Regulated cost of capital for airports

Many elements of infrastructure have natural monopoly characteristics. Under these conditions, if the owner of the infrastructure is profit-maximising, he is likely to impose high user charges and extract a monopoly rent. As a consequence, in many infrastructure services in most countries, independent regulators are established which control the user charge.



The critical building block that goes into this is assessing the `fair' rate of return on equity capital. By and large, infrastructure projects have low betas; whether business cycle conditions are good or bad, they tend to generate stable cashflows. By this logic, the rate of return obtained by the developer should be relatively low.



India requires a trillion dollars of infrastructure investment in coming years. For this to come about properly, sound thinking on the appropriate rate of return is required. If this rate of return is set too low, then the required investments will not be forthcoming. If the rate of return is set too high, then developers will earn monopoly rents, and the economy will be hobbled with expensive infrastructure.



The regulated industry has strong incentive to lobby with the regulatory agency. Almost nobody else in the country has detailed technical knowledge about the activities within the regulated industry. This field is thus fraught with problems of governance, the capabilities of regulatory agencies, etc. High quality public discussion, and criticism of the activities of regulatory agencies, is thus critical to ensuring that the outcomes are sensible. Our puzzle in India is that of getting to an ecosystem comprised of well drafted laws that create independent regulators, high quality staff in regulators, high quality independent experts outside government, well educated journalists, freedom of press, etc.



In this setting, an important order has been released by the Airports Economic Regulatory Agency (AERA): tariff setting for the Delhi airport. This will be of great interest to people interested in the fields of infrastructure financing and corporate finance in India. In my knowledge, this is the first episode in the field of Indian infrastructure where high quality corporate finance knowledge has gone into tariff setting. The arguments and methods here will be relevant for other airports, and for other areas of infrastructure.

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The genesis of India's 'basic structure' doctrine

by href="http://ajayshahblog.blogspot.com/2011/05/author-pratik-datta.html">Pratik
Datta.

India and Pakistan are slowly reintegrating their economies,
through href="http://ajayshahblog.blogspot.com/2011/11/pakistan-india-mfn-what-are.html">trade
and investment. Will we stop at sterile commercial transactions, or
can there be more to the engagement of the two countries? Most of us
in India think of Pakistan as a country with serious governance
problems; we think that India has little to learn from Pakistan. A
careful reading of history will surprise most of us.

One of the most important developments in the history of the Indian
Constitution was the rise of the `basic structure' doctrine, which
limits the extent to which a powerful political configuration can
amend the Constitution. What is not widely known is the intellectual
links that led up to this. A judge of the Supreme Court of India
created what was possibly the first constructive jurisprudential
connection between India and Pakistan: he imported the concept of
basic structure into Indian jurisprudence from a decision of the
Supreme Court of Pakistan. This is not to say that the basic structure
doctrine was not discussed before by myriad scholars and applied in
other countries, but merely to celebrate an old acquaintance that not
too many of us recall today.

The authors of the Constitution of India saw the necessity of
having a mechanism for amending the Constitution: Art. 368 of the
Indian Constitution. However, one question that has time and again
caught the attention of the Indian Supreme Court is the extent of this
amending power. For example, can Parliament amend the Constitution and
make India an autocracy? If not, then is there any implied
restrictions to the power of amendment? And if such restictions do
exist, what is the scope of judicial review of an amendment passed by
a super majority of the elected representatives of the country?

There appear to be three critical milestones in India's path to the
basic structure doctrine.

Justice Mudholkar in the case of href="http://www.indiankanoon.org/doc/1308308/">Sajjan Singh
(AIR 1965 SC 845), for the first time (para 63) used the
phrase `basic feature' of the Constitution to argue that there
are certain features of the Constitution that cannot be amended
by the Parliament through its amending powers under Art. 368 of
the Constitution. This judgment was a seperate concurrent opinion
and not the majority view of the Court. Justice Mudholkar drew
upon the Pakistan Supreme Court's decision in Fazlul Quader
Chowdhry v. Mohd Abdul Haque, 1963 PLC 486, which had used the
basic structure doctrine already.

