governance, political economy, institutional development and economic regulation

sabarmati

(photo credit: narendramodi.in)

Later today when the Chinese supremo savours Khakra (a snack) and toasts PM Modi over a glass of aam-ras (the juice of raw mangoes), on the carefully grassed banks of the Sabarmati river, the symbolism of the location will not be lost on him.

What was till recently a sludge filled, trickle, has been transformed into a full water body. What was only a repository of nostalgia is now a kingdom of dreams and hope illustrating that India has shaken-off its somnolence of the past decade and is ready to Samba. The Sabarmati saga shows that we too can execute Chinese style development- large dams like-Narmada, regulating the water supply; city development projects, like the Sabarmati redevelopment scheme and more recently the ambitious Ganga re-development project. All this, in the face of stiff opposition from the usual bug-bears of large development: environmental fundamentalists who, rather academically, advocate strongly against channeling a river, or indeed doing anything which changes its natural flow.

As the bonhomie gets lubricated by Chaas (buttermilk) PM Modi must drive home the point that India has arrived, by politely refusing the expected Chinese offer of US$ 100 billion in financial support (to trump the Japanese offer of US$ 35 billion) for sundry projects. India is not up for sale to the highest bidder. Such bilateral support comes tied with numerous strings including the compulsory use of Chinese contractors. Japanese credit is the same. Whilst the terms of credit are deceptively attractive, there is no open international competition in the award of contracts. This loads the cost of the contract in present value terms far more than the discount on the interest rate offered.

The losers are usually the tax payers of the country providing the credit and the citizens of the country receiving the credit. The first because such “cheap” credit is funded out of the government budget of the donor country. The second because it is the citizens of the recipient country and users of such projects, who will bear the higher lifecycle cost of “gold plated” projects or the supply of low quality and shoddy goods. The winners are industry and business on both sides of the border, who gain by executing such projects. So expect to see an unholy alliance of Chinese and Indian business, loudly applauding the availability of such bilateral credit.

It doesn’t end there. Babus on both sides of the border will also raise a rousing cheer. The sole job and raison d’etre of our Department of Economic Affairs, within the Ministry of Finance, is to “negotiate” such bilateral credit lines. The Chinese (and the Japanese) have counterpart departments negotiating the supply of such credit. So that is another unholy alliance which undermines the financial autonomy of the country.

For many years, our babus have been used to touring the World Capitals with a begging bowl. None of them ever consider how incongruous it looks to assert our rightful place in the UN Security Council on the one hand, whilst simultaneously looking for some “rice” to fill the bowl.

It is time we changed that. The sustainable budget deficit of the Union Government is around US$ 400 billion. A lot of the existing debt is long term and the fiscal space available for new borrowings is limited. We should not fill the narrow window currently available with “nominally cheap but actually expensive” bilateral credit sources. It is just not worth the erosion of our international perception as a resilient stand-alone economy which seeks and gets credit on commercial terms. The key to financial strength is to spend only on projects which have high rates of economic and social returns and to avoid cost overruns. Money well spent is always rewarded by the financial markets through cheaper costs of borrowing.

Getting money cheap and then wasting 25% of it, which is the standard economic loss of non-competitive bids, does not impress financial markets as a viable strategy because it does not enhance our ability to service the credit.

If we need a bullet train or a super highway or high speed tracks linking our Five Big Metros then let us fund them through a mix of foreign commercial credit and foreign direct investment. That is the cheapest finance available today. Both sources also come with strict oversight on expenses and project management.

As the two supremos dip Bhakri (wheat flat bread) into the Kadhi (tangy sauce) Modi should move to the second agenda item and probe the extent to which the Chinese want to collaborate with India in international commercial ventures, in third countries between their companies and our own Navratnas (premier Indian State Owned Enterprises) and Indian private entrepreneurs. Both sides could learn from such collaboration.

Indian business communities in Africa and East Asia are hamstring by the crushing impact of Chinese competition. If collaboration can replace competition, both China and India benefit. After all, the best business venture is a monopoly, like a single toll bridge across a river. We should emulate the developed world, which advocates competition in overseas markets for their goods and services but hang on to quasi monopolies in their own domestic market.

More creatively, can we form an Indo-Chinese multi-national to promote renewable energy internationally? As a tangible target, what about announcing that by 2019, (1) both supremos would switch from the cars they drive in today, to electric cars and (2) their respective official homes and offices in New Delhi and in Beijing would be powered solely by Renewable Energy solutions manufactured through Indo-China cooperation.

As they scoop up the Kansar (a dessert) PM Modi should broach the third pillar of India-China partnership; a gas pipe line running from Turkmenistan/Iran through Pakistan to India and onto Southern China. Gas is critical to India’s energy plans. It is key to improve air quality in urban areas; provide a clean cooking fuel; power our city generators and reduce the incentive to use fire-wood as a fuel in our villages. Of all the commercial fuels, gas and hydro based energy have the most characteristics of a public good. Both generate the least negative externalities in energy supply. On the supply side, Iran is a traditional friend of both India and China. China has an increasingly dominant position in Pakistan which can facilitate safe passage for the pipeline. Their traditional policy of setting up Pakistan as a counter to India is now questionable in the face of Islamic terror and China’s own problems with Islamic communities in their North West. There is a commonality of interest in accessing gas from Iran. It should be pursued boldly using the plurilateral (Iran-Pakistan-India-Bangladesh-China) approach.

Great leaders are those who go beyond the narrow limits drawn by their babuish advisors. PM Modi and President Xi both have the mandate and the time to establish their credentials. They should start by making this point in Delhi.

Jobs

(photo credit: the hindu.com)

It is curious that we learn nothing from experience. The World Bank, sundry bilateral and multilateral donors spent 10% of their funds during the 1990’s on developing generalized skills (also known loosely as capacity development) in developing countries before junking the program, because results were difficult to attribute to inputs and “value for money” difficult to assess.

The lessons drawn from international experience are: First, that skills development is best integrated into the system of education and not treated as an end-of-pipe intervention. Second, end-of-the-pipe skills development has to be linked to the jobs available and, from a “value for money” perspective, is best done on-the-job.

The UPA government, in its typically muddled manner, whilst looking for ways to explain away poor growth, picked on “skills deficit” in India as a key constraint for growth. Industry immediately applauded the initiative, sensing that public resources were likely to be spent on a task, they should rightly be doing themselves.

Putting skills before jobs is a strange priority for a country which exports skills, across the value chain and which could export more, if only there were no visa constraints imposed by developed markets, where these skills are in demand.

Why would skilled Indians seek to work overseas if there were sufficient opportunities at home? The fact is that there are none. Today you can hire a skilled carpenter or a plumber for Rs 800 (US$ 13) per day in any of the Indian Metros. You can get a computer literate, office assistant for as little as Rs 10,000 (US$ 160) per month. Graduates, without permanent jobs, subsist on temporary employment at Rs 7000 per month. The entry level monthly salary for engineers is Rs 20,000 (US$320).

