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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FSLRC has a website

The Financial Sector Legislative Reforms Commission is one of the important elements of economic reforms in India. It now has a website.

Justice Srikrishna and Chirag Anand at the inaugural

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NIPFP-DEA Research Program: third MOU going out till 2014

From August 2007 onwards, the Department of Economic Affairs (DEA) of the Ministry of Finance (MoF) has collaborated with NIPFP on a new kind of research arrangement titled the `NIPFP-DEA Research Program'. This institutional innovation induces capacity building in the fields of macroeconomics and finance at the Macro/Finance Group of NIPFP, original academic and policy papers in these fields which are released into the public domain, and policy advice in these fields for DEA.

Earlier this month, the third MOU was signed for the NIPFP DEA Research Program, thus carrying this working arrangement forward till March 2014.

R. Gopalan, Thomas Mathew, M. Govinda Rao and Manoj Govil at the signing ceremony

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Interesting readings

The new Indian
journalism: Vinod
K. Jose in Caravan magazine profiles Narendra Modi.

Bibek
Debroy on the prospects for the CPI(M) in West Bengal.

Ronald
U. Mendoza has an article on voxEU which should ideally
trigger off similar research by political scientists in India,
about politics as a family business.

A
caucasus wedding, by an unnamed US foreign service
person. This is fascinating reading from two points of
view. First, I'd love to get the Wikileaks report about the same
wedding filed by the corresponding Indian diplomat. I fear our
guys are just not in the same league in terms of the quality of
despatches. And, there was something eerie in this story: it
reminded me of the socially backward subset of India.

Trampling on the individual in
India: A
response by Suw Charman-Anderson, on Firstpost, to Kapil
Sibal's dreams of tracking the location of every resident of
India. A country where the government knows less about citizens is
likely to be a country with
greater de
facto freedom of speech

Learning
how to argue, an interview with Ran Yunfei by Ian Johnson in
the New York Review of Books. It's an interesting glimpse into
China. It's also relevant for India as we face a series of attacks
upon freedom of speech.

Haseeb
Drabu in Mint worries about the record 25 amendments
found in the Finance Bill that apply with retrospective effect.

Mobis
Philipose on SEBI's concerns about algorithmic trading.

The Kingfisher bankruptcy is helping us think more clearly about
the problems of failure of firms. I read

a remarkable blog post about it. And,
see a
debate between Vikas Bajaj and Heather Timmons on the New York
Times blogs.

Open DataCamp 2012, in
Bangalore on 24 March.

The
public and its problems by Raghuram Rajan, in Mint.

How
to help the Syrians by Hugo Dixon. He talks about Why
civil resistance works by Erica Chenoweth and Maria
Stephan. This
is a
paper and a book. Put together, these give
you fresh insights into India's path to independance.

Glowing
pork, exploding watermelons by Thomas N. Thompson,
in Foreign Affairs, on the problems of food safety in
China. I wonder how we are faring on these questions.

I have wondered why my interest in watching TED talks had dwindled
away. Benjamin
Wallace, in New York magazine, helps understand what
happened there.

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Why Ngozi Okonjo-Iweala should be the next head of the World Bank

by Lant Pritchett.



The US had a chance to lead. It abdicated that chance, to play
domestic politics and put forward a US nominee who is manifestly less
qualified to be head of the World Bank, than the alternative candidate
nominated by African countries: Ngozi Okonjo-Iweala.



The World Bank is a full-service development institution that
provides loans, grants and development advice to promote
development, which is the transformation of countries towards
prosperous economies that support broad based improvements in material
well-being, democratic polities that respect citizen rights and
respond to citizen demands, and capable administrations that allow
governments to carry out their core functions: law and order,
education, macro-economic management, health, infrastructure,
regulation, security.



Therefore an ideal candidate should have:

• Some experience in government and the process of policy-making (as
  the World Bank's clients are all governments);
  


• Some acquaintance with economic policy and policy making: including
  the tough choices like allocation of resources across uses;
  


• Some knowledge of finance (it is, after all, a bank that makes income
  from lending money);
  


• Perhaps some management experience in a multilateral organization;
  


• Exposure to the breadth of development issues.
  