The phrase `basic structure' or `basic feature' of the Indian
Constitution has arisen in some decisions before Mudholkar, J. pointed
it out in 1964. For example, in re: Beruberi Union case (AIR 1960 SC
845) and State of West Bengal v. Union Of India (AIR 1963 SC 1241)
used the phrase but in a much looser sense and not squarely in the
context of implied limitations to the amending power under
Art. 368. It is, then, fair to say that Justice Mudholkar was the
first important introduction of this concept into Indian
jurisprudence.

The decision of Sajjan Singh came up for reconsideration by the
Supreme Court in IC
Golak Nath's case (AIR 1967 SC 1643). Justice Wanchoo after
opining in para 113 that `the power to amend includes the power to
add any provision to the Constitution, to alter any provision and
substitute any other provision in its place and to delete any
provision', went on to discuss in para 115 if there are any
implied limitations on the power of amendment under Art. 368. In this
context he referred to the doctrine of basic structure as was
highlighted for the first time in India in the separate opinion of
Justice Mudholkar. However, Justice Wanchoo ultimately opined that no
limitations can be and should be implied upon the power of amendment
under Art. 368 but did not go into the question as to whether Art. 368
can be used to repeal the present constitution and come up with a
completely new one. Justice Wanchoo was however speaking only for
himself and two other judges amongst the 11 who were on the
bench. Finally, 6 judges held that Fundamental Rights cannot be taken
away by an amendment while 5 judges held that Fundamental Rights can
be taken away by an amendment. However, the line of argument taken up
by Mudholkar and Wanchoo, that there are implied restrictions to the
power to amendment under Art. 368, was still a fringe argument.

This implied restriction or basic structure argument gained
prominence for the first time in Kesavananda's judgment (AIR 1973 SC
1461) where a 13 judge bench of the Supreme Court deliberated on this
issue. In spite of the length and complexity of the judgment, the one
ratio that emerges out of it is that the amending power under the
constitution cannot be used in a manner so as to interfere with the
basic structure of the Indian constitution. Reference to Mudholkar's
views in Sajjan Singh (which in turn was the view of the Supreme Court
of Pakistan) was made in para 681.

It is in this context, we should recognise the immense contribution
of the Supreme Court of Pakistan to the constitutional jurisprudence
of India. And Justice Mudholkar needs to be credited for at least
trying to make possibly the first jurisprudential connection between
the two neighbours back in 1964.

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Developments on implementation of the GST

by Viral
Shah and Ajay Shah.



As with many other problems in Indian economic reform, getting to
the right destination on the GST requires winning on policy, politics
and administration. On the policy side, the basic design of the GST
needs to be done right. Pulling this off will require great political
skill - a coalition of beneficiaries from the GST will need to
champion it in the Indian federal setting. Finally, assuming that the
policy and the politics has been done well, it will require the right
plumbing. In this blog post, we review progress on this third
element.



Done right, the GST ought to replace all existing indirect taxes. This would remove barriers to inter-state commerce, and create an Indian common market. It
should treat all goods and all services identically. It should be a
single administrative system covering tax payments to both Centre and
States thus eliminating the compliance cost that is associated with
dealing with multiple tax authorities. It should be
globalisation-compatible: goods and services sold to non-residents
would be fully refunded the entire burden of indirect taxation that
has been incurred at all stages of production. India would then follow
the principle of not taxing non-residents. This would be fair for domestic producers who face foreign competition, and ensure competitiveness of domestic producers selling abroad.



These are powerful and important economic concepts. However, their
translation into reality is critically about execution. In the case of
the GST, as with the New Pension System, the problem of execution is
substantially (though not entirely) a question about building large
IT systems.



While much of the legal and policy framework around GST is still
being worked on by the Central Government in consultation with States,
some progress has been made on setting up the infrastructure for
processing registration, returns, and payments in a standardised
manner. A detailed note
on the IT infrastructure for GST has been put up by the Ministry
of Finance.