The problem is not a skills deficit. The problem is the lack of jobs. We generate only 10% of the 10 million jobs we should create incrementally every year in addition to employment at 163 million in the informal and 32 million in the formal sector. The Union Government should concentrate on enhancing growth with jobs. The downstream activity of skills development should be integrated into our education system and is best left to the private sector for short-term end of the pipe solutions. It is a task the private sector has managed very well thus far.

The IT sector explosion of the 1990s did not happen because there was already a large pool of jobless IT specialists sitting around in India, waiting for jobs. It happened because savvy IT entrepreneurs spotted a business opportunity to provide back-end services. They leveraged the low wage expectations in India to grow an export oriented service industry. Licensing liberalization for satellite links helped create the necessary telecommunication channels. The IT industry initially employed scores of specialists who incubated raw skills and trained them on-the-job.

When Suzuki (Maruti) started operations in India, in the 1990s, it did exactly the same, to create the technical skills needed to change over from the 1940s automobile technology peddled till then by the Birlas (Ambassador) and the Walchand group (Premier Padmini). Licensing liberalization in automobile manufacture created competition for the two incumbents from SUZUKI-MARUTI, which in turn upgraded and re-skilled Indian technicians to meet the needs of a modern automobile plant. The rest is history.

Only industry and business know the skills they need and how best to shape them to enhance value-on-the-job. Government intervention to finance such initiatives or (horror of horrors) plan for where, what and when training is to happen, can only be an unmitigated disaster and a complete waste of money.

Industry will argue that skill development is a public good; that individual companies have no incentive to train employees because they can get poached by others. This is nothing but griping. Skill development is what industry association like CII, FICCI, ASSOCHAM and their regional offshoots should be doing using pooled industry resources. This is their natural role just as much as lobbying for industry.

The gold standard in skill development is the apprenticeship system in Germany. Next time the PM transits through Frankfurt, he should take time out, after meeting Ms., Merkel, to review the difference between what we are planning to do and what Germany does. It is not for nothing that German engineering skills are the best.

We don’t need a separate Union Ministry for Skills Development or for Entrepreneurship. The Ministry of Human Resource Development or even the Ministry of Labour and Employment, are the natural homes for this function.

The Peter Principle operates strongly in public institutions. Work expands to fit the resources available. Often, the result is unnecessary, heavy handed, inefficient, intrusive regulation, of the kind the University Grants Commission demonstrated recently, with respect to the Delhi University and the IITs.  More ministries means more problems.

What we need to fix, is the system of education. Skills come in an extended value chain ranging from basic life skills, needed by everyone to be a productive part of society, to the highly specialized skills needed to land on Mars. Skills need to be integrated seamlessly into our system of education. Skills must not be developed piece meal. Doing so is expensive and has a very high failure rate.

We need to do away with the “paper chase” for degrees which has resulted in a proliferation of tertiary education institutions run more like “businesses” than schools. We need to focus far less on academic knowledge and significantly more on experience and practical learning.

Most “educated” Indians do not keep a set of home tools. The reason is they do not know how to use them. The average “educated” Indian cannot fix a broken chair; repair a blown fuse; darn underwear; knit a cap; polish shoes; iron clothes or clean the toilet to leave it sparkling. The only skills we value are the ones which involve sitting on an office table and barking orders at inferiors.

Our education system assumes that every child who joins primary school is going to be a top flight scientist. This leaves learning room only for the obviously brilliant students and immediately sidelines those who are late starters and even those who have limited ambitions in academics. This is the least inclusive and the least effective way to teach kids to explore and develop their individual comparative advantage. It also does very little for encouraging “innovation” which is the key to growth.

Public resources are scarce. They should be used to leverage private resources for creating jobs and enhancing growth. Focusing on skills, well before we have a strategy for creating productive, skilled jobs is putting the cart before the horse.

flying geese

(photocredit: lakechalice.blogspot.com)

97.5% of Delhi residents live in urban areas, many in slums. All 17 million of them live within an area of 1500 square kilometers. Travelling from end to end, despite the horrendous traffic, takes just two hours on average. There are five Municipalities (including the Delhi Cantonment Board) to look after their comforts. In addition, the Union Government itself directly manages Policing, Jails, Urban Development, Water Supply and the Metro Rail-which is fast becoming the life-line of the city. More than 75% of the available beds are in health facilities owned and managed either by the Municipalities, Union Government or non-state and private care-givers. It is not clear what value the State Government adds.

We do know however that the Delhi Government spent around 2.5% of its revenue expenditure or US$ 68 million (Rs. 1500 per household) in 2013-14, just on feeding its top heavy administrative architecture– the Lt. Governor, Legislature, Council of Ministers, Secretariat administration, District Administration and financing of elections, none of which can be directly traced to tangible outcomes which benefit citizens.  This does not include its expenditure on useful things like jails, police, the judiciary, social sector programs, infrastructure, economic empowerment and some less useful things like spending 4.6% of its revenue budget (US$ 179 million) as subsidy on the supply of electricity to its pampered residents, who buy power at between 4 to 10 cents per kWh.

Delhi became a State Government in 1992. In the two decades since, the government has precious little to show for its efforts beyond a spanking new Secretariat building, stadia, flyovers and roads courtesy the Asian games earlier and more recently, the scam ridden Commonwealth Games. The State Government sits awkwardly between the Union Government, which quite naturally is loath to give up hands-on control and the Municipalities, which remain marginalized. More fundamentally, loading Delhi citizens with three levels of government is just more “babugiri” (bureaucratize) than an average citizen can handle. It is also an extremely wasteful way to govern a city.

Prime Minister Modi’s pet theme is “co-operative federalism”. But federalism must not stop at the level of governments alone. True federalism is the empowerment of local, grass roots, direct democracy where citizens play an active part in governance, especially in a relatively homogenous and rich city-per capita income in Delhi is the highest in India.

Currently the pipe, through which political power and benefits flow from the top to the citizen at the bottom is too leaky. Union Ministers and their babus; MPs, MLAs, Delhi Government Ministers and their babus and Municipal Corporators and their babus all tap into it, leaving very little to trickle down.

PM Modi would do well to articulate the “co-operative federalism” vision as a sharing of prosperity. As a part of this sharing, he should initiate a dialogue with state governments to let loose the Big Five Metros of Delhi, Mumbai, Kolkata, Chennai and Bangalore comprising 6% of India’s population from the “drag” of the underlying state level administration. They must be set free to chart their course independently under the Mayoral system like London or New York.

Urbanisation in India could conform to an adaptation of the “flying geese” model of industrialization in East Asia propounded in the 1960s by a Japanese scholar-Kaname Akamatsu. As a city matures into a metro, it must graduate out of direct state government management and support, which should divert its energies to less developed cities and areas. The logic of cities, particularly megapolises, is that their size and scale makes them supremely viable; generates “agglomeration economies” which is loosely similar to the concept of “network efficiencies”; creates well-paying jobs; provides better facilities for citizens and encourages a plural, meritocratic and modern society.