Experience in Government.

Ngozi has been the Minister of Finance of
Nigeria, twice. If one had to name a tough job in the world, I think
that would be it. She did it first from 2003 to 2006 and by all
accounts handled a very tough situation -- including tackling entrenched
corruption -- in an admirable way. Jim (to be fair we'll use first
names for both) has no experience in government. He has been engaged
in development as an academic and through NGOs.

Advantage Ngozi.

Acquaintance with Economic Policy.

Ngozi has had training
in economic development from MIT. Jim has been trained as doctor and
anthropologist. Ngozi has been a Minister of Finance making budget
allocations and dealt with the entire array of economic policies to
promote growth and prosperity. Jim has worked exclusively on health
issues (rightly, as he is a physician) and never been in position of
responsibility about economic policy. Health was just one of many
sectors for which Ngozi had to allocate budgets and promote
performance.

Advantage Ngozi.

Knowledge of Finance.

Ngozi has been a Minister of Finance
as such, among other things, she led the Paris Club negotiations that
led to billions of dollars debt relief for Nigeria. Jim has no
demonstrable experience in finance, banking, the private sector.

Advantage Ngozi.

Management Experience.

From 2007 to 2011 Ngozi was a Managing
Director of the World Bank. She therefore has in-depth experience
running a large and complex multi-lateral organization. Jim was director of WHO's HIV/AIDS department, from 2004 to 2006, and so has some
experience in a multilateral organization. Jim has also, for two years, been president of an American university. But while Ngozi was near
the top of a large organization dealing with all development issues
Jim was responsible for one disease in an organization that does only
health.

Advantage Ngozi.

Breadth of exposure.

There is a massive difference between doing
development policy, and doing charity work to mitigate the consequences
of the lack of development. Ngozi has done development policy in many
settings and in many positions both in Nigeria and within the World
Bank. Jim deserves praise for having devoted his time, attention and
expertise in medicine to improve the health care for people in the
developing world -- which is certainly one component of development --
but
his development experience is limited.

Advantage Ngozi.

Passport.

Jim holds an American passport. Ngozi is a
Nigerian woman.

Advantage Jim.

In this day and age, is that still really all it takes?

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Movement at SEBI towards principles-based regulation

by Shubho
Roy and Ajay Shah.

A milestone for SEBI in its rule-making function

SEBI is a modern financial regulator in that it issues `subordinate
legislation' (i.e. regulations) which constitute law. These laws embed
intricate domain knowledge where Parliament does not have the capacity
for detail. This separation -- where Parliament sets up SEBI and gives
it the power to write subordinate legislation -- is the hallmark of
modern regulatory arrangements. This needs to be accompanied by
sophisticated arrangements through which such regulatory agencies are
independent, accountable and free of conflicts of interest. While SEBI
has many problems, it is the most sophisticated arrangement of this
nature found in India today.



From 1996 onwards, SEBI has issued regulations for mutual funds. On
21 February, they published
regulations ("SEBI (Mutual Funds) (Amendment) Regulations, 2012")
that govern advertisements of mutual funds, and the methods by which
the mutual funds value their assets and consequently the units that
they issue.



These regulations are a major milestone in the evolution of Indian
financial regulation, in the shift away from rules to principles.

Rules versus principles

The two major approaches to regulation are 'rules based' and
'principles based or outcome based regulations'. Rules based
regulation sets out the processes which a regulated entity is
supposed to comply with, and is not directly concerned with the consequent outcome. Firms then
try to find clever ways to comply with the letter of the law, but
defeat the purpose of the rules.



As an example, consider statutory warnings on cigarette boxes. The
rules require that the font in which the statutory warning is
printed should have a minimum 'height'. Firms get around this by
printing the warning in the required height, but reducing the width of the
characters to a ridiculously low size, so that it is very difficult
for readers to decipher. Thereby, they are able to comply with the
directive for statutory warnings, yet defeat the purpose of warning
buyers.



