management strategy must cater to three objectives:

• The mechanism for borrowing must not induce economic distortions upon the domestic economy.
• It must create strategic depth of being able to borrow on a very large scale when faced with great challenges, once every few decades.
• It must induce sustainable mechanisms for reasonably low cost borrowing, at reasonably predictable rates, for the long term.

There are four main pathways to choose from in debt issuance:

1. Monetisation of the deficit. Here, the central bank distorts the monetary base with `fiscal dominance’ where it buys the bonds issued by the government.
2. Coerced borrowing from financial firms. These are typically regulated firms, who are coerced using the tools of financial regulation.
3. Borrowing from voluntary participants (domestic or foreign). This is done through local currency bonds issued domestically, possibly nominal and possibly inflation indexed.
4. Borrowing abroad using foreign currency denominated bonds. As an example, this could involve Yen denominated bonds issued in London.

As with many other countries, we started out in India with the first method (monetisation of the deficit). This induces an economic distortion: the loss of monetary policy autonomy. A long journey of monetary policy reform took place, from the Ways and means agreement of 1993, to the Monetary policy framework agreement in 2015 that ushered in inflation targeting. This freed up monetary policy from the limitations imposed by debt management. In 2015, there was an attempt at institutional reform, in the form of the establishment of the Public Debt Management Agency (freeing up the Reserve Bank of India of the responsibility of issuing public debt), but this did not come to pass.

From 1993 onward, the main strategy for public debt management in India has involved method 2 in the list: a system of `financial repression’ where the government borrows from coerced financial firms. This is a tax upon financial intermediation. The interest rates discovered through government borrowing are important prices that impinge upon the economy. But these rates are distorted owing to the presence of coerced buyers of government debt. The lack of voluntary lenders creates the lack of strategic depth. The government is limited in how it can expand its borrowing when faced with special situations.

From the late 1990s onwards, economists and thinkers have sought to enhance fiscal prudence in India through the mechanism of fiscal responsibility law. It is increasingly clear that this does not work. In recent work, Datta et. al. 2023 show that the Indian constitutional arrangements frustrate the possibility of Parliamentary law imposing fiscal discipline upon the union government. Once this idea is internalised, there is one main path towards fiscal responsibility: market discipline. This requires removing the system of financial repression.

Who lends to the Indian state?

In this context, the question Who lends to the Indian state? attains importance. A recent paper by Aneesha Chitgupi, Ajay Shah, Manish Singh, Susan Thomas and Harsh Vardhan examines this question. For a period of 10 years, we assemble information from multiple sources, which were all available in the public domain, to examine the nature of lenders to the Indian state. Some discoveries that we make are:

• The SLR went down in the last decade. This meant that the extent of bank funds mandated for the government decreased. However, the actual investments by banks in government debt securities was higher than what was mandated.
• Simultaneously, there was major growth in the role of insurance and pension funds lending to the government. While de jure financial repression of banks declined, there has been no such retreat with pensions and insurance.
• All the three groups of financial firms bought a lot more government bonds as compared with the de jure requirements. Excess ownership went from about 0 in 2011 to Rs.30 trillion in 2021.
• How did the government increase borrowing over the last decade, while simultaneously elongating the maturity profile? The answer lies in (a) Strong growth in insurance and pensions industries, and (b) Excess ownership of government bonds by coerced industries.
• The voluntary lenders are the private firms, MFs and FIIs, who are 4.8% of investors in the government debt market for 2021. India (along with China) remains an outlier in having very low borrowing from international debt markets.

Important questions for the future

This field is target rich with interesting questions, some of which are:

1. Why do financial firms lend so much to the government?
2. What will the structure of lenders to the government look like, 10 years out into the future?
3. If a big surge in borrowing is required, where will it come from?
4. How are households and firms changing their behaviour in response to the financial repression tax?
5. What is the path to fiscal responsibility?

Conclusion

The field of public finance in India has studied deficits and debt. There has been work on the institutional arrangements for debt management (i.e. the establishment of the Public Debt Management Agency). There has been relatively little work on the economic reasoning, the strategic thinking for debt management. In this paper, we offer novel insights and facts for this journey. More research is required, at the interfaces between public finance, finance and public administration, to grow knowledge on the important field of debt management strategy.

Announcements

Positions for researchers in the field of working of courts

XKDR Forum is looking for two researchers to work on a project on the working of courts in India.

About XKDR Forum

XKDR Forum is a Mumbai-based inter-disciplinary group of researchers working in the fields of courts, household and firm finance, public finance management and land. In these fields, the group engages in academic and policy oriented research, and advocacy. The new recruits will come into an active research program in the field of working of courts.

Researchers at XKDR Forum have been working in the field of legal systems development for the last decade. Their work in this field includes developing unique case-level datasets from public sources; statistical analyses to establish stylised empirical facts; and studying institutional arrangements of the judicial branch. The work published by their researchers in this field can be found here.

As a research associate at XKDR Forum, you will work on project deliverables under the supervision of a senior researcher. You will be expected to work in person at the office premises in Mumbai.

Eligibility

The project involves building and/ or working with large databases of court data. The eligibility requirements for these two positions are:

1. Masters in Public Policy or Economics, along with skills or an interest in the coding languages of R and Python; or
2. Masters or bachelors in Data Science, along with an interest in questions of public policy or public administration.

Candidates with work experience of 1-2 years are preferred, but if you have a Masters degreee, the absence of this attribute is not a barrier to applying for these positions. They must be comfortable working in an inter-disciplinary research environment with people from varying backgrounds such as economics, public policy and law. They must be curious and passionate about research and must be willing to work on independent outputs as well as in teams.

The remuneration offered will be commensurate with your skill and experience and will be comparable with what is found in other research institutions.

Interested candidates must fill in the application form by 31st August, 2024.