McKinsey estimates that the Big Five Metros in India together contribute at least 35% of the national GDP. Their share in high value jobs would be even higher. More importantly, the World Bank assesses that better management, infrastructure and facilities in Metros has a significant multiplier/spill-over effect, catalyzing rapid growth in a 300 km radius around each city. Recent data indicates that population growth in the Metros is slower than in the adjacent intermediate cities. Migrants vote with their feet in search for jobs. Whilst cities have significant agglomeration benefits these tend to peter out by the time they become Metros. Rent and wages increase responding to scarcity of land and labour. Land intensive and sunset industries tend to get pushed out. More importantly the returns to realty development lie in turning hitherto peri-urban areas into cities. This is another reason why the “ripple effect” of freeing Metros could be politically attractive for the political elite in state governments.

This means that whilst State Governments would lose direct management control over and revenue from the Metros, they would gain from the additional revenues generated from economic growth and jobs beyond the Metros. Managing large cities is best done by stakeholders who have a direct and permanent interest in the city. These are usually commercial interests who have a locational advantage in being there and home owners. Municipal management allows both groups to be dominant in decision making, via their tax contributions, in a more direct way than is possible under fuzzy state government control.

The fiscal devolution formula determined every five years by the Finance Commission is weighted in favour of poorer states. By hiving-off rich cities from their budgets and their higher levels of development from their score cards, state governments could lower there development ratings and hence benefit through a higher per capita devolution of central finances. The Finance Commission is also veering towards incentivizing states which help themselves by raising incremental revenues and improving performance. This means that states which lower their base level development benchmarks strategically by hiving-off developed cities, would find it easier to earn incentives. All this “gaming” could further dilute the pangs of separation.

How is this proposal likely to pan out politically? The BJP and its allies, like the Shiv Sena, with their strong urban, voter base, are likely to benefit from autonomous Metros. Regional parties, where there is a strong bi-polar power distribution today, as in Tamil Nadu, may also see some value in potentially avoiding the “winner takes all” default option today.  In West Bengal, hiving off Kolkata may appeal to all parties; the CPM, with its rural base, shouldn’t care; nor would the Trinamool, since they seem to be default successors to a dormant Congress. In Karnataka and Delhi, Metro separation can give impetus to “disruptive innovators” like the AAP and other clones, possibly led by the IT kings of Bangalore, which seek to build an alternative “non-political alliance” to the more traditional political parties.

Developing 100 SMART cities is a good move aligned with the philosophy of “co-operative federalism”. But even smarter is letting loose the Big Five Metros (BFM); Mumbai, to rival Singapore as a financial hub; Chennai to rival Hollywood and Chicago rolled into one as an arts and engineering hub; Kolkata to rival Hong Kong as the entre port for Nepal and China; Bangalore to rival Silicon valley and Delhi to rival Washington. The political fall-out of State protests is manageable and can be diluted with grants, to hold state governments harmless. The growth and jobs consequences are positive. The profiling of the Big Five, as public management innovators, can be rewarding. The “soft power” effect of the consequential reforms strategies can make a compelling story for the rest of India.

Change and reform is best implemented when it can be benchmarked nationally. The BFM, sprinkled across the four main regions of India, can show the way on tax reform; “value for money” investment management; responsive service delivery and performance-oriented human resource management- all of which are key constraints today.  

 

regulators

(photo credit: rediff.com)

Energy development, because of its scale and complexity, only happens when “deals” are struck between governments and developers. Some deals are better than others. From the public policy perspective the “deals” we should be looking for, are those which minimize “rents” and maximize welfare.

In the Indian context, Independent Regulation is best placed to achieve this objective. This is evidenced by the contrasting experience in electric power and gas.

Electric power has been regulated at an arms-length from the government by the Central Electricity Regulatory Commission (CERC) at the center and mirror state level regulators since 1998, and there are at least five indicators of positive change to show for it.

First, during the period 1995 to 2013 the installation of generation capacity outstripped the availability of fuel and today around 30 GW of thermal power assets are stranded, primarily due to non-availability of coal. Not a hall-mark of good planning, but evidence that electricity regulators have done their job rather well, whilst government, which regulates the nationalized coal industry and the gas sector directly, via the Ministry of Coal and the Ministry of Petroleum and Natural Gas, respectively, failed to get coal and gas supply up to scratch.

Second, and more importantly, there is a competitive power market today. Around 10% of the bulk electricity supplied is bought and sold on energy exchanges and not via long term bilateral contracts as was the case earlier. Starting with the introduction of financial incentives to maintain grid discipline, via the Availability Tariff in 2000, the inter-change market has grown with two separate and competing exchanges. Private “merchant power” plants have been established on a pilot basis, which rely solely or partly on sale in the power market, at market prices, rather than on the clunky bilateral contracts of yore.

Third, at the other end of the spectrum, huge, private, mega power plants, each of more than 4 GW capacity, using the latest super-critical boiler technology,  have come up, which supply electricity to more than one state.

Fourth, retail supply is significantly reformed though still financially unstable. Supply quality and access have improved. Mechanisms for customer participation and managing grievances have been institutionalized by the 2003 Electricity Act.

Lastly, the Central Electricity Regulatory Commission has led the commencement of domestic trade in proxy carbon credits by allowing distribution companies to meet their renewable energy (RE) commitments by buying certificates/credits from RE suppliers.

In all these initiatives the CERC has worked in partnership with the Ministry of Power and Private Developers to devise a regulatory framework which progressively relies on market mechanisms to enhance capacity and meet demand, whilst retaining the power to restrain wild, speculation driven fluctuations in electricity prices.    

No one would claim that Indian electricity today is anywhere close to being the gold standard of regulation internationally but we are getting ahead. Compared with the dark days of the private power misadventure in the second half of the 1990s with ENRON, when everything was doom and gloom, electricity has turned the corner, thanks to Independent Regulation.

Take the curious case of the TATA and ADANI Mega Power Plants. Both developers submitted the lowest bids for two separate ultra-mega power plants in Mundra, Gujarat, respectively in 2006 and 2009. Both proposed to use coal imported from their captive coal mines in Indonesia; a smart move at the time because Indonesian coal was cheaper than domestic coal, which was also in short supply. Both parties voluntarily bid a fixed tariff although TATA moderated the fixed element to 55% of the levelised tariff. Fuel accounts for around 60% or more of the cost of coal generation so obviously both parties were pretty sure that they had sewn up the fuel volumes and the price. The units were commissioned from 2009 onwards. As luck would have it by December 2011 the Indonesian government had imposed a minimum export price on coal which was 50% higher, which knocked the economies of imported coal for a six. What had been a commercial coup became a loss leader for the two developers. Both approached the CERC for help to pull them out of the hole they had dug for themselves.

Here is where Independent Regulation made a difference. CERC could have taken the technically “correct” route; thrown up its hands and said a contract is a contract and just as upsides are not shared by the developer, downsides should not burden the consumer. One CERC member did take this approach also pointing out that it was no business of CERC to sort out contractual problems between distribution utilities and generators. He was technically right of course. But the Commission took a more pragmatic, business-like approach. It appointed a committee of experts to examine the issue along with the stakeholders and report to the commission. The report was received in August 2013.