Recently, the rules asked that cigarette packets must contain
a picture of a pair of lungs with cancerous growth. In response, firms forced down the resolution of the
pictures so that they look like two blotches of ink to a
normal viewer. These blurry pictures cannot be interpreted by anyone
lacking in good knowledge about human anatomy. The person must
not only know what a pair of lungs looks like; he must also know
that the light blotch in the dark blotch represents a potentially fatal cancerous growth.



Rules based regulation draws regulators into an endless arms race,
where the industry will always tend to invent ways to circumvent the
rules. It creates an unhealthy tension in the relationship between
regulators and the industry. In addition, rules tend to rapidly become
obsolete with the constant evolution of technology and
processes. Government has to keep modifying the rules, catching up
with new thinking in the industry. If this is not done, Government
holds back progress by preventing such evolution.



The alternative to rules-based regulation is principles-based regulation. Law based on principles is not new. A large number of our older
laws have been based on principles. These laws do not specify a
method or process that an entity must approach but lay down the
guiding principle that it must follow. A beautiful example of this
is the Indian Contract Act, which was written in the late 19th
century. It is principles-based law that has stood the test of
time.



As an example, the Contract Act defines acceptance of a contract to
be complete when information of acceptance reaches the person who
offered the contract. This definition in no way requires a specific mechanism for acceptance. When the Contract Act was
written, telephones or email had not been imagined. However, the
principles-based text of the Contract Act has withstood 150 years of
technological change.



An expert body, like SEBI, which studies the market and issues
subordinate legislation, yields
greater malleability: regulations can be repeatedly
changed, unlike laws drafted by Parliament which are very hard to change. However, the full benefits in terms of heightened
malleability are obtained when the very subordinate legislation is
principles-based. Rigidity is the greatest with rules-based law, it is reduced with rules-based subordinate legislation accompanied by a high quality rule-making expert body, and it is minimised when both laws and regulations are principles-based.



Principles-based law is integral to common law and is part of our
legal heritage. In recent decades, when India became socialist and
when staff quality in government agencies declined, there was an
insiduous shift to detailed, prescriptive,
micro-management. Principles-based regulation and laws was put back on
the financial policy agenda by the Percy
Mistry report in 2007.

The new principles-based SEBI regulations

The new SEBI regulations on advertisement reveal a shift towards
principles-based regulation. For example a regulation reads:

In audio-visual
media based advertisements, the standard warning in visual and
accompanying voice over reiteration shall be audible in a clear and
understandable manner. For example, in standard warning both the
visual and the voice over reiteration containing 14 words running
for at least 5 seconds may be considered as clear and
understandable. (emphasis added).

Instead of mandating that the warning should be at least 5 seconds
long, as would have been done with rules-based regulation, it is stated that that it must be audible, clear, understandable. The 14
words in 5 seconds is now not a legal requirement: it is only an
illustration of how the principle can be satisfied.



On valuation, the new regulations say:

The valuation of investments shall be based on the
principles of fair valuation i.e. valuation shall be reflective of the
realizable value of the securities/assets. The valuation shall be done
in good faith and in true and fair manner through appropriate
valuation policies and procedures.

This regulation recognises that there are many different types of
assets a mutual fund may acquire, stocks, securitisation papers,
derivatives, bonds, etc. Each of them may have different forms of
valuation. More importantly the list of assets mutual funds may buy is
not exhaustive: MFs in India are going to buy an array of new instruments in India and abroad. The principle
however, will hold true for different assets and valuation
methods. The objective of the regulation is to ensure that the
investors get a fair picture of the assets that their fund holds.

Assessment

We do not know what forms of media the mutual funds of the future will use: billboards will go 3D, holograms will be used, mobile
phones will carry rich targeted advertising. Mutual funds will
also invest in new financial instruments in global markets. As
long as they provide warnings in a clear and understandable manner
and value their assets in a fair and truthful system, they will be
compliant with SEBI regulations and can innovate freely.