The exercise of discretionary powers: The case of debarment and restraint from capital markets

by Natasha Aggarwal, Bhavin Patel, and Renuka Sane.

Introduction

Financial market regulators, such as the Securities and Exchange Board of India (SEBI), can impose monetary penalties and other sanctions, including debarment from capital markets and restraint from dealing in particular securities. Enforcement action by the state, such as a market regulator, is a double-edged sword. On the one hand, empowering the state to impose sanctions ensures that violators face consequences. Enforcement actions potentially serve as a deterrent against future violations and restore society's (and the market's) trust in the system's fairness. However, if the procedure established by law is not followed while imposing sanctions or if the sanctions are unpredictable or disproportionate to the offence, the process can be seen as unjust and lose its legitimacy. Such actions would damage markets instead of protecting them. Research suggests little clarity exists about the basis for determining penalty amounts in insider trading cases ( Asthana, Sane, and Vivek, 2021) and that there is no discernible pattern on how SEBI applies debarment provisions (Damle and Zaveri, 2022).

Debarment and restraint have enormous business, reputational, and career consequences on whom they are imposed. Section 11(4) of the Securities and Exchange Board of India Act, 1992 (SEBI Act) requires that SEBI provide written reasons when ordering debarment or restraint in final and interim orders. Such reasons must explain why a sanction is necessary in the interests of investors or the market. SEBI has ordered debarment in 575 instances and debarment with disgorgement in 111 instances (SEBI Annual Report (2022-23)) across all violations. This article investigates SEBI's process for applying debarment and restraint sanctions. It focuses on the following questions:

1. Whether SEBI specifies reasons for ordering debarment and/or restraint?
2. What reasons are specified?
3. Are these reasons special to the instances where debarment or restraint is ordered?
4. Is there a correlation between the amount of quantified gain or advantage and the period of debarment or restraint ordered?
5. If the answers to the above questions are negative, are there constitutional grounds of arbitrariness and non-application of mind on which such orders can be challenged?

Our analysis suggests that SEBI often does not provide reasons for imposing debarment and/ or restraint. When it does give some reasons, it does not indicate why debarment and/ or restraint are imposed rather than other sanctions, such as penalties. In such instances, SEBI uses near-identical language in its orders when imposing debarment and/ or restraint as it does when imposing penalties. We also find little correlation between the quantified gain or advantage resulting from the violation and the period of debarment or restraint. Our reading of the law suggests that SEBI's processes expose its orders to challenge on constitutional grounds of non-application of mind and arbitrariness.

Data and methods

Our data consists of SEBI orders on insider trading, which has become an important issue for SEBI in recent years. During 2022-23, SEBI took up 85 insider trading investigations and imposed penalties worth Rs. 3 crore (SEBI Annual Report (2022-23)). There has also been a rise in the percentage of appeals in insider trading cases allowed at the Securities Appellate Tribunal (SAT), from 9% in 2021-2022 to 44% in 2022-2023. The increasing numbers of insider trading matters investigated, penalties, debarment and restraint imposed, and appeals allowed by SAT raise questions about whether SEBI has exercised its administrative discretion in consistently, rationally, and predictably determining sanctions.

We collected a set of insider trading orders passed by SEBI between September 2009 and July 2023. We then created a dataset of orders which matched the following set of keyword searches relating to insider trading: a single instance of 'insider' AND a single instance of 'UPSI' OR 'unpublished' OR 'prevention' OR 'insider trading' (case-insensitive). This gave us 913 observations (599 by Adjudication Officers (AOs) and 314 by Whole-Time Members (WTMs)). AOs do not have the power to impose debarment and restraint as sanctions. We, therefore, focus on the subset of observations related to WTMs. Table 1 presents the summary of our dataset.

Table 1: Summary of our data

Total number of observations	913
Number of observations from WTMs	314
Debarment	188
Restraint from capital markets	71
Both	57
Average period of debarment (in years)	2.9
Average period of restraint (in years)	1.8

There are 188 instances where WTMs have ordered debarment from capital markets and 71 instances of restraint from dealing in securities of the relevant company. In 57 cases, debarment and restraint have both been ordered. We observed no qualitative difference between these 57 cases and the remaining cases where only debarment or restraint was ordered. The average debarment period is about three years, and the average period of restraint is two years.

As described earlier, the SEBI Act requires SEBI to give reasons for imposing debarment or restraint. We use this as the basis of our analysis. From each order, we extracted information on whether SEBI explicitly provided reasons for imposing debarment or restraint, what the reasons were, and whether the order noted the amount gained or loss avoided by the violator. We then used the 'Free online text compare tool' from GoTranscript to compare SEBI's reasons for imposing penalties with reasons for ordering debarment and restraint. This helps us understand if the reasons provided by SEBI are generic or specific. We also studied whether the number of years of debarment or restraint was correlated with the amount gained or loss avoided. This provides one measure of determining proportionality in such orders.

Results

Has SEBI specified reasons?

Table 2: How often does SEBI provide reasons for its actions?

Sanction	Number of instances	Reasons provided	Reasons not provided
Debarment	188	153 (81.4%)	35 (18.6%)
Restraint	71	20 (28.2%)	51 (71.8%)

Table 2 shows SEBI orders do not provide a rationale in ~19% of cases where debarment has been sanctioned and ~72% of cases where restraint has been ordered.

What reasons has it specified?

Where SEBI does provide reasons, they are similar to non-statutory factors it provides when imposing penalties higher than the minimum prescribed under the SEBI Act. The reasons include:

1. Ensuring a level playing field and minimising information asymmetry.
2. Protecting the investors' interests.
3. Regulating and developing the market.
4. Upholding standards of transparency, good governance and ethical behaviour.
5. Upholding the integrity, orderly development and fairness of the market.
6. The seriousness of the violation.
7. Insider trading is behaviour that undermines confidence in the securities market.
8. Discouraging and curbing future instances of insider trading.
9. The role and extent of involvement of an alleged violator.