Based on this report, the CERC allowed the enhanced cost of coal to pass through but ring-fenced the possibility of the developer benefiting beyond the pass-through of cost. This was in February 2014. The Haryana supply licensee, one of the consumers, appealed to the Appellate Tribunal of Electricity which partly endorsed the CERC order in August 2014.  Haryana next appealed to the Supreme Court (SC), which stayed the CERC order last week. Both TATA and ADANI shut down their generators last week, though neither entity admits that the shut-down is a response to the SC order.

On the face of it, this saga is illustrative of a regulatory melt down. But consider the facts. Haryana is due for elections within the next two months. It is a Congress ruled State. There is a fair possibility that its opposition to the CERC order is not substantive and commercial in nature but is driven purely by the political compulsion to paint the BJP central government in a bad light, as being captive to crony capitalism. Conversely of course, being a non-BJP State Government, its actions could also be the justified outrage of a consumer at an agreement not being honoured.

This problem of contracts needing to be renegotiated, once they become unviable, has been endemic since the ENRON days and affects infrastructure and energy across the board. Forcing a developer to abandon an unviable contract with punitive sanctions fits technical correctness and possibly could deter speculative bids in future. But it comes at the cost of serious supply disruptions in the short term; significant potential loss for Indian banks financing the project and of course potential bankruptcy for the developer.

Independent Regulation, with its attendant appellate arrangements is not immune to this problem. Unviable contracts can surface anywhere. Also even regulators are learning from experience. In electric power the scope for price competition was imagined to be on a much larger scale than seems possible now given the constraints of thinly traded international energy (gas and coal) markets; India’s shackled “nationalized” coal industry and financially fragile retail electricity supply sector.

But competition is a sequentially evolved form of regulation. Even in the case of Rate of Return regulation, as is the norm for NTPC and other State Owned generators, we are still be better-off doing it through an Independent Regulator, than within the cozy confines of a Government Ministry. Why is CERC able to take tough, business-like decision?

First, the process adopted is transparent. All CERC proceedings are public. Stakeholders have equal and open access to all the documents. There can be no allegations of behind the door negotiations. Second, all stakeholders get to hear each other and participate. Third, whilst the CERC members are all retired babus, the institution has developed a reputation for impartial and unbiased decision making. The personal reputations and professional credentials of the members and technical staff are above reproach.

Compare the happenings in power with the twisted tale of Reliance’s Krishna Godavari Basin D6 concession. The paucity of documents available in the public domain; the decisions on gas pricing shrouded in the process secrecy, which is habitual to a government ministry; the sporadic and inspired information leaks; veiled insinuations of “deals” between government and Reliance Industries have all created such a “trust deficit” that finding a way out is a mine-field for any government. Once the credibility of a government process gets seriously eroded there is rarely an option but to replace it with another process.

The credibility of the process adopted by the Ministry of Petroleum and Gas to implement the New Exploration Policy 1999 has become seriously flawed. A “cost of service” type of price regulation mixed with “benchmark price competition” is sought to be retro-fitted onto the Production Sharing Contracts in the absence of explicit market prices and marketing freedom for developers. Even the committee (2012) chaired by no less an eminence that Prof. C. Rangachary (ex-Governor of RBI) has failed to evoke a satisfactory settlement. Yet another Committee under Dr. V. Kelkar is likely to meet a similar fate.

Of course it does not help that the matter concerns Reliance Industries. Like all big corporations, it is on the hate list of assorted activists, who fear its financial muscle and are awed by its’ organizational punch. Reliance is an upstart in the “cultivated” world of Indian business, which remained mothballed till Dhirubhai’s disruptive innovation stood it on its head in the 1980s; widening its equity base to retail investors and sharing its prosperity widely, it created its own brand of public-private partnership based on a mix of the Japanese “Keiretsu” and Korean “Chaebols, which were Asian innovations in business, till that style of deal making was washed away by the 1997 East Asian crisis and next got discredited as “crony capitalism”.

China continues to use such business relationships well. Its’ Party dominated politics provides a steady stream of relationships which can be built upon. But If authoritarian China, is like a large river, flowing placidly but forcefully through the plains, democratic India is like a mountain stream; turbulent, capricious and frothy at the mouth. Our fractured and complicated political architecture is a business persons’ nightmare, with its twists and turns. In our hyper charged political environment, government partnership with business instantly attracts the charge of crony capitalism and a working relationship can be easily mis-construed as a public partnership for private gain.

These perils of democracy ae unlikely to abate. But putting an Independent Regulator between the government and large business helps in holding unsavory deals at bay, whilst promoting “deals” in public interest. The experience of the CERC substantiates this. Had the Ministry of Power taken the very same business friendly decision, as CERC did, in the Mundra Mega Power case, especially in the stormy days preceding the 2014 general elections, allegations of crony capitalism would have flown thick and fast.

Putting an Independent Regulator in Oil and Gas, fully empowered to license production and determine prices, can have similar advantages in “deal making”. The consuming public recognizes that business is all about deal making. What it abhors, is the secrecy and lack of access to information, associated with oil and gas deals.

Had an Independent Regulator been in place Mani Shanker Aiyar (2009) and Jaipal Reddy (2012) need not have been shifted to other portfolios. The brunt of the negotiations would have been between the regulator, the public and the developer. Shining a light on the decision process often automatically dilutes entrenched, but indefensible positions and facilitates consensus.

We need an integrated Energy Regulator covering power, coal, oil and gas. Fortunately, the Appellate Authority for Electricity already has a mandate to include petroleum. The CERC should be similarly mandated to regulate oil and gas. This avatar of the Commission should report directly to a new Ministry of Economic Affairs. Its task must be to achieve growth targets, including by being the administrative ministry for all environmental and economic regulators (excluding the RBI) and by harmonizing their functioning via policy. The now defunct Ministry of Planning could well be retrofitted for this task by shifting the Economic Division of the Ministry of Finance to it. It could be headed by a junior, technocratic Minister, reporting directly to the Prime Minister.

Our under developed governance systems require segregation of functions between Ministers- who make policy and propose legislation and Regulators- who implement policy, fairly and effectively. This distinction is similar to the separation between Legislators- who make the law and Judges-who implement it. For one thing, the two disciplines are very different and require different skills. Secondly, allocating functions narrowly has the advantage of pin-pointing the origin of problems and for finding workable solutions. Mixing up policy and implementation is neither fair to the consumer nor to business. Separation of powers and functions is the key to effective solutions.

 

 

 

 

S334

Acquiring property in tony Panchsheel Park, New Delhi is every middle class Punjabi, Kalal,  refugee, boy’s dream. It came true for me today just shy of 62-never mind that the apartment is old; that one walks up the stairs to the second floor; the floor is cracked mosaic; the wash basin is below and not sitting on top of the supporting ledge; the toilet is fixed into the floor, not the wall and there is no place to have live-in servants. Just being able to buy an apartment with a full cheque payment seemed a triumph- no doubt helped by the fact that the MCD has jacked-up the circle rate so high here, that you save no tax by paying in cash, as is the norm, even if you must have cash in the required proportions.