In terms of organisation structure, existing success stories
include the Tax Information Network (TIN) and the New Pension System,
both of which are being managed by NSDL. A more general concept of
`National Information Utilities' (NIU) was proposed by the TAGUP
Report. This report drew on the success of establishing market
infrastructure institutions such as NSE and NSDL, and recommended that
NIUs be such non-Government companies, with Central and State
Governments as joint shareholders, dispersed shareholding among other
institutions, avoiding shareholders that may have a conflict of
interest, and avoiding listing on exchanges. In spirit, NIUs must
have the efficiency of a private corporations, but be animated by a
public purpose.



In the Budget Speech of 2012-13, the Finance Minister announced
that a NIU for implementing the GST would be constructed. It would be
called GSTN and would be fully operational by August 2012. The first
steps towards constructing GSTN have now been taken, with a Cabinet
approval for GSTN. The official press release on this says:

The Cabinet has approved a proposal to set up a Special Purpose
Vehicle (SPV) namely Goods and Services Tax Network SPV (GSTN SPV) to
create enabling environment for smooth introduction of Goods and
Services Tax (GST). GSTN SPV will provide IT infrastructure and
services to various stakeholders including the Centre and the States. 

The GSTN SPV would be incorporated as a Section 25 (not-for-profit),
non-Government, private limited company in which the Government will
retain strategic control. It would have an equity capital of Rs. 10
crore, with the Centre and States having equal stakes of 24.5%
each. Non Government institutions would hold 51% equity. No single
institution would hold more that 10% equity, with the possibility of
one private institution holding a maximum of 21% equity. 

GTSN SPV would have a self-sustaining revenue model, based on levy of
user charges on tax payers and tax authorities availing its
services. While the SPV's services would be critical to actual rollout
of GST at a future date, it is also expected to render valuable
services to the Centre / State tax administrations prior to the GST
implementation.

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Welfare programs change behaviour

Many people like to envision worlds where the State will tax the rich and help "the needy" - this ranges from free health care to unemployment insurance to disability insurance, etc.



There are many problems with these schemes. One of them is the fact that people respond to incentives. We are not bricks, we are not stones, but men, and being men, we will optimise. When unemployment insurance is offered, people will try less hard to find a job, to acquire skills that will get them a job, to migrate to a place where jobs are more easily found, etc. When health care is free, people are more inclined to be fat or smoke or otherwise take less care of themselves. And so on.



Among economists, it's considered obvious that people drive in a more rash manner when wearing a seat belt, but in the wider discourse, this raises hackles. When researchers found that drivers pass closer when overtaking cyclists wearing helmets as compared with overtaking bare-headed cyclists, economists were among the few who were not surprised. Laypersons generally recoil from the idea that the presence of a government giving out free open heart surgery increases obesity.



The first element of the behavioural change is lying and misrepresentation by citizens. When a government says it will give out disability insurance, people have an incentive to go to a civil servant and claim that they are disabled. I remember hearing a story from Holland, when a certain set of rules were constructed to give an early pension to the disabled, and policy makers had estimated that 1% of workers would be eligible for those benefits. In a few years, 10% of workers tried to claim these benefits, and front-line civil servants were placed in the difficult situation of having to identify the few genuinely disabled within the large pool that was claiming to be disabled.



The second layer is genuine changes in behaviour. Ljungqvist/Sargent have emphasised the damage caused by European-style welfare programs, which encourage or support withdrawal from the labour market. Some of these problems are now coming about with NREG. Migration out of villages is central to India's future, but NREG is reducing the incentives of people to engage with the urban labour market and ultimately to leave.



I just came across an example of behaviour distorted by incentives that veers on the fantastical: An unemployed Austrian man sawed his foot off, to avoid being found fit enough to go back to work. We find it incredible that Aron Lee Ralson cut off his right arm (to avoid certain death). But sawing your foot off to avoid going back to work?



This is a colourful story and only an anecdote. The man is most likely a nutcase. It is nobody's case that such extreme responses will come about on a large scale. The claim of the microeconomics literature is more limited: that on average, fairly significant behavioural changes come about in response to changes in the rules of the game. Through this, welfare programs have unintentional consequences that go far beyond those visible at the surface.