Are these reasons special to the instances where debarment or restraint is ordered?

The reasons are broad and do not indicate anything special that justifies the imposition of debarment and/or restraint rather than another sanction, such as a penalty. The reasons also do not clarify how the period of debarment or restraint was determined in these instances.

Our analysis from the GoTranscript tool indicates a 99% similarity between the reasons for imposing penalties and ordering debarment and an 86% similarity between the reasons for imposing penalties and ordering restraint. This indicates that the reasons for imposing debarment or restraint are the same as those for imposing penalties. Moreover, the language used to describe these reasons is nearly identical. Application of mind in the exercise of administrative discretion implies that the regulator provides reasons for imposing a sanction and clarifies why it has decided to impose one type of sanction (such as debarment or restraint) rather than another (such as penalty). The fact that SEBI uses near-identical language suggests that SEBI does not consider the proportionality of the sanction to the specific nature and extent of the violation in recording its reasons for imposing certain sanctions or calculating the quantum of penalty or the periods of debarment and restraint. This also suggests that its orders in such instances suffer from procedural lapses and a lack of application of mind and are open to challenge.

Is there any correlation between the amount of quantified gain and the period of debarment or restraint ordered?

Table 3 provides the number of instances in which SEBI established the amount gained or loss avoided before imposing a sanction and the average period of debarment and restraint.

Table 3: Amount loss/gained and the average period of debarment

	Number of instances	Average period (years)	Cases with "Till further orders"
Debarment: Amount gain/loss established
Yes	120/188	3.51	2
No	68/188	1.76	4
Restraint: Amount gain/loss established
Yes	40/71	2.05	2
No	31/71	1.47	12

The table points to three observations.

• First, in 36% of cases where debarment was imposed, SEBI did not identify the amount gained or loss avoided. This is higher in the case of restraint at 40%.
• Second, the average sanction period is higher when the amount of gain/loss avoided is established.
• Third, SEBI imposes debarment and restraint without an end date more often in cases where it has not established the amount gained or loss avoided.

Figure 1 shows the correlation between the amount gained/loss avoided and the years of debarment and sanction in more detail.

Figure 1: Amount loss/gained and the periods of debarment and restraint

Figure 1 does not include two instances in which SEBI quantified the amount of gain and ordered both debarment and restraint 'Till further orders'. The amounts gained in these two instances were Rs. 2,79,51,000 and Rs. 26,82,000.

There is no correlation between the period of debarment ordered and the quantified gain or advantage. There appears to be an inverse relation between the period of restraint ordered and the quantified gain or advantage. We, therefore, infer that the quantified gains or advantages have not been a consistent factor in determining the debarment or restraint period. Moreover, of the 188 instances where SEBI has imposed debarment, it could not quantify the gain in 158 instances (i.e., approximately 84%).

Constitutional safeguards on administrative discretion

One reason for SEBI's non-application of mind when imposing debarment and restraint may be that the SEBI Act provides no guidelines. However, the Indian Constitution and case law in the Supreme Court suggest that this is not a valid excuse.

The Constitution of India imposes restrictions against the exercise of arbitrary power by the State against its citizens. Such arbitrary exercise of power violates Article 14 of the Constitution. This principle has been reiterated by the Supreme Court (Bachan Singh v. State of Punjab, (1982) 3 SCC 24; East Coast Railway v. Mahadev Appa Rao, (2010) 7 SCC 678; Trustees of H.C. Dhanda Trust v. State of Madhya Pradesh, (2020) 9 SCC 510) where it has said:

Whenever a statute transfers discretion to an authority, the discretion is to be exercised in furtherance of the objects of the enactment. The discretion is to be exercised not on whims or fancies rather, the discretion is to be exercised on a rational basis in a fair manner.

Further, the Court has also said:

Every order should demonstrate "due and proper application of mind by the person making the order" and clearly set out the reasons for the order. --East Coast Railway v. Mahadev Appa Rao, (2010) 7 SCC 678.

The Court has also held that there must be consistency in decision-making involving the exercise of administrative discretion.

[I]t is important to emphasize that the absence of arbitrary power is the first essential of the rule of law upon which our whole constitutional system is based. In a system governed by the rule of law, discretion must be confined within clearly defined limits when conferred upon executive authorities. The rule of law, from this point of view, means that decisions should be made by the application of known principles and rules and, in general, such decisions should be predictable and the citizen should know where he is. If a decision is taken without any principle or without any rule it is unpredictable and such a decision is the antithesis of a decision taken in accordance with the rule of law. -- S.G. Jaisinghani v. Union of India, AIR 1967 SC 1427.

One can expect the constitutional guardrails to apply to SEBI actions, whether for penalties or debarment. Consequently, SEBI must provide clear reasons for imposing debarment or restraint, the period of such debarment and restraint, and what is special in the instances where such debarment or restraint is ordered, making it different from instances where it is not.

Conclusion

The absence of justifiable exercise of its discretionary power by SEBI when imposing debarment and restraint in a reasonable number of cases is demonstrated by the fact that there are many instances where no reasons are provided when imposing such sanctions. Where reasons are provided, they do not indicate anything special in these particular instances that distinguishes it from instances where such sanctions are not ordered and are largely the same as those provided for imposing penalties. Finally, little correlation exists between the quantified gain or advantage and the debarment or restraint imposed.

It is particularly important to examine whether SEBI provides reasons when imposing debarment or restraint, how it determines the duration of such sanctions, and what these reasons and methods are because the SEBI Act does not specify what these factors should be, unlike in the case of penalties. These reasons and methods must be described in its orders so that they are available to the persons directly affected and the general public. This is required by the rule of law principles of reasoned decisions and knowability and predictability of the law. It is not sufficient to describe such reasons and methods in internal, unpublished documents or decisions, such as those determining whether an Adjudicating Officer or a Whole-Time Member should adjudicate a matter. If SEBI fails to provide good reasons or does not clarify its methods, its orders are open to challenge on constitutional grounds of arbitrariness.