Property is important to middle class Punjabi refugees, uprooted so cruelly from their narrow, little, secure, world of dank gullies and bulbous backsides in Rawalpindi or Lahore. For us, property is legitimacy. The more upscale the locality, the greater is ones claim to legitimacy-as if one can buy ones way up the rigid social hierarchy.

The fact is one can. It was 1977. I had just finished college and started earning a salary as a Senior Management Trainee in the Delhi Cloth Mills (a princely Rs 900 per month). Three male friends (who shall remain unnamed) and I were drinking in a house in super-tony Golf Links. The session ended at around 2.00 AM. We were fairly sozzled and making a ruckus on the road. Some resident called the cops, who rounded us up fairly respectfully (after all it was Golf Links and we looked like we belonged) and took us to the Tuglaq Road Police Station. We were arraigned before the Station Officer.

He asked the first boy his name and address. The address was Golf Links, where we had been drinking. The SHO nodded. The second boy’s address was in Lutyens’ Delhi, where the senior-most Delhi babus live. The SHO nodded. My address was my parents rented place in Lajpat Nagar-a middle/lower middle class, refugee colony. The SHO let forth a string of expletives in “classic” Haryanvi, admonishing vermin, like me, who “spoil” nice upper-class boys. As punishment for this inexcusable crime of social pollution I was made to crouch with my hands stretched up front, to atone for my sins, whilst the other two stood coolly.

That was the day my “liberal” dream ended and I came face to face with reality. No I did not become a Naxalite as did many of the present day liberals. I did it the Punjabi way. First, I resolved to join the Indian Administrative Service-to join which only merit rules; the crème de la crème of babugiri which escalates you up the social ladder faster than a dope-head snorting coke. Second, I resolved to buy property to step out of the kicchad (muck) I was in.

I serially bought a DDA flat; a plot in Greater Noida; a flat in Friends Colony and finally a flat in Panchsheel Park. I waited to get my Aadhar card made till I had a “worthy” address to put on it. Now I do.

To appreciate the contrast, consider my wife-Vidyun. A thoroughbred Rajput from Uttar Pradesh. A born aristocrat, whose parents never knew the value of money. Her father was swindled out of his landed riches when his father died young and he was just a young boy. Reduced pretty to refugee status you would say.

The difference is you can take the riches out of royalty, but not the status or the mind space that goes with it. The fatherless boy took refuge in books and the company of powerful mentors who looked kindly at him, for they knew his past. They sympathized with him and admired his courage at not being disheartened by his misfortunes; a truly Royal trait.

To the true Rajput what matters is not the size of the cheque you can write but the principles you can uphold and the blood you can shed whilst doing so. Bred in this Dream world-part early Bollywood, part mythological, it is no wonder that to Vidyun, what matters is not where you live but who you are, because her legitimacy lies in her historical identity. It is enough to establish, even today, that you are the grand-daughter of the Thakur of Akohdi for the heads to nod in acknowledgement of your genes. It also helps if you are beautiful, immensely talented and a successful professional, as she is.

Vidyun is dismissive of neighbourhoods for she defines the neighbourhood she graces. It is ok to live in a slum, if everyone knows that it is not where you really belong. You just happen to be passing through. Indian’s have an unending belief that eventually genes will triumph like a Kamal flowering even in kichhad. And indeed they are right.

But for middle class Punjabi refugees-small time shop keepers, traders, swindlers, bootleggers, money lenders and lower level lackeys of the British Raj-pushed out from their native habitats in what is today Pakistan, there is no historical identity they can take solace in. How can one extol the virtues of selling “Vimto” from a horse drawn cart? For us what matters is the here and now and acquiring property is the one thing that fills this historical void.  

For me it’s all over now. My work is done at last and it is time to start walking towards the final resting place, wherever it may be, my Aadhar Card in my pocket, clearly stamped as Panchsheel Park, my ticket to everlasting legitimacy. And who knows, there may even be more property up this road. But it won’t matter as much. I have my ticket already.     

 

mangoes

(photo credit:southasia.foreignpolicy.com) 

FM Jaitley’s comments recently in Mumbai, that the media did not know much about what happens inside government, riled many a media person. Expectedly, the comment was attributed variously to smugness and being out of touch with the intimacy, the media has got used to in the “chummy’ days of the UPA, when they were actually a “fly on the wall”.

Some media worthies had the grace to take the comment at face value and pointed out that lack of information or communication by government, in the modern age, is as bad as disinformation, because this “city of the Djinns” uses both to self-advantage. The only option is to be open and share in the “information age”

But imagine this scenario. What if the government had early information of the mounting unrest (which has unfolded subsequently) in Pakistan against the Sharif government and felt it was not an opportune time for Secretary Singh to dialogue with her counterpart in Islamabad.  Instead, the ostensible reason offered, to pull out of the talks, of being upset with the Pakistan High Commissioners attempt to get briefed by the Hurriyat, seems a master stroke.

The response, however, from a section of the strategic community was severely negative (due to lack of information?), ranging from outright condemnation of this dangerous departure from precedent to  approbation for undermining the fundamental basis of Indo-Pak relation so studiously built around “talks” for the last many decades.

How can the government possibly come straight out and say that the fundamental asymmetry between India and Pakistan is similar to the asymmetry between the US and Myanmar.  Forget the fire power and soft power asymmetry. It is the asymmetry of political beliefs. Myanmar has Aung San Suu Kyi and Pakistan has Malala Yousafzahi; both heroes in their own right. But the hard fact about long standing militaristic societies is that they change only when their military leaders feel compelled to do so, either because of conviction, or pressure. Also luckily for the US it does not share a border with Myanmar but it is always difficult to figure out the outcomes of counterfactuals (what ifs).

How can there be pressure on the Pakistan army to step out of politics when their unsustainable economy is liberally financed by “friends” in the Middle East, who get repaid with the supply of Sunni Jihadists or financed by the US, in its constant attempt to wedge a foot into the door of this tinderbox country?

And if these friends were not enough, they now also have China dripping investments and promises into ports, roads and infrastructure.  Clearly, business school teachers are out of touch when they say the only ones who fail to access finance are those who need it the most. They never took into account a Nuclear Pakistan, passing the “N button” like a parcel between squabbling political leaders, as easily, as they would a shisha.

In India the overwhelming sentiment in the face of the new rash of political problems in Pakistan, is deep sympathy and concern similar to what the rest of India felt for the BIMARU (sick) states (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) in the past.

But such lip sympathy is of little use to the people of Pakistan who must be fed up with fighting a daily struggle to survive. The inevitable shortening of life and business horizons; the apathy towards tackling fundamental fiscal imbalances; the seeming disregard for joining the ranks of open economies whose growth is based on competitiveness and the habitual cultivation of an inward looking, defensive perspective, must indeed be soul destroying.

Sad as it may be, there is little than India can do but to “buckle up”, be prepared for being named as the fall guy, yet again and keep open its channels of communications with the Pakistan Army via its (and our friends) friends in the US, the Middle East and China.