Politicians and bureaucrats in India like to roll out out more welfare progarms. It would be useful to bring alternative perspectives on these questions, which are mainstream worldwide but are considered cutting edge in India: about the limited governance capacity of the State, about the fiscal crisis that the State faces, and about the behavioural changes induced by welfare programs. In this field, you may like to see a paper by Vijay Kelkar and me.

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RBI's rate cut

Watch me talk about it on CNBC-TV18.

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The inflation crisis has not ended

The most important measure of inflation in India is the year-on-year change of the CPI-IW index. This time series, for 120 months, is shown above. From 2006 onwards, India slipped into a new phase of macroeconomic instability, where inflation has strayed far outside the informal target zone of inflation at four-to-five per cent.

Has inflation subsided?

In recent months, there has been a surge of optimism that the inflation crisis is coming to an end. However, a careful look at the seasonally adjusted data reveals that there is cause for concern.

Month	P-o-p SA	Y-o-y
Sep 2011	17.49	10.06
Oct 2011	2.01	9.39
Nov 2011	3.11	9.34
Dec 2011	-2.14	6.49
Jan 2012	8.22	5.32
Feb 2012	12.01	7.57

In September 2011, point-on-point seasonally adjusted (annualised) inflation was at 17.49 per cent. The year-on-year inflation was running at 10.06%.



We then had three good months: October, November and December, where the point-on-point seasonally adjusted (annualised) inflation dropped to 2.01, 3.11 and -2.14 per cent. This yielded a sharp decline in the year-on-year inflation to 6.49 per cent in December 2011 and further to 5.32 per cent in January 2012.



But after that, things haven't gone well. Point-on-point seasonally adjusted inflation, which is the thing to watch for in understanding what is happening every month, is back up to 8.22 per cent in January 2012 and 12.01 per cent in February 2012. Year-on-year inflation is back up to 7.57 per cent in February 2012.



A casual examination of the key graph (shown above) shows that the worst of double digit inflation seems to have ended. But we are not inside the target zone of 4 to 5 per cent, and neither are we likely to achieve this in the rest of this year. It would be unwise to declare victory over the inflation crisis, with this information set in hand.

Looking forward

Looking forward, there are two main problems worth worrying about. The first is the expectations of households. At the heart of India's inflation spiral is the problem that the man in the street has lost confidence that inflation will stay in the four-to-five per cent target zone. Survey evidence about household expectations has shown double digit values. This generates persistence of inflation; idiosyncratic shocks tend to not quickly die away. The mistrust of households is rooted in the lack of commitment to low and stable inflation at RBI, and this problem is not going to go away quickly. Despite all the problems faced in fighting inflation, RBI continues to communicate, through speeches and official documents, its lack of focus upon inflation.



The second problem is that of the exchange rate. Exchange rate depreciation feeds into tradeables inflation. With a large current account deficit, with policy impediments putting a cloud on capital inflows, rupee depreciation has taken place and may continue to take place. This would be inflationary. Indeed, if RBI chooses to cut rates on the 17th, there will be further weakening of the rupee (since the interest rate differential will go down thus deterring debt flows), which will further exacerbate tradeables inflation.



The media and financial commentators treat it as a given that on 17th, RBI will cut rates. However, the outlook on inflation is worrisome. India's inflation crisis, which began in 2006, has not ended. Year-on-year CPI-IW inflation has not yet got into the target zone of four-to-five per cent, nor is this likely to happen anytime soon.



Our thinking on this needs to factor in the general elections, which are looming at the horizon in May 2014. Given the salience of inflation in India for the poor, the ruling UPA coalition is likely to be quite concerned about getting inflation back to the informal target zone of four-to-five per cent, well ahead of elections. This also suggests that the time for hawkish monetary policy is now, so as to get inflation under control by mid-2013, well in time for elections in mid-2014.

