governance, political economy, institutional development and economic regulation

When I’m 64

Paul Mccartney

(photo credit: wikipedia)

Paul McCartney -he of the long, brown hair who hung out in the company of the Beatles in the 1960s-wrote this song when he was just 16. Clearly he was not an economist and didn’t need to be hesitant about asking his “love” to project forward by 48 years, her likely feelings for him at the ripe, old age of 64. We don’t know what she told him then, but today it is unlikely to be the right thing to do.

First, not many lose their hair by 64 and the ones that do, get them back with renewed vigour, courtesy a visit to Dubai for a hair boost. Second, it is unwise to ask the modern spouse if she would lock the door if you remain out till 3 AM. The likelihood is that you would be opening the door for her when she comes in at 6! Third, the role distribution between men and women is no longer about the former mending a fuse and the latter knitting a sweater. Nor do women typically look forward to have three grandchildren dangling at their knees. But Mccartney got one thing right when he plaintively asked “will you still feed me when I am 64”.

The way to a man’s heart remains via his stomach and it is not just food that we refer to. In rural areas women have traditionally done most of the drudge of farming, animal husbandry and cottage industry along with fetching firewood, water and often carrying the weekly supplies home from the village market.  But now, even in urban areas, supporting the family by earning an additional income has become a critical role for women. In fact several studies of recent migrants to urban areas find that women adjust far better to the demand for skills in cities than men. The bulk of the labour demand in the urban informal sector is for housework and hospitality related jobs. Nannies in Gurgaon earn Rs. 40,000 a month, the same as recently graduated engineers. Women are better equipped to meet this demand than men, who tend to slide down the labour profile, from being proud farmers to become daily wagers in manual unskilled muscle-power related work or fall into petty crime. A woman with a steady income is consequently not to be sniffed at.

Even amongst the rich, women today play an important role in salving the stomach. Take for example the case of club memberships in the megacities. With a limited number of “legacy” clubs- leftovers from the colonial past- and growing demand, membership of a decent club has become a problem, even if you don’t have Groucho Marx’s hang up of not wanting to be a member of a club which would accept him. Most clubs however do have fast track arrangements for women memberships. A spouse, with a membership in these “legacy” clubs, is consequently a fairly efficient way of ensuring perpetual access to decent food and booze at ridiculously low prices, relative to the extravagantly generous environs.

Our PM Modi is already 64 and so must sympathise with the problems of his age cohorts. We know that this makes little electoral sense for him. After all, less than 5% of our population is above 64. Far better to cater to the 80% who are below 44. But here four things the PM should think about.

First, caring for the elderly is no longer a family effort. Nuclear families and migration make that impossible. Catering to the health needs of the old is a completely different specialization than looking after working adults. India is hopelessly deficient in this skill and public health institutions do not even waste their time on this “marginal” activity. The one thing the PM should remember is that social norms are built around how the elderly are treated. Even elephants will remain with a sick and elderly herd member, providing comfort and company. Should India not have a similar publicly funded HealthLine for the elderly?

Second, better nutrition, awareness and altered social expectations have enhanced longevity. The fond, greying, father marrying off his daughters and setting off for pilgrimage; his worldly duties done, is a Bollywood caricature, observed more in the breach, than in real life. India does not use its elderly purposefully. We tend to look at the “jobs and employment” pie as fixed. An elderly person occupying a job is seen as one job less for the young. This age based discrimination violates the fundamental principle of human rights and the economic principle of merit-based employment. Callow youth can be a disadvantage in many jobs and experience coupled with reasonable health, an economic virtue. A society which seeks to provide productive employment to the “specially enabled” cannot logically discard the elderly from its work force.

Third, the PM and FM Jaitley should regulate our private Medical Insurance Industry better. These companies blatantly cherry pick medical cover for those above 60 and make it available only to those who can either fudge their heath reports or to the few who enjoy “perfect health”, even after 60 and that too at astronomical premia.  There is no insurance cover available for those who have the typical “old age” health concerns of hypertension; diabetes and other assorted pains and aches. The pity is that there is significant demand from those who are more than 64 and can pay handsome premia but who want to insure against all possible “old age health risks and care”. Surely there is a business opportunity there which Insurance Regulatory and Development Authority (IRDA) should nudge the private health insurers to exploit as a desirable private good?