We recommend developing more precise, appropriate, and usable guidelines in the legal framework to guide and constrain SEBI's discretion in imposing sanctions. The amount gained or loss avoided in insider trading cases may be difficult to quantify. Given this, the 15J factors must be modified to indicate how the debarment period can be calculated in such instances. The Competition Commission of India (Determination of Monetary Penalty) Guidelines, 2024 may be a good reference point for designing such guidelines. Having a clear set of guidelines that SEBI follows in its orders will help satisfy the requirements of consistency, non-arbitrariness, and predictability. This will also help address the high (44%) overturn rate at the SAT, which SEBI self-reports for its insider trading cases. This is perhaps attributable to the frequency with which the SAT modifies sanctions imposed by SEBI.

The Report of the High-Level Committee under the Chairmanship of Justice Anil R. Dave on the Measures for Strengthening the Enforcement Mechanism of the Board and Incidental Issues stated that debarment may serve as an ineffective deterrent mechanism. This, coupled with the lack of specific reasons in SEBI's orders, suggests a need to review the use of debarment and restraint as sanctions in SEBI's enforcement proceedings and to develop more implementable guidelines to guardrail the regulator's actions in imposing such sanctions.

References

Asthana, Sane, and Vivek, An analysis of the SEBI WhatsApp Orders: Some observations on regulation-making and adjudication, Leap Blog, 27 May 2021.

Damle, Devendra and Zaveri, Bhargavi, Enforcement of Securities Laws in India: An Empirical Overview, 24 August 2022.

Securities and Exchange Board of India, Report of the High-Level Committee under the Chairmanship of Justice Anil R. Dave on the Measures for Strengthening the Enforcement Mechanism of the Board and Incidental Issues, 2020.

Securities and Exchange Board of India, Annual Report, 2022-2023

The authors are researchers at TrustBridge. The data cited here was collected by a team at TrustBridge comprising Madhav Goel, Karan Gulati, Amol Kulkarni, Sonam Patel, Praduta Singh, and the authors. We thank Sonam Patel for her assistance in data analysis and creating graphs and tables. We also thank the three anonymous referees who read an earlier draft and provided their comments and suggestions.

An evaluation framework for public procurement processes

by Karan Gulati and Anjali Sharma.

Governments require and use goods and services to operate their machinery and deliver schemes and programs to their constituents. However, self-production cannot meet this need for goods and services. As a result, governments rely on public procurement. However, India does not have an optimal public procurement system. Tenders often undergo modifications, the government incurs significant debt due to payment delays, competition is limited, and contract execution is frequently delayed. Procuring entities also tend to favour large private companies by setting eligibility criteria that exclude small and medium-sized enterprises or providing them with private information that offers a competitive advantage.

Given this experience and the limitations of existing literature, integrating international and best practices can facilitate strategic evolution and ensure that the Indian public procurement system is conducive to achieving broader objectives of efficiency and effectiveness in public resource allocation. By methodically aligning with these practices, India can foster a competitive market environment, attract better vendors, and achieve effective and sustainable procurement outcomes. Specifically, such methodological alignment can help establish an evaluation framework with clear benchmarks and indicators that enable the measurement of procurement processes across departments, identify systematic weaknesses, and explore opportunities for reform.

In a new TrustBridge Rule of Law Foundation Working Paper, we propose "An evaluation framework for public procurement processes" that recognises the government's dual role as the state and a market participant throughout the procurement life cycle and can be deployed to evaluate public procurement across sectors and procuring entities. It contributes to India's growing field of evidence-based literature and policy interventions. Based on the UNCITRAL Model Law on Public Procurement, OECD Recommendations of the Council on Public Procurement, the World Bank's Benchmarking of Procurement, FIDIC, ADB, and NEC standard contracts, and relevant literature, the evaluation framework includes the following benchmark:

• Transparency
• Integrity
• Documentation
• Capacity

• Timeliness
• Negotiation
• Monitoring
• Dispute resolution

It divides these benchmarks along two axes. The first pertains to the role of the procuring entities, either as (i) the state or (ii) a market participant. The second pertains to procurement stages: (i) pre-award to award, (ii) award to completion, and (iii) completion to payment. For instance, as the state, procuring entities must ensure transparency before awarding a tender. To evaluate transparency, the framework assesses whether procuring entities publish procurement plans, which aids in planning and reduces the need for emergency procurement. It also evaluates whether the entity conducts pre-bid consultations, which are beneficial for identifying suppliers early in the process.

To assess the effectiveness of the framework, we evaluate the procurement processes of the National Highways Authority of India (NHAI), India's largest public procuring entity, with tenders worth over 3,70,000 crore rupees (USD 44.5 billion). Its parent ministry, the Ministry of Road Transport and Highways, accounts for over half of India's capital expenditure on procurement. This operational experience should have endowed NHAI with expertise that reflects a spectrum of procurement processes and methodologies. Furthermore, the government's focus on infrastructure development, especially in road transport, underscores the NHAI's role as a driver of public procurement by the Indian state. Thus, evaluating NHAI can provide insights into public procurement processes in large-scale procuring entities and the efficacy of our framework.

Through this first-of-its-kind and illustrative evaluation, we identify several areas for improving India's public procurement system, thus optimising the allocation of public resources, curtailing opportunities for rent-seeking, and fortifying public trust. This includes better estimation of project timelines, improving the role of independent monitoring, and conducting performance evaluations. It also highlights that procuring entities need to enhance transparency not just in their operational processes but also in their data collection and reporting practices. These results validate the efficacy of our evaluation framework. Its comprehensive nature, encompassing a range of benchmarks, allows for a detailed evaluation of public procurement processes. Its application to NHAI demonstrates its potential to evaluate and improve procurement processes across procuring entities.