Formally, India has never conceded that the Indo-Pak affair is anything but a bilateral issue to be decided accordingly. But beyond the world of formal institutions, lies the “real” world of “informal” institutions, where the fate of common people on both sides of the border is decided. We must burrow deeper into our seat at this “informal table” and make better use of it in the forthcoming leadership level meetings with China and the US.

 In India we say “finis” with “supari”. In Pakistan they lately prefer “mangoes”. Neither tactical device generates positive outcomes. Being friends, means assisting, when needed, including to make the mangoes rot.

great powers

(photo credit: english.sina.com)

  1. You don’t have to say you are sorry. Japan took half a century to sort of apologise to Korea for its war crimes. The US has never apologized to the Vietnamese for napalming them.
  2. You can lie with impunity. The US and the UK lied about Saddam Hussain’s arsenal of chemical and nuclear weapons. Russia lies when it says local rebels are fighting the Ukrainian government. China lies when it calls itself a democracy.
  3. You don’t have to go looking for someone to talk to at a diplomatic party. Everyone else flocks around you.
  4. The line-up for the photo-op after a conference happens around you rather than you scrounging around for a place in the third row.
  5. Your “think tanks” are well funded and packed with retired Ambassadors, Generals and assorted strategists and feel comfortable preaching to your neighbours.
  6. You consider it your duty to send 20 some things, who can barely handle their nickers, to “help” the unfortunates in foreign lands. Never mind that they have never done the same in the country of their birth.
  7. A University professor in the neighbouring countries gets paid the same as a semi-skilled worker in yours.
  8. When you are sure that if you die in your sleep in a foreign land, your local embassy will bother to inform your folks and send back your body.
  9. When you don’t need a visa to travel to other “great countries”, except those whom you have browned off.
  10. When you don’t have to spend an hour figuring out how the loo flushes in your up-market hotel abroad.
  11. When a decent meal in your hotel abroad doesn’t mean that its McDonalds for the rest of the business trip.
  12. When you BPO jobs out to allies.
  13. When high security for the “President” does not mean locking down the neighbourhood where she is visiting for the entire day.
  14. When more foreigners are voting with their feet to come and work in your country than there are citizens trying to get out.
  15. When your language is recognized by the UN as one of its official languages.
  16. When the number of scholars working on your country in the universities of a competing great power are many more that those working on your neighbouring countries.
  17. When your delegation is doing the selling (not the buying) at an air and weapons fair.
  18. When the WTO calls you for convenient dates before fixing the next round of negotiations.
  19. When the poorest adult woman in your country weighs at least 10 kg. per foot of height.
  20. When you don’t need to have a child just to have someone to look after you in old age.

 

 

imran khan

(photo credit: en.wikipedia.org)

Samson, the mythical Israeli, who was born with the strength to rip apart a lion with his bare hands, loses it all, when Delilah, an unreliable female “partner”, in whom he confides that the source of his strength lay in his long hair, cuts them off, in exchange for “blood money” from his enemies, whilst he is asleep.

Possibly learning from Samson, Imran Khan, the ruggedly handsome, heart throb, erstwhile cricketer and presently a potential Prime Ministerial hopeful in Pakistan, complete with long locks,  pledged during the recent siege of Islamabad, which he led demanding PM Nawaz Sharif’s resignation, that he would not marry (lest he lose his locks?) till a “New Pakistan” dawned.  

The South Asian sub-continent is rife with similar examples of political leaders who eschew marriage to serve a higher purpose, implicitly learning from Samson.

Gautam Buddha walked away from his sleeping family and the World, to found a new religion, which has adherents across the world practicing the technique of deliberate disassociation from material things and thoughts via meditation, as a therapy for even tired, dissolute and remorselessly materialistic, Wall Street Bankers.

India is particularly afflicted by this seeming conflict between a higher duty and the pleasures of a family. Sadhus (holy men) are Hindu mendicants, colourfully clad in ochre robes and long hair, matted in a manner any Rastafarian would envy, whom the rest of us have to support as they pursue a higher purpose.

Even politicians are affected by this bug. Jinnah, the founder of Pakistan, was a bachelor. Nehru, India’s first Prime Minister, Jinnah’s contemporary and rival did not remarry after his wife died in 1936. A. B. Vajpayee, the first BJP stalwart to become Prime Minister also never married. Bhen Mayawati, the Dalit leader from Uttar Pradesh; Mamta Banerjee the first time, firebrand, Chief Minister of West Bengal; Amma Jayalalitha, the veteran Chief Minister of Tamil Nadu and PM Modi, all are not married. Rahul Gandhi, the scion of the Nehru clan, pledged himself to the nation in the 2014 elections, also seemingly following that path. But sadly it did not help the election outcome.

There is something incredibly attractive to South Asians about the idea of their leaders giving up permitted pleasures, like having a family, to serve the nation. The notion that a family distracts rather than focuses attention on one’s career, is enshrined in Hinduism, which urges people to renounce material concerns, once they have discharged all their family duties and obligations.

This underlying bias, which views a family as a drag, rather than a resource, was reinforced by the colonial tradition. Young officers under British rule were not allowed to acquire a family till they were (a) old enough to afford one and (b) too senior to be likely to engage in battle and get killed, thereby leaving behind a helpless family to be looked after by the paltun (his army colleagues).

That the family and most importantly a wife, is important in making a man what he becomes, is entrenched in Indian tradition. This is why callow youths, prone to “false” female charms, are not encouraged to choose their own wives, lest they choose Delilahs, as Samson unwisely did, who would only shorn them of their power and desert them thereafter.

Whilst the choice of a spouse or partner is a tough one for any man-politician, it is an impossible choice for women-politicians for a number of reasons.  

First, men are wayward. During the extended daily absence of a busy politician wife, whose every waking moment is taken up by matters of the State, heaven knows what the man may be getting up to. Keeping track of a male spouse, boosting his fragile ego and keeping him harmlessly engaged, can quite derange a woman-politician.   

Second, not every man can keep looking grand, like Prince Phillip of the UK, whilst perpetually trailing Queen Elizabeth, his wife, and yet remain seemingly content to be perpetually out of the main spotlight. Some male spouses of powerful women, are prone to leverage their position, to their advantage in business thereby potentially wrecking the woman-politicians career.

There are very few “Power Couples” like the Clintons, who have perfected the “art of living and thriving together”. In India, Prakash and Brinda Karat of the CPI (M), stand out as one such power couple. But sadly such sharing of power does not seem to have brought political dividends.

In India, such successful, congenial power play, is seen most often in the bureaucracy, where it is used to deadly effect. In contrast, politicians are still too seeped in the male-dominant tradition and need to catch up with their bureaucratic colleagues. Possibly, the political environment reflects main steam India, with all its social inhibitions better, whilst the bureaucracy, after all, is just a chip-off-the-Colonial block and thereby retains some characteristics of a more western orientation.