A historical perspective

Inflation went out of control in 2006/2007 because RBI's pursuit of the exchange rate peg required very low interest rates at a time when the domestic economy was booming. (The capital controls that were then prevalent failed to deliver monetary policy autonomy; the only way to get towards exchange rate goals was through distortions of monetary policy). Given the lack of anchoring of household expectations, that inflation crisis has not yet gone away. Today, RBI is substantially finished with exchange rate pegging; we are mostly a floating exchange rate. In the future, inflationary expectations will not get unhinged owing to a pursuit of exchange rate policy by RBI. But while a pegged exchange rate pins down monetary policy, a floating exchange rate does not define monetary policy. RBI has yet to articulate what it wants to do with the lever of monetary policy. The first task for the lever of monetary policy should be the conquest of the inflation that is in our midst, owing to the monetary policy stance of 2006/2007.



In the early 1990s, unsterilised intervention in the pursuit of Rs.31.37 a dollar gave an inappropriate stance of monetary policy, which kicked off an inflation. Dr. Rangarajan wrestled it to the ground, even though the monetary policy transmission was weak then. In 2006, we ignited another inflation, once again owing to exceedingly low policy rates in the pursuit of exchange rate policy. Dr. Subbarao's challenge lies in wrestling this to the ground. His job is easier when compared with what Dr. Rangarajan faced, thanks to the progress which has taken place on financial reforms and capital account decontrol.

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New insights into the events on the Indian stock market in the mid-1990s

Liquidity matters

One of the most important features of a financial market is
liquidity. In a well functioning market, a trader faces low costs of
transacting and can confidently expect that at future dates, across
many states of nature, the cost of transacting will prove to be
low.



The immediate impact of a low cost of transacting is that it
imposes a lower `tax' upon the speculator, who brings new information
into prices, and the arbitrageur, who removes obvious mistakes in
prices. The long-term impacts that are obtained when the trader can
confidently expect that transactions will be inexpensive are in two
parts. When investors expect to waste money in buying and then selling
a certain security, they demand higher rates of return from it: i.e.,
the cost of capital for the issuer goes up. And, when traders are
confident that high liquidity will persist into the future into a
diverse array of states of nature, they will more confidently embark
upon dynamic trading strategies which are required for producing
useful securities such as options.

Measurement of liquidity

In an electronic limit order book market, a static concept of
liquidity is eminently visible: you look at the order book and work
out what is the impact cost faced when doing transactions of a desired
size. E.g. it is easy to take order book data from NSE and work out
the impact cost seen for doing a transaction of Rs.10,000 for all
companies.



Impact cost accurately measures the instantaneous cost
faced when placing an order of the stated size. It is a observed
precisely in a modern exchange setting. There are two
weaknesses. No large order is going to be placed as one single market
order into the order book. Hence, the analysis of the NSE order books
does not guide us in understanding liquidity when doing large sized
transactions, e.g. Rs.1,000,000. The moment we think of orders
that are spaced over a short time (e.g. I break up an order for Rs.1
million into 100 orders of Rs.10,000 each) or over a long time
(e.g. dynamic hedging of an option book) I have to worry about the
fluctuations of impact cost, or my liquidity risk.



The biggest problem lies in the fact that in numerous market
situations, order book information is not observed. Two key areas are:
the deep past, before order book data existed, and the OTC market,
where there is no order book. E.g. the CMIE daily returns data for BSE
starts from 1/1/1990. NSE equity trading began in 11/1994. But NSE's
order book snapshots (thrice a day) only exist from 4/1996
onwards. For the period prior to 1996, there is no data on
liquidity.

The power of range

The first flush of the financial economics focused on
returns. It was amazing, the amount of interesting work that
could be done once you had assembled a dataset with daily
returns. This was first done at the Centre for Research on Security
Prices (CRSP) at the University of Chicago, and it made possible an
entire generation of financial economics.



As an example, the ARCH model is a very clever way to utilise pure
returns information and construct a time-varying notion of
volatility. Models of the ARCH family assumes that volatility is
deterministic, and that it responds to realisations of
returns.



A remarkably important fact looks beyond returns to the
range between the day's high and the day's low price. When
volatility is high, the range is higher. Range is a volatility
proxy. This has been known for a while -- e.g. On the estimation of
security price volatilities from historical data, M. B. Garman and
M. J. Klass, page 67--78, Journal of Business, 1980.