Lastly, FM Jaitley was recently reported as supporting the reduction of interest rates for kick starting the stagnant realty sector. Whilst, setting interest rates should be strictly in the purview of the RBI Governor, could Mr. Jaitley please think about extending tax and interest rate benefits to “retirement homes” of which, yet again, the supply is far less than the demand, across all price segments. Caring for the old and giving them a good send-off when they die, is a nit-picky, long term business investment and does not lend itself to the typical realty practice of theme of doubling your money in two years by hiving off an leveraged assett. Big, established, realty and hospitality companies, with a reputation to protect, can only be attracted into the retirement home segment if the deal is sweetened by government.

Hopefully the FM will include this “public benefit” in the 2015 budget. This writer is waiting to sign up for one such “home” now that I am 62.

police

(photo credit: http://www.thehindu.com)

Liberals and human rights advocates are a queasy bunch with no stomach to face up to the honest truth that effective governance implies a better informed and more intrusive government.

Light handed regulation” is the mantra of neo-liberal economics. But such regulation fails unless the regulator can monitor compliance with the rule of law by acquiring more and better, real time data on individuals and business entities.

Take the simple case of ensuring that shop workers are not exploited by owners and get at least one weekly holiday and enjoy restricted, daily, working hours. The “heavy handed” manner this is done is by shutting entire markets down on a specific day and prescribing shop opening and closing hours. The “light handed regulation” option could give shop keepers the liberty to set their own working hours. But to protect workers’ rights, effectively, it would need to generate a real time centrally networked, database of cash transactions- to validate shop working hours and a bio-metric clock- doing the same for employees working hours.  How does this square with the Liberal preference for “small government”?

Consider the case of self-assessment by tax payers. Regulation cannot get lighter than that. But to be effective, it has to be coupled with predictable and significant sanctions against deviant behavior. This means generating a database, on each tax payer, comprising an effective audit trail of all financial transactions and a tax agent randomly trawling this data, using “red flags”, so that deviance can be detected and brought to trial.

Tracking phone call, social media, emails and physical movement of individuals all becomes part of “Big data” which needs to be captured to provide the information required for credible sanctions systems. This is especially necessary, in democracies like India, where all sanctions are appealable and hence must be backed by “judicial quality evidence”.

“Big data” does have unintended but positive outcomes. The clamour, amongst the elite,  for the status symbol of publicly provided, security guards can be greatly reduced, if “security” comes with a GPS enabled, real time, tracking of location and real time reporting, via a smart phone app, of whom the VIP is meeting as a routine procedure.

No Liberal would object to the installation of CCTV cameras where they live, to protect their lives and property. But this comes with the potential downside of intrusive government. Taking cameras closer to people generates “Big data”. Its value lies in the ability to constantly trawl it to prevent crime (or even natural disasters), by identifying “hot spots” and patterns of criminal behavior and to bring criminals to book. Constraints on individual privacy are inevitable. Also there is bound to be misuse, despite checks to prevent gaming; for example the illegal use of individual information, acquired for security purposes, to black mail individuals. There will always be “insiders”, who could trade off any inherent inefficiency in keeping “big data” secure.

Is Edward Snowden a traitor or an American hero? His country folk were divided on the fine point of the “tipping point” between an “insiders” duty to guard official secrets versus the citizens moral responsibility to fight “Big Government”. There is a stark choice between ensuring security and preserving individual freedom. Too much individual freedom (say the right to religious beliefs which may even bar or restrict social integration, as is available in India and the US) can be as negative as too little individual freedom (China, Russia) in the name of national security.

But the flash points where security collides with individual freedom are more often due to “entrenched privilege” being threatened, than the high ground of morality being squashed.  Indian Liberals, who willingly submit to racial profiling and body searches at US and UK immigration, are outraged if an Indian security personnel, so much as dares to question them about what they are carrying in their bags, whilst boarding domestic flights, trains or buses.

Of course most Liberals in India belong to the elite. For them the State and its officials are only to be suffered, not recognised. There is an implicit sense of “entitlement” amongst the elite, who expect to be “served”, even if they dodge their taxes. Much of this springs from the unfortunate spectacle, of fawning subordinates around a preening public official, in much the same manner, as courtiers may have supplicated before our erstwhile Maharajas.