The real problem of course is not the fact of the marriage but its outcome in children and a spreading net of close relatives all whom want a finger in the power pie. Indian parents are culturally tuned to cosset their children endlessly. Combine this cultural trait with access to political power and you have the beginnings of a corrosive dynasty.

PM Modi is a competent and charismatic man, but the fact that the only thing he will leave behind is his collection of kurtas and turbans and several large development projects dedicated to the nation, is chillingly compelling. Indeed this was also the Mahatma’s magic and possibly the reason for his forsaking his family. His meagre personal belongings, his charkha and his thoughts are all we are left with and yet, they are more powerful and long lasting, than all the riches in the world and the combined political force of the State in India. Maybe we should go back to our roots.  

 

 

 

 

Modi piegeons.theunrealtimes.com

(photocredit: unrealtimes.com)

In inimitable style, Prime Minister Modi freed the nation from the “stifling” control of the Planning Commission (PC) on August 15-India’s Independence Day.  Not many are likely to mourn its passing.

But bureaucracies dislike a power vacuum and it is not clear who inherits the mantle of work the Commission used to do. Of primary concern is the need to co-ordinate the allocation and use of public resources, mostly though not exclusively, as investment for sustainable development. The amounts involved are huge, amounting to 11 % of GDP, of which Central government resources comprise 60% whilst the residual 40% are state government resources.

India’s quasi federal structure creates governments at three levels with varying and mismatching levels of functional assignments and resource allocations and a spaghetti bowl of mandated and discretionary, inter-government transfers. Whilst a good long term strategy would be to work at aligning responsibilities with resources, there is little hope of these issues being sorted out in the next five years.

The need of the hour is to find practical near-term solutions to three key issues which would remain unresolved if the PC is wound up.

One, which government entity could be empowered to realize the PMs vision of “cooperative development” between the Union government and the states?

Two, which government entity could have the capacity and the mandate to take an integrated and a technically informed view on development priorities and evaluate options and their tradeoffs?

Three, which government entity could be structured to bring together the best brains in the business of development to assist the “combined team of the PM and the Chief Ministers of state governments” to take informed and optimized decisions which simultaneously reduce poverty, create productive jobs and ensure sustainability?

This is not to assert that the PC did any of the three very well. But it did provide a forum for all three issues. The fact that it was not used to that purpose is a reflection of its leadership rather than its substance.

The PM, whilst announcing the demise of the Planning Commission (an institution, which the PM heads, created in 1950 by executive order), also said it would “soon” be replaced by another institution but no details were shared. Speculation abounds that this may be a lean, high power, government “Think Tank”.

It is unclear however why the government needs another in-house think tank when it has so many aided “Think Tanks” already at its disposal. The National Institute of Public Finance and Policy (NIPFP); Indian Council of International Economic Research (ICRIER); National Council of Applied Economic Research (NCAER); Institute of Economic Growth (IEG), just to name a few, which are all part of the Delhi Durbar.

Others include highly specialized ones like the Center for Policy Research (CPR); The Energy Resource Institute (TERI) and the Center for Science and Environment (CSE) in Delhi. There are scores more of such “knowledge institutions” in other metros and the state capitals. All of them are already able and engaged in providing research and knowledge support to governments, state owned enterprises and the private sector.

Why spend new public money on establishing yet another sarkari (government) or quasi sarkari knowledge institution, which will likely be bedeviled by the same constraints as its predecessor? All sarkari institutions suffer from the problem of low remuneration levels, which are insufficient to attract the best from the domestic private sector or to attract the many qualified Indians working abroad. Lateral entries are mostly “fixed” on the basis of exploiting networks, not on the basis of assessed merit. Lastly, and most importantly, their processes and systems are stiflingly bureaucratic, which puts-off most experts.

In any case, even the best “Think Tank” cannot achieve all the three objectives cited above. Even International Development Institutions, like the World Bank, IMF and UNDP find it hard to sell their admittedly “high quality thoughts” if they are not backed by money power to implement them. A Think Tank is not the solution.

The erstwhile Commission discharged several functions. It coordinated the allocation of vast public investment resource and monitored implementation and expenditure. It provides the secretariat for the National Development Council (NDC; an entity created in 1952 by executive order for interaction between political heads of the Union and state governments). In fact unfettered “thinking’ and “knowledge generation” was never a major part of the Commission’s job. It was more a hands on “applied knowledge” generator which navigated political economy constraints to suggest commonly acceptable, technically suitable options for allocating development resources. This role remains vital.

The notion that the Ministry of Finance, Department of Expenditure, Plan Finance Division can perform the investment management; resource allocation and monitoring role is laughable, given the limited human resources available to it.

Why not then simply assign the entire existing Planning Commission staff to the Plan Finance Division; upgrade this to a Department and let it do the job? This solution would be even worse than the existing arrangements. It would extract whatever independent “non-government” knowledge capital, which existed in the Planning Commission, plus embed the entire process in the traditionally (possibly necessarily), non-transparent functioning in the “forbidden fortress” of the Ministry of Finance even further, with no hope of efficiency improvements in return.

Can the PM retain the bird in hand- the virtues of the PC- whilst still netting two more birds (state leadership participation and enhanced human capital) in the bush?

This post outlines a proposal to this effect:

  1. The PC already provides the secretariat for the National Development Council. Unfortunately, meetings of this entity have been reduced to a mere formality, where no meaningful co-operation takes place. The reason is that it is not empowered to do more than talk. This can change dramatically if it is empowered to “approve” the medium and long term invest plan of the Union and State governments. This “symmetric sharing” of fiscal power, between the state and union governments would be unprecedented. It could energise the NDC into a business like agency.
  2. What we call “the Five Year Plan”, in India, is very similar to what more modern governments call the “Medium Term Fiscal and Expenditure Framework (MTFEF)”. This is an internationally accepted “good practice” as a guide. The Plan can be tweaked into becoming this modern avatar.

In essence the MTFEF requires the setting of aggregate fiscal deficit, revenue and expenditure targets; assessing the fiscal resources and then painting in allocations for different sectors and projects, within these broad fiscal envelops.

This is already done by different agencies independently; RBI, MOF, line ministries, state governments and the PC. Each entity has vested institutional interests which are at variance. The RBI would like to constrain debt and regulate money supply since it targets inflation. The MOF traditionally exaggerates revenue and borrowing potential while targeting growth. The line departments and state governments exaggerate expenditure needs to “grab” the highest allocations. The interplay between these entities is expected to reach an optimised equilibrium which the PC presents to the PM and the NDC. We still need an entity to perform this vital function.

  1. This could be a new “empowered” NDC which would operate much like the Governing Board of a multilateral development institution. The Governing Board would consist of the Prime Minister as chair; a designated central minister as Dy. Chair; chief ministers of state governments or their alternates, key central government ministers and the RBI Governor as members. The Governing Body would ensure pan-India political leadership and “buy-in”.
  2. Technical governance could be provided by an Executive Board, chaired by the Secretary of the new NDC Secretariat. Other members would be of Chief Secretary level from each state government and key Secretaries of the Union government. The Executive Board would mirror, at the bureaucratic level, the composition of the “political” Governing Board. It would be the function of the Executive Board to coordinate and clear documents formulated by the Secretariat, before circulation to the Governing Board for decision.
  3. The new Secretariat would be designed for independence and competence. This requires that only the best talent is selected. To ensure merit all appointments to the secretariat would be outside the central staffing pool which is operated by the Department of Personnel, GOI and draws officers from the All India Services and Central Services based on pre-determined proportions from each service and then allocates the officers to vacant positions in the union government; a cumbersome and non-transparent mechanism of ever there was one.