In the late 1990s, people got back to looking at this in a new
way. We understood that range is an enormously informative
volatility proxy. There is much more information in the range of the
day than is found in the squared returns of the day.



Another new volatility proxy is `realised volatility', where you
difference intra-day returns to construct a time-series of returns
within the day. As an example, in an 8-hour trading day, there
are 480 minutes. So you could difference returns into 5-minute
intervals, and you have 96 readings of returns on each day. The
standard deviation of this is a good measure of the volatility of the
day. As an example, the recent paper by Grover
and Thomas, Journal of Futures Markets, August 2012, does
performance evaluation for a VIX estimator by asking for better
predictions of future realised volatility.



In the ARCH world, volatility of the day was not observed,
and squared daily returns was a poor proxy for this. Realised
volatility is a highly precise estimator of the volatility of the day,
and range is also remarkably good.

Constructing a deep history of stock volatility

Using intra-day data, it is possible to construct a realised
volatility for every security for every day. This is obviously
infeasible for the period when intra-day data is not observed -
e.g. in India before electronic trading came along, i.e. before
November 1994.



But as long as the day's high and the day's low are observed, one
can construct a range-based measure, and thus push deeper into
history.

Constructing a deep history of stock liquidity

When trading is electronic, it is possible for the exchange to
produce `snapshots' of the limit order book, as has been done by NSE
from April 1996 onwards. Using these, it is easy to get precise
estimates of the spread for all stocks. But what about the period
before that?



I just read a fascinating paper: A
Simple Way to Estimate Bid-Ask Spreads from Daily High and Low
Prices by Shane A. Corwin and Paul Schultz, Journal of
Finance, April 2012. Their key insight is that the day's high is
almost always at the ask and the day's low is almost always at the
bid. When the high/low is computed over two days, the variance is
doubled but the spread component is intact. This generates a mechanism
for extracting a spread estimator using only high-low data.



I liked the paper a lot. At its best, finance is close to data, the
data has low measurement error, the work is careful and grounded in a
detailed institutional understanding of reality, and the results open
up new lines of inquiry.



Using these new ideas, it becomes possible to dig into history,
using the CMIE data for BSE which goes back to 1/1/1990, and construct
liquidity measures for that deep period.



The authors do precisely this:

They show a big and dramatic drop in the spread at the time when
electronic trading came in. There are three key dates here: NSE
started electronic trading on 3 November 1994, BSE started electronic
trading on 14 March 1995 and in November 1995, NSE became the dominant
exchange [link]. This
is a valuable addition to our understanding of these events. I do
worry about mistakes in measurement of the day's high and day's low,
however, prior to the onset of electronic trading at NSE in November
1994.



I found it fascinating, how a 2012 paper has produced a better
understanding of our history of the mid-1990s.

Understanding the badla episode

What is equally interesting, and what is not mentioned by the
authors, is the dog that did not bark prior to the launch of NSE. This
is the event where SEBI forced BSE to stop badla trading.



I had worked on this question at the time (in 1996). I had rigged
up a matching scheme where each A group company (where badla
trading used to take place) was matched against a partner from the B
group (where there had never been badla trading). This allowed
you to construct a hedged portfolio: long the A group companies and
short the B group companies. The performance of this portfolio is:

This hedged portfolio has a most
satisfying zero return in the days before SEBI's decision. This gives
us confidence that the matching is done well. The two big dates of
SEBI decisions -- 12
December 1993 and 12 March 1994 -- show big negative returns for A
group companies. And from 4 November 1994, when trading at NSE began,
we start seeing a recovery.



At the time, this was interpreted at the time as a liquidity
premium. See Short-term
traders and liquidity: A test using Bombay Stock Exchange data by
Berkman and Eleswarapu, Journal of Financial Economics, 1998,
who worked this out nicely.



But the new evidence for the deep history of spreads on the BSE, by
Corwin and Schultz, suggests that there was no big change in
liquidity in 1993 or 1994. This raises new questions about why
such large price reactions were observed. I used to think this was a
great liquidity premium story; now I'm not so sure. I'm pretty certain
that A group companies had sharp negative returns in early 1994, but I
am now less sure that we know why.