Extending this evaluation framework is essential to building on this foundational work. The task now involves evaluating other large-scale procuring entities. This endeavour is about identifying areas for improvement and understanding the patterns that define public procurement processes. The insights from this work can inform policy-making and catalyse systemic improvements, contributing to enhancing and refining the public procurement system.

References

Anirudh Burman and Pavithra Manivannan, Delays in government contracting: A tale of two metros, Leap Blog, 23 December 2022.

Anjali Sharma and Susan Thomas, The footprint of union government procurement in India, XKDR Working Paper No 10 of 2021.

Charmi Mehta and Diya Uday, How competitive is bidding in infrastructure public procurement? A study of road and water projects in five Indian states, Leap Blog, 29 March 2022.

Karan Gulati and Anjali Sharma, An evaluation framework for public procurement processes, TrustBridge Rule of Law Foundation Working Paper No 4 of 2024.

Prasanta Sahu, Forget stimulus, clear your dues: Rs 7 lakh crore unpaid dues to industry by central govt depts and PSUs, Financial Express, 8 September 2020.

Shubho Roy and Anjali Sharma, What ails public procurement: an analysis of tender modifications in the pre-award process, Leap Blog, 26 November 2020.

Yugank Goyal, How Governments Promote Monopolies: Public Procurement in India, The American Journal of Economics and Sociology, 26 November 2019.

The authors are researchers at the TrustBridge Rule of Law Foundation. We are grateful to Akshay Jaitly, Renuka Sane, Charmi Mehta, and participants at the Joint Field Workshop on Public Procurement for their valuable comments. Views are personal.

Announcements

Call for papers: Insolvency and bankruptcy reforms in India: 10 years after IBC

10 December, 2024

XKDR Forum is inviting papers for work on Insolvency and bankruptcy reforms in India: 10 years after the IBC. This process is intended to build the successor to the volume Insolvency and Bankruptcy Reforms in India, which was published in 2022. This includes issues such as:

• Legal developments and changes in the IBC since 2016.
• Changes in the legal framework relative to design principles.
• Political economy of insolvency reforms.
• The consistency, certainty and predictability of judgements and credit contract enforcement.
• Economic impact of the law in evolution of the Indian credit markets.
• Economic impact on lender and borrow incentives.
• Performance of insolvency institutions.
• Relationship between firm exit and the institutional features of the financial sector, particularly banking regulation and legal frameworks on capital flows.
• Missing markets - for personal insolvency and collateral markets.
• The industries of insolvency professionals for insolvency resolution, Liquidation professionals, valuation.
• The remaining public policy on insolvency and bankruptcy reforms.

The conference welcomes multi-disciplinary research work: economics, law, public policy and practitioner perspectives. The audience for the conference is expected to comprise academics, participants from the legal and financial industry, policy makers from government and regulators.

Program committee

• Adam Feibelman, University of Tulane
• Anjali Sharma, TrustBridge Rule of Law Foundation
• Aparna Ravi, S & R Associates
• Bhargavi Zaveri-Shah, National University of Singapore
• Harsh Vardhan, Independent
• M. S. Sahoo, National Law University, Delhi
• Rajeswari Sengupta, IGIDR
• Renuka Sane, TrustBridge Rule of Law Foundation
• Taeko Suzuki, Nishimura & Asahi
• Susan Thomas, XKDR Forum
• Umakanth Varottil, National University of Singapore

Timelines

• Paper submission deadline: 20^th September 2024.
• Expected date for notification of acceptance: 25^th October 2024.
• Dates of the conference: 10^th December 2024.

Submission process

• The papers must be sent as PDF files to [email protected], with the "Submission for Insolvency and Bankruptcy reforms 2024" in the Subject title. Details about the conference can be seen at https://xkdr.org
• Submissions will be reviewed by the Program Committee.
• 10 papers will be selected for the conference.

Conference location

Venue: MCA Club, Bombay
Accommodation at the conference venue for a night (9^th December 2024) will be provided to academic presenters and discussants.

Announcements

Call for Papers: 15^th Emerging Markets Conference

10^th - 13^th December, 2024

XKDR Forum in collaboration with Vanderbilt law School is inviting papers to be submitted for the 15^th Emerging Markets Conference, 2024. In the past, the audience for these events has comprised of academics, participants from the legal and financial industry, policy makers from government and regulators.

Details of the previous conferences can be viewed at https://emergingmarketsconference.org/. The conference aims to cover presentations and discussions across the following set of research topics:

• The sources of economic success or failure in EMs.
• Finance in EMs (households, financial markets, financial intermediaries, firms and finance, finance and growth).
• Political economy, law, public administration, regulation in EMs.
• The impact of populism upon the possibility of sustained growth.
• Insights into large EMs that matter in and of themselves.
• Insights from narrow research projects that illuminate EMs in general.
• The new phase of globalisation and its consequences for international trade, international finance and the nature of the EM firm.
• Features of a society that enable or disable convergence into the ''normal'' package of high levels of freedom and prosperity.
• The puzzles faced by all kinds of decision makers: individuals, civil society actors, firms, all levels of government.
• Grand challenges such as climate change: implications for EMs and ramifications of choices made in EMs.

Conference design

For EMC 2024, we intend to bring on board a wider research papers, panels on contemporary policy and keynotes by experts in the area of finance, economics and law. The conference this year will be completely in - person mode.

Best Discussant Award

Each year, we award the Springer Emerging Markets Conference discussant award for the best discussant and the first runner up discussant of the papers presented on each day of the EMC. The discussants are selected by an audience poll.