All positions in the NDC secretariat would be open to external competition. Government officers would be expected to compete with external experts for appointment to specific positions, each of which would have defined job descriptions and eligibility criteria. Secondly, all appointments would be contractual. This simple device will give more flexibility to the NDC to pay for merit. The fear of competition and the need to temporarily step out of the “comfort zone” of service regulations (like the payment of house rent at market rates rather than allocation of a government house; payment of car and driver allowance at market rates rather than allocation of a government car) will automatically ensure that only those competent in and committed to pursue specialized technical work would apply.

All recruitments would be processed by the Union Public Service Commission (UPSC) to ensure that the highest fiduciary standards in selection are maintained.

Despite the liberalized compensation, the operational cost would be lower than in the case of the PC by limiting the number of employees to 100 or around one half of the staff presently employed; enhancing the teeth to tail ratio and aggressively adopting technology to reduce cost.

The proposed new NDC can meet the PMs objectives of introducing “co-operative federalism” by building “a common team” of leaders from state and the union governments.

It bridges the gap between state and the union government, at the bureaucratic level, by bringing high level government representatives together in an empowered Executive Board with real time “shared” powers and functions.

It ensures that the best available human capital is made available to inform the deliberations of the NDC and yet minimizes the institutional dislocation from the demise of the Planning Commission.

The bath water is drained, the “baby” remains, to be nurtured into an image of inclusive, federal, technologically empowered, institutionally integrated, India.

 

 

TFA

(photo credit: Times of India)

The Economist, a venerable English newspaper, can be excused for being confused about why India kicked the WTO bucket on July 31st. But it is a mystery why the Economist expects nations to behave rationally, when it knows full well that individuals don’t.

Humans fear losing more than they like winning, similar amounts of money. The anxiety about loss is irrational. There is nothing rational either about buying diamonds, but the world spends $72 billion each year on them. It is even less rational to buy missiles and weapons but the world turnover of these adult toys is more than $350 billion annually. Incidentally, this not very different from the net estimated gains for developing countries from implementing the now torpedoed Trade Facilitation Agreement (TFA); basically aimed at cutting red tape in international trade.

Assume instead that irrationality rules. It then becomes easy to see why a seemingly “win win” solution, in a narrow, partial equilibrium sense, like the TFA, becomes less attractive because of the costs and collateral political damage it causes to the cozy, status-quo favouring domestic elites.

The Economist is perceptive however, in assessing that the WTO in its “jamboree” form is dead as the dodo. On this it is bang on. The expectation that nearly 200 nations can possibly reach a common “agreement” and more importantly stick to it is so utopian that it boggles the mind.

But it is odd that a newspaper, as incisively investigative and intellectually rigorous, as the Economist, should not have picked up on the key, underlying issue of “cultural rifts”, which lies at the core of multilateral failures (trade and climate change).

In developing economies, a “sustainable agreement” is one in which the mutuality of interest is explicitly acknowledged; no party has residual reservations and the agreement is aligned with practicality. A mere formal consent, given under pressure, or with the intention of “kicking the can down the road”, is no consent at all. A pile of papers signed to seal such “faux deals”, have even less value. Whilst individuals are prone to such derelictions, agents (read leaders and bureaucrats) are even more likely to adopt the easiest route to avoid immediate stress.   

Why then do multilateral institutions bother to negotiate such unsustainable “deals”? First, every broking house has a “managerial incentive” to “close” deals. Never mind if they unravel subsequently. Second, cultural cleavages between ancient civilisations and “modern” States create mutual mis-assessments of the degree of consent and the leeway for subsequent rethinking behind formal agreements. Third, modern institutions are prone to use a “template” methodology for assessing conformity and consensus. Whilst templates reduce the time and cost of decision making by enforcing standardized conformity, they miss the contextual signals indicating covert dissent; misgivings or simply lack of “buy in”.

The near universal business model today is the one based on neo-liberal economic precepts and political architecture. Prior to 1990, Soviet Russia cocked a snook at this model of development which is embedded in the “Doing Business” publication of the World bank/IFC.

Today, it is China which is doing so. Despite growing at more than 8% per annum over the last 33 years; becoming the second largest economy in the world and reducing the level of its poor to 3%, it ranks 96th out of 189 countries in the “ease of doing business”. What explains the mismatch between its achievements and its ranking?

The purpose of this statement is not to undervalue the “Doing Business” publication. Instead, the intention is to show that there is more than one way of skinning a cat as so vividly illustrated by China.

Large, continental economies, like China or India, have options to innovate development solutions, which may not be available for small countries. If an economy is hugely dependent on external markets or foreign investment, the need to “de-risk” its institutional arrangements, in the conventional sense, will be far greater. Big economies can attract business interest, purely on the basis of their vast market potential, without having to go through the hoops of process change to conform to “best practice” institutional norms. The only caveat is that political stability is a must.

But it is hard work to convert informal, business practices, which work at the boutique level, into a generally applicable market principle. The diamond trade in India, worth around $9 billion, is done entirely on trust. No formal agreements are executed between buyers, sellers or couriers but there are no defaults. Yet, no Indian retail investor would consider purchasing a home without signing legal agreements with home suppliers. Access to bank credit is similarly cocooned in masses of paper. Never mind that the Non-Performing Assets (NPA) of Indian public sector Indian banks have nevertheless increased to an alarming level of 10%. Never mind that these paper agreements are virtually unenforceable or enforceable only at significant transaction cost.

Small players need the comfort of a legal agreement. Large players know that any agreement is sustainable only if it remains mutually beneficial and the balance of market power does not shift significantly over the course of the agreement. In effect, this reduces a legal agreement to a mere formality, more like a memorandum of understanding or a minute. More accurately, a fudge, to lull the less informed into a false sense of security.

The bottom line is, clunky international agreements are out. Smaller pacts between immediate beneficiaries are easier to conclude and provide higher gains all around. Consider how ineffective the G20 (a talk shop of mostly rich countries and a few poor countries-including India, convened to coordinate national actions during the 2008 financial crisis) was in the WTO-TFA affair. The group aims for “individual country action based on a common understanding”. The Indian action of rejecting the TFA, in opposition to the remaining 19 members of the G20, was akin to kicking it in the teeth.

The “unnatural exuberance” of the last 30 years is over. Trans-border equity is no longer normative. It has to be negotiated every time, in every context. Market power is in; collaboration between high-worth, small groups (BRICS) is in; bilateral deals are in. The world is suddenly less grandly inclusive and more squalidly business like, than ever before. But it is also more real and practical and less hypocritical.

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