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Path-breaking rules under the Right to Education Act, in Gujarat

by Parth Shah.

One major initiative of the Indian government, in href="http://ajayshahblog.blogspot.in/2012/01/education-in-india-compact-reading-kit.html">the
field of education, was the Right to Education Act of 2009. This
act has major problems, as has been argued by numerous observers and
experts in the field. This Act focuses on the interests of incumbent
public sector education providers, instead of focusing on the
interests of children and parents. It is focused on inputs into the
educational process, regardless of the outcomes which are coming
out. It penalises private schools that have weaknesses on
inputs, regardless of the fact that these schools often induce
better learning outcomes when compared with public
schools.

At the same time, the translation of the Act into benign or malign
outcomes critically hinges on the Rules under the Act, which are
notified by State governments. Thus, now that Parliament has chosen to
enact the RTE Act, the critical frontier that matters is how state
governments choose.

In recent weeks, Gujarat notified its href="http://gujarat-education.gov.in/education/Portal/News/159_1_MODEL%20RULES%2029.2.12.PDF">Rules
for the implementation of the Right to Education Act (RTE)
2009. It has introduced some of the most innovative ideas for
recognition of existing private unaided schools. The Committee in
charge of drafting the Rules in Gujarat, that was headed by the former
Chief Secretary Mr.Sudhir Mankad, has broken new ground in
understanding the policy issues faced in education in India today.

Instead of focusing only on input requirements specified in the Act
like classroom size, playground, and teacher-student ratio, the
Gujarat RTE Rules put greater emphasis on learning outcomes of
students in the recognition norms. Appendix 1 of the Gujarat Rules is
the one which has a path breaking formulation for recognition of a
school: this will be a weighted average of four measures:

Student learning outcomes (absolute levels): weight 30%

Using standardised tests, student learning levels focussing on
learning (not just rote) will be measured through an independent
assessment.

Student learning outcomes (improvement compared to the school's
past performance): weight 40%

This component is
introduced to ensure that schools do not show a better result in
(1) simply by not admitting weak students. The effect of school
performance looking good simply because of students coming from
well-to-do backgrounds is also automatically addressed by this
measure. Only in the first year, this measure will not be
available and the weightage should be distributed among the other
parameters.

Inputs (including facilities, teacher qualifications): weight
15%

Student non-academic outcomes (co-curricular and sports,
personality and values) and parent feedback: weight 15%

Student outcomes in non-academic areas as well as feedback
from a random sample of parents should be used to determine this
parameter. Standardised survey tools giving weightage to cultural
activities, sports, art should be developed. The parent feedback
should cover a random sample of at least 20 parents across classes
and be compiled.

This is one of the first times in India's history that public
policy has focused on children and parents, instead of focusing on
the public sector producers of education services.

Furthermore, the Gujarat RTE Rules have taken a more nuanced and
flexible approach in other areas too. For instance, both class size
and teacher-student ratio have not been defined in absolute terms, but
in relative terms. The required classroom size is 300 sq feet but in
case classrooms are smaller, then instead of re-building them, the
Rules allow for a way to accommodate that with a different
teacher-student ratio. The formula is: Teacher Student ratio = (Area
of the classroom in sq feet-60)/8. This approach not only allows
smaller classrooms to exist but also gives schools a more efficient
way to manage physical infrastructure.

If a private school is unable to meet recognition norms, then the
RTE Act de-recognises the school and forces it to close down. This
sudden forced closure would create serious problems for the students
and parents who would have to find a new school in the
neighbourhood. The Gujarat Rules allow for the State to takeover the
school, or transfer management to a third party, and create a genuine
possibility for the school to continue and meet the norms. This, once
again, shows the focus of the Gujarat Rules upon the interests of
students and parents.

This approach is significantly better to that of the other states
where recognition norms are based solely on input requirements and
that are also rigid (like playground, classroom size and
teacher-student ratio). The Gujarat approach recognises the
substantial contribution made by budget private schools in urban and
semi-urban areas where land and buildings are very expensive.
Actually many government schools themselves would not be able to meet
the rigid input norms that RTE has mandated.

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