Program Committee

• Adam Feibelman, Tulane University
• Ajay Shah, XKDR Forum
• Bidisha Chakraborty, Saint Louis University
• Dan J Awrey, Cornell Law School
• Harsh Vardhan, Independent
• Indradeep Ghosh, Dvara Research
• Joshua Felman, J. H. Consulting
• Kose John, NYU Stern
• Kumar V, SMU - Cox School of Business
• Marios Panayides, The University of Oklahoma
• N. Prabhala, Johns Hopkins University
• Pab Jotikasthira, SMU - Edwin L Cox School of Business
• Pradeep Yadav, The University of Oklahoma
• Rambhadran Thirumalai, ISB
• Rajeswari Sengupta, IGIDR
• Renuka Sane, TrustBridge
• Sanjay Kallapur, ISB
• Susan Thomas, XKDR Forum
• Tanika Chakraborty, IIM Calcutta
• Yesha Yadav, Vanderbilt University

Important dates

• Paper submission deadline: 31^st August 2024.
• Expected date for notification of acceptance: 29^th September 2024.
• Dates of the conference: 10^th - 13^th December 2024.

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The usefulness of the CMIE household survey data for electricity research in India

by Susan Das, Renuka Sane and Ajay Shah.

Measurement for electricity research

The problems of the electricity system are of particular importance in India given that the existing institutional arrangements work relatively poorly. While this has been a concern for decades given the importance of electricity in economic growth, it has achieved a fresh prioritisation due to the need for a clean energy transition. The problems of electricity sector have become the critical bottleneck for the decarbonisation of the economy (Jaitly and Shah, 2021).

De jure government subsidies, and de facto theft, take place in this field on a significant scale. While researchers are able to readily observe de juresubsidies, theft is hard to observe. Domestic consumers and agriculturists shape the political economy of sub-national electricity. Policy makers make decisions about the de jure and de facto policy frameworks with an eye on how these pressure groups will react. The mechanisms through which transfers take place are often subtle. As an example, Mahadevan (2023) obtained micro data for one state in India, and found that electricity bills were manipulated to charge less to households in regions that had voted for the ruling party.

Understanding the field, and analysing possible policy pathways, will benefit from quantitative political economy research grounded in household survey data. Once household level electricity expenditures are observed alongside an array of household characteristics, it becomes possible to analyse the incidence of present or alternative subsidy mechanisms. Researchers could try to understand the mechanisms through which tariffs and subsidies shape expenditures, the role of appliance ownership, the problem of theft of electricity, the elasticity of residential electricity demand to price changes and other policy actions, and the impact of electricity consumption upon the household.

These possibilities have been opened up in India through the CMIE CPHS database, a panel dataset where 240,000 households are observed thrice a year. As with many measurement strategies such as crime victimisation surveys, there is value in looking beyond aggregative measurement, and directly asking households about their experiences. The CMIE CPHS dataset opens up diverse array of research possibilities in the field of electricity research. Some research papers have emerged which harness this. Martínez Arranz et al. (2021) have used the CPHS to study the expansion of access to 24 hours of electricity supply between the 2014-2019 period across 24 states and UTs. Kulkarni, Sahasrabudhe and Chunekar (2022) have used the CPHS to analyse the appliance ownership trends in India which potentially can be used to forecast residential electricity demand.

At the same time, there are concerns about the veracity of this data. The world over, it is difficult to supervise field investigators and obtain cooperation from respondents, particularly from high income households. While the CMIE CPHS database represents a remarkable new phase in economic measurement in India, there has been a debate about the difficulties of this data.

In this article, we perform sanity checks of this data, across natural experiments of tariff changes in Tamil Nadu. This helps assess the extent to which the data can be a sound foundation for researchers in this field. It also contributes to the larger literature on the problems of household survey data, on economic measurement in India, and on pathways to measurement in emerging markets that do not rely on the official statistical system.

The CMIE CPHS database

The Consumer Pyramids Household Survey (CPHS) is a longitudinal household survey conducted by the Centre for Monitoring Indian Economy (CMIE) from 2014. A panel of over 240,000 Indian households across 27 states and 514 districts is measured thrice a year. The sample is nationally representative and selected through a multi-stage stratified design. The survey captures many features of the household including labour supply, investment, borrowing, consumption, income, and demographics. It represents the first large scale longitudinal dataset of this nature in India.

A rich literature has emerged based on the CMIE CPHS data, ranging from questions of household portfolio choice, labour markets to health and mortality impacts of diseases. In May 2024, a search for the string CMIE CPHS on Google Scholar showed 310 papers. Pandey, Patnaik and Sane (2019) study the evolution of financial savings with the changes in the design of tax breaks, while Gopalakrishnan, Ritadhi and Tomar (2019) study the effects of adjustment costs in real estate affecting portfolio choice. Patnaik, Sane and Shah (2019) study the effects of a flood in Chennai on the income and consumption pattern of affected households and the heterogeneity in impact by financial constraints and income levels. It has been used to understand gender gaps in the labour market outcomes as a result of the impact of COVID-19 (Deshpande, 2022; Abraham, Basole and Kesar, 2022, excess mortality and prevalence of COVID-19 (Malani and Ramachandran, 2022; Mohanan et al., 2021), and the impact of location and income on the health of individuals (Patnaik, Sane, Shah and Subramanian, 2023).

Household survey measurement is facing challenges the world over. Respondents who are immersed in modern distractions, or are busy, are prone to refuse to answer questions, which gives non-random non-response. Supervision and control of field investigators is difficult in the Indian locale, which makes field research particularly difficult. Publication orientation creates little incentive for researchers to expend resources on correctness of data (or software).

In the specific context of the CMIE CPHS database, there have been concerns about a potential under-counting of poor households. For example, Somanchi (2021) argues that CPHS under-represents women, young children and poor households and, over-represents well-educated households. Similarly, Pais and Rawal (2021) raise questions regarding the lack of a precise sampling frame and the likely exclusion of poor and mobile households. CMIE has responded to these concerns (Vyas, 2021). These debates raise concerns about potential applications of this database.