Principles based regulations have two major advantages over a rules
based system:

1. The regulations require the regulated to strive towards an
   outcome and not mechanistic compliance.
   
   


2. The regulations allow for innovation to be absorbed quickly by
   the industry as long as they meet the objective of the
   regulation. Imagine if the Contract Act had specified that all
   acceptance of contracts should be done by letters. All the
   innovation of e-commerce, mobile telephony based commerce,
   telephonic negotiation and trading would have been illegal till the
   statute was amended. This would have required Indian law-makers to
   constantly update the Contract Act.

Moving to a principles based system is a crucial step
forward, away from the command and control mindset that many regulators
suffer from. Instead of prohibiting malpractices, all too often,
laws in India micro-manage the regulated business. This is a recipe
for stagnation.



However, principles based financial regulation also has
costs. Rules are black and white - there is legal certainty. With
principles based regulation, the precise nature of a government
response to a new idea by the private sector is less predictable.



More complex behaviours are, then, required of the regulator. More
litigation will arise. This will impose a greater burden on staff in
regulators, courts and law firms. They will need to understand
principles (and their underlying drafting intent), alongside practical
knowledge about how the real world works, so as to be able to
intelligently apply the principles. This requires a great deal
of understanding of technology, business and regulatory
objectives. Moving towards a principles based system requires
commensurate strengthening of organisational and staff capabilities at SEBI, the
Securities Appellate Tribunal (SAT), and the Supreme Court.

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IEDs in Diwali and Toxic chemicals in Holi

When I was young, resounding explosions and other fireworks were an integral part of Diwali. It was not possible to conceive of Diwali any other way. If you extrapolated into the future, and envisioned the next doubling of GDP, you'd have forecast that there would be much more than 2x the explosions and other glittering displays, assuming that social mores stayed unchanged.



There was a dark side to such Diwali celebrations: the inevitable trickle of people engaging with explosives who got hurt, extreme discomfort for all forms of life other than humans, and air pollution. Many years ago, it seemed like all these problems were real, but there wasn't any other way. It was hard to conceive of a world where Diwali was celebrated differently.



I used to think there was a common goods problem: Each individual gained utility out of igniting fireworks, despite imposing externalities on other creatures (of various species) in terms of noise or pollution. It isn't easy to get humans to be concerned about externalities imposed upon others.



I have been astonished at how these three messages (accidents, animal rights, pollution) have gone through to the young, and Diwali now involves much less of the fireworks than used to be the case. After we factor in the GDP growth, the change is simply amazing. By rights, such a social transformation should have been very hard. But it happened. I wonder how this happened. (There is some data on this phenomenon at Central Pollution Control Board, but the work is of poor quality and the website is terrible, so it's hard to compare 2002 against 2011).





Fast forward to Holi. Holi seems deeply entrenched, particularly in North India. There is a dark side to Holi celebrations: toxic chemicals, sexual harassment, substance abuse. All these problems are real, but there doesn't seem to be any other way. Unlike the problems of Diwali, two out of these three (toxic chemicals and substance abuse) are about private goods: the individuals who engage in certain practices are the direct losers as a consequence. So there isn't a common goods problem here; this should be easier to solve. But it's hard to conceive of a world where Holi is celebrated differently.



Or should we be so pessimistic? I saw a story on NDTV: Nearly 175 hospitalised for colour poisoning. As information about these problems spreads, will behaviour change? In an ideal world, we should have the public goods of Health/Safety/Environment regulation, ensuring that the dyes used are safe. In an ideal world with high quality police and courts, the sexual harassment and Holiganism will be checked. But it will be many years before India has such governance capacity; at present the main focus of politicians is not upon public goods. For a few decades, the only way forward is for a lot of people to step away from the present social mores. It happened with Diwali; could it happen to Holi?





Could it happen to Ganpati Visarjan in Bombay?

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