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No method in this madness

No method in this madness

It is open season for bad policy decisions around the world.

In a throwback to the 1970s, Argentina last week announced plans to renationalize YPF, its biggest oil company. The move will eject Spain’s Repsol group as majority shareholder and give the government majority control with the backing of the Argentinian Congress. The move will likely flout several international rules and the European Commission is already threatening reaction. In the US, presidential candidate Barack Obama is throwing his weight behind the “Buffett Rule". This rule—which necessitates a minimum 30% tax for those with incomes over $1 million—followed comments by billionaire Warren Buffett that his tax rate (on investment income) should not be lower than his secretary’s (on employment income). President Obama knows that the chances of this Bill passing the Senate and the House is rank low. America surely needs tax reform, but tinkering of this type distorts tax systems. He persists with bad policy because it makes for good politics. In the UK, David Cameron’s government has authored the most radical restructuring of the National Health Service (NHS) since 1974. In the 14 months the Bill took to pass, it went through 1,000 amendments. The hotch-potch of measures in the Bill cuts across every major segment of NHS and appears to have been driven by coalition imperatives.

But India has outdone these countries. We have passed new legislation and added rules to existing regulations that could define the textbook on how not to create public policy. We have done it across industries and with such effectiveness that in some cases we have taken double-digit industry growth rates and converted them to zero.

Here is a sampling of only four such public policy changes over the last few years.

The Right of Children to Free and Compulsory Education Act (RTE), 2009: The RTE is the raging topic of discussion of this week since the Supreme Court opined, rightly in my view, that there was no constitutional issue with a mandatory quota of 25% seats in private schools being reserved for below poverty line kids in the neighbourhood.

Abolition of front-end loads for mutual fund distribution: Like the RTE, this comes from the righteous-minded in the government who believe their actions protect vulnerable customers. In India, a mutual fund is a simple, easily understandable, tax-advantaged method of saving for the future. Despite this, there are only seven million or so unique holders of mutual funds, making for an abysmal 3% penetration of households. World over mutual funds are “sold" by distributors incentivized by a distribution fee called a “load". The load also incentivizes undesirable churning. Rather than establishing and enforcing rules related directly to churning, the regulator chose to kill the baby and throw out the bath water. Prior to the initiation of the rule in 2009 the industry was growing at a 40% compounded annual growth rate. Since then it has stagnated.

Regulation with retroactive effect to tax offshore transfers 2012: I wrote about this in my last column (“Changing the rules of the game", 9 April) and so will not belabour it here. Suffice it to say that vengeful persecution of a business house to extract a pound of flesh, using arbitrarily exercised powers, will have dangerous long-term ramifications on business.

(The yet to be passed) microfinance Bill: The microfinance industry saga contains so many lessons about how not to conduct policy that it is difficult to fit them into one paragraph. A somnolent central bank, a state government which was both the competitor and the regulator, an overzealous official, and a non-united industry together sank a sector that was growing at over 100% a year and was creating value for customers and shareholders alike. Sure there were some dubious practices on the periphery. But rather than targeting those specific wrong-doings, policy action chose to destroy the sector. The phoenix will rise from the ashes (the demand is very, very strong), but here the lack of policy action on the microfinance Bill (postponed now to at least the next session of Parliament) is making it difficult.

And so with either righteous or malignant intent we have passed regulations that have had major impact on businesses. And with each passing day we dream up ways to stack new bad policy upon policy.

As my teenage daughter says, “enough already".

PS: Polonius responding to a modern day Hamlet may well have said: “This be madness, there is no method in it."

Narayan Ramachandran is an investor and entrepreneur based in Bangalore. He writes on the interaction between society, government and markets. Comments are welcome at narayan@livemint.com

Also Read | Narayan Ramachandran’s previous columns

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