The purpose of this article is to examine the usefulness of one measure from this database – expenditure on electricity -- where veracity of measurement is essential for applications in the field of electricity. Towards this objective, we harness a group of natural experiments, and examine the gross regularities seen in the data.

Natural experiments with the price of electricity in Tamil Nadu

We examine four events where the price of electricity changed in the state of Tamil Nadu. Two of these were tariff changes by the regulator (the Tamil Nadu Electricity Regulatory Commission (TNERC)), and the other two were changes in the on-budget subsidy by the state government.

Prior to the first event, the tariff regime prevalent in the state was based on the tariff order passed in 2012 by the TNERC. The effective prices for electricity varied between INR 3.00 - INR 3.25 per kWh for households whose consumption was below 100 kWh of electricity. Further, the prices gradually increased to the range of INR 3.50 - INR 4.60 per per kWh for households whose consumption was up to 250 kWh in a month. For consumption beyond 250 kWh, the price rose to INR 6.60 per kWh. In this backdrop, a sequence of four natural experiments took place:

Subsidy increase in 2016

During the state legislative assembly election campaign in Tamil Nadu in 2016, the then Chief Minister Jayalalithaa announced 50 kWh of free electricity a month to over 19 million residential consumers as one of her poll promises (Srikanth, 2016). She won the election, and the promise was kept in June 2016.

Tariff decrease in 2017

On 11 August 2017, the TNERC issued a tariff order which decreased tariffs for domestic consumers (TNERC, 2017).

Subsidy increase in 2018

In November 2018, the Government of Tamil Nadu (GoTN) introduced additional subsidies. These varied from INR 0.5 - INR 1.00 per kWh for consumption below 250 kWh in a month (TNERC, 2018). This is a small event where very little changed.

Tariff increase along with subsidy in 2022

The TNERC approved a tariff increase for domestic consumers across all consumption slabs in September 2022 (TNERC, 2022). Alongside this, the GoTN announced an additional 50% subsidy on electricity consumption between 50-100 kWh (for consumers having consumption below 250 kWh) in addition to the 50 kWh of free electricity (Guruvanmikanathan, 2022).

These changes are summarised in Table 1, which depicts the full price schedule of electricity vis-a-vis electricity consumption (kWh) for residential consumers in Tamil Nadu under different price regimes. We show the effective price factoring in the subsidies by the GoTN for a household as per its electricity consumption after each event of tariff or subsidy change announced by the state.

Table 1: Price schedule (monthly) for electricity for residential consumers

Slab	Electricity Consumption	Tariff 2012	Subsidy 2016	Tariff 2017	Subsidy 2018	Tariff 2022
	(kWh)	(INR)
0-50 kWh	0-50	3.00	0.00	0.00	0.00	0.00
0-100 kWh	0-50	3.25	0.00	0.00	0.00	0.00
	51-100	3.25	3.25	2.50	1.50	2.25
0-250 kWh	0-50	3.50	0.00	0.00	0.00	0.00
	51-100	3.50	3.50	2.50	2.00	2.25
	101-200	4.60	4.60	3.00	3.00	4.50
	201-250	4.60	4.60	3.00	3.00	6.00
Above 250 kWh	0-50	3.50	0.00	0.00	0.00	0.00
	51-100	3.50	3.50	3.50	3.50	4.50
	101-200	4.60	4.60	4.60	4.60	4.50
	201-250	4.60	4.60	4.60	4.60	6.00
	251-300	6.60	6.60	6.60	6.60	8.00
	301-400	6.60	6.60	6.60	6.60	9.00
	401-500	6.60	6.60	6.60	6.60	10.00
	Above 500	6.60	6.60	6.60	6.60	11.00

What might we expect to see, in expenditure data at a per-household level, across these four events? For the purpose of this article, we bring a simplistic prior: that the short-term price elasticity of energy demand is low, so the household expenditure will just go from $qp₁$ to about $qp₂$, with adjustments in the consumption basket based on a commensurate income effect only.

We recognise, of course, that the reality is more complex than this. Many other elements of adjustment are in fray, both in the short term and in the long run. With a lag, higher electricity prices change the incentives for energy efficient equipment and rooftop solar generation. Going beyond such conventional economic responses, the incentives for theft change: when electricity is more expensive there is a greater incentive to steal. The changes in the price schedule seen in Table 1 could induce complex effects combining these factors. Sophisticated research projects, in the field of household electricity consumption, are required that seek to tease out the short-term and long-term effects.

This article is not in that field: it is an examination of the concerns around measurement of household level electricity expenditure as seen in the CMIE CPHS database. We examine the gross regularities about how household electricity expenditure changed across these natural experiments. Our ability to do this across four natural experiments, adds up to an opportunity to examine the usefulness of the CMIE household survey data for the purpose of electricity research. If the expenditure change generally goes with the price change, for relevant households, we will conclude the dataset has value for researchers in this field.

Data description

We focus on the 10,000 households observed in Tamil Nadu. Within this, we obtain three facts:

• Total expenditure (INR) - This is sum of all the expenses incurred by a household on the consumption of goods and services during a month. It includes expenses on rent, food, clothes, utility bills, entertainment, fuel etc. This feature is not directly captured during CPHS survey process, rather it is derived as the sum of all the monthly individual expense heads captured during the survey of a household. We derive this feature from the monthly expenses data.
• Electricity expenditure (INR) - This is the expenditure incurred by a household on electricity during a month. We obtain this feature from the monthly expenses data.
• Weights - We use household weights for the state level estimates provided by CPHS for making estimates at the monthly frequency level. We further use the adjustment factor for household non-response to adjust sampling weights to balance for non-responses during the survey. It is the ratio of the total number of sample households in the stratum and the non-surveyed regions to the accepted sample from these.

An important strand of the field of economic measurement is assessing how a variety of methods for measurement fared through the pandemic. In this article, however, the third event was in November 2018 (which was well before the pandemic) and the fourth event was in September 2022 (which represents post-pandemic conditions). This article, thus, does not offer insights on data quality in the pandemic.

What might we expect?

1. The event: In June 2016, the state government announced 50 kWh of free electricity to domestic consumers, an implementation of a promise that was made in the election campaign.

   Prediction: We expect to see lower expenditure in the aggregate.

2. The event: The TNERC approved a tariff cut in its 2017 tariff order for domestic consumers with consumption below 250 kWh of electricity.

   Prediction: We expect to see lower expenditure in the aggregate due to tariff cut in addition to existing free 50 kWh of electricity.

3. The event: In November 2018, the state government announced a further subsidy on electricity sold to domestic consumers. Varying subsidies were introduced ranging from INR 0.50 - INR 1.50 per kWh for different slabs of consumption of up to 250 kWh of electricity consumption. This was in addition to the already existing subsidy of 50 kWh of free electricity across all slabs of consumption. This was the smallest of the four changes in the price schedule that are examined in this article.

   Prediction: We expect to see lower expenditure in the aggregate, with a small effect.

4. The event: The TNERC approved a tariff increase in its 2022 tariff order for domestic consumers. Alongside this increase in tariffs, the subsidy given by the state government also increased. GoTN announced a further 50% subsidy on the next 50 kWh of electricity consumption (for households below 250 kWh of consumption) in addition to the prior 50 kWh of free electricity.

   Prediction: We expect to see higher expenditure in the aggregate in smaller magnitude due to combination of tariff hike by TNERC and subsidy announcement by GoTN.

Results

We now examine the household survey data and assess the extent to which the predictions, based on a simple prior, are borne out by the statistical evidence. For each price change, we examine household expenditure in the six months before and after the event. We view this in the aggregate. The results are shown in Table 2.

Table 2: Aggregate results across all events for monthly electricity expenditure

	Before		After
	Mean	Median	Mean	Median
	12/2015 — 5/2016		7/2016 — 12/2016
Electricity expenditure (INR)	313	196	192	150
Share in total expenditure (%)	2.88	2.25	2.05	1.76
	2/2017 — 7/2017		9/2017 — 2/2018
Electricity expenditure (INR)	191	163	173	148
Share in total expenditure (%)	1.94	1.86	1.46	1.36
	5/2018 — 10/2018		12/2018 — 5/2019
Electricity expenditure (INR)	179	151	174	142
Share in total expenditure (%)	1.59	1.47	1.51	1.37
	3/2022 — 8/2022		10/2022 — 3/2022
Electricity expenditure (INR)	142	116	154	137
Share in total expenditure (%)	1.15	1.02	1.16	1.06

• Event 1, subsidy in 2016:

  The mean electricity expenditure went down from INR 313 to INR 192. The median went down from INR 196 to INR 150. The gap between these two location estimators may potentially reflect extreme values that are influencing the mean.

• Event 2, tariff cut in 2017:

  The mean and median expenditures went down, as predicted.

• Event 3, subsidy in 2018:

  The mean and median expenditures went down, as predicted. The change was small, as predicted.

• Event 4, tariff increase along with subsidy in 2022:

  The mean and median expenditures rose by INR 12 and INR 21. These appear to be unusually small effects given the size of the price increase.

Conclusion

The gross regularities of the CPHS data in Tamil Nadu appear to change in sane ways, across the four tariff or subsidy change events. These findings contribute to the field of economic measurement in India. They encourage applications of this data into the field of electricity. Much more future research is required, of course, in examining household behaviour when faced with policy changes, in the short term and in the long term.

References

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Deshpande. 2022. The Covid-19 pandemic and gendered division of paid work, domestic chores and leisure: evidence from India's first wave. Economia Politica 39.1.

Gopalakrishnan, Ritadhi and Tomar. 2019. Household Finance in Developing Countries: Evidence from India. Rochester, NY.

Guruvanmikanathan. 2022. Tamil Nadu: Scheme to surrender power subsidy unlikely anytime soon. The New Indian Express.

Jaitly and Shah. 2021. The lowest hanging fruit on the coconut tree: India's climate transition through the price system in the power sector. XKDR Forum.

Kulkarni, Sahasrabudhe and Chunekar. 2022. Appliance ownership trends in India: As per Consumer Pyramids Household Survey Data.

Mahadevan. 2023. The Price of Power: Costs of Political Corruption in Indian Electricity. University of California, Irvine.

Malani and Ramachandran. 2022. Using household rosters from survey data to estimate all-cause excess death rates during the COVID pandemic in India. Journal of Development Economics.

Mart́inez Arranz et al. 2021. The uneven expansion of electricity supply in India: The logics of clientelism, incrementalism and maximin. Energy Research and Social Science.

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Pandey, Patnaik and Sane. 2019. Impact of Tax Breaks on Household Financial Saving in India. National Council of Applied Economic Research.

Patnaik, Sane and Shah. 2019. Chennai 2015: A novel approach to measuring the impact of a natural disaster. National Institute of Public Finance and Policy.

Patnaik, Sane Shah and Subramanian. 2023. Distribution of self-reported health in India: The role of income and geography. PLOS ONE.

Somanchi. 2021. "Missing the poor, big time: A critical assessment of the consumer pyramids household survey".

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TNERC. 2017. TNERC Tariff Order No.01 of 2017 in T.P. No.1 of 2017.

TNERC. 2018. TNERC Tariff Order No.07 of 2018 - Provision of Tariff subsidy for FY 2018-19 by the Government of Tamil Nadu.

TNERC. 2022. TNERC Tariff Order No.07 of 2022 in T.P. No.1 of 2022.

Vyas. 2021. View: There are practical limitations in CMIE's CPHS sampling, but no bias. The Economic Times, 23 June 2021.

Susan Das and Renuka Sane are researchers at TrustBridge. Ajay Shah is a co-founders of XKDR Forum.