Liberals mourn that there is too little reliance on “trust” and too much emphasis on “surveillance”. But isn’t it ironic, that in the US: the birth place of Liberal policy practices and “small government”, it is “legally enforceable contracts”, which are the life blood of social and even personal interaction. A society governed by “contracts” by definition, is a society which does trust anyone, including the State, to do the right thing.

It is the same with the theory of incentives. The fundamental basis of neo-liberal policy practice is to embed the correct “incentives” in regulations, which then elicit the desired behavioural outcomes associated with the desired results. The provision of artificially embedded incentives, as neo-Liberal policy practice seeks to provide, inevitably come with intrusive metrics of measurement because what is not measured can neither be sanctioned nor rewarded. Regulatory intrusion, big data and “big” government are the inevitable consequence.

In direct contrast, are systems which rely on “belief”, “religion” or “spirituality”. These seek to bind people to a higher morality and blind them to the needs of individuality. Communism is one such “belief” which relies on the morality of the State and not contracts. Of course, it also comes with high levels of State control and intrusive oversight by a bureaucracy of the faithful, exactly as any other religion.

The Liberal position becomes even more laughable when we consider the available “best practice” on poverty reduction; a key objective for developing economies. “Tightly targeted, cash transfers” to the poor is the latest mantra. But these have to be preceded by identification of the poor; close monitoring of their locations and current incomes. In fact, what this requires is a national database of the entire population of India so that we can segregate the poor from the non- poor; citizens from non-citizens and similarly along any other targeted classification (gender, caste, religion or spatial location). 25% of the Indian population is migratory. This requires “spatial location” enabled assessment of their current economic status since poverty levels vary across states. You can’t get bigger data than all these demographics on 1.25 billion people.

The loss of individual privacy is embedded in the logic of extensive digitization of information. Think of the benefits from being able to identify people uniquely; record their demographics (age, marital status, gender, health and education metrics) securely; store transactions securely and access the stored information instantly. If it is alright for the government to be intrusive versus the poor, why is it so horrible for the “privacy” of the rest to be invaded? The much touted right of the individual “to be forgotten” can exist versus other individuals (though how even that could be enforced is not known) but it must never exist against the State.

“Big data” and a better informed government are here to stay. Liberals should wake up and smell the coffee.

ashraf

(photocredit: dnaindia.com)

It is unlikely that the national coalition in Afghanistan, which the US has stitched together, will last. More likely, the Unity Government provides a convenient cover of artificially generated “peace” allowing the US to withdraw, with “honour”, from the “graveyard of invaders”.

Once it leaves, the US shall make all efforts to secure a working relationship between the Taliban and the Afghan Unity Government. The US has already started distinguishing between the palatable, if misguided, Taliban, with whom business is possible and the utterly untouchable Al Qaida.

The new Afghan President, Ashraf Ghani seems comfortable with cutting a deal with the Taliban to include them too, in the fullness of time, in the power sharing structure. This approach also fits well with the traditional “big tent” approach of the US which also includes decentralizing power and thereby enhancing inclusion of hitherto marginalized segments. This option is worth a try, but is likely to fail just as surely, as the existing Unity Government.

Mr. Ghani is a knowledgeable, well-meaning and committed, if somewhat unbending, politician-international bureaucrat-academic. His main problem will be similar to what Manmohan Singh faced in India. How does a personally honest leader turn a blind eye to massive corruption and yet retain control over the government?

Mr. Ghani says his first priority will be to make it difficult to be corrupt by improving governance systems. The conundrum is that “power sharing”, almost by definition, means allowing warlords a long rope. Manmohan Singh called it the “dharma of coalition politics”. Once executive control is loosened to avoid the personal association of the leader with the expectedly bad decisions of the warlords, stopping the system from unravelling is tough.

In his last political assignment (2002 to 2004) Mr. Ghani was Finance Minister in Afghanistan and was very successful in introducing some order and economic sense into governance. The parallels are ominous. Mr. Singh too was outstanding as Finance Minister in India before he got the top job. It doesn’t end there. Like Manmohan Singh in 1999, Ashraf Ghani lost his first election in 2009. The question then is: will Mr. Ghani be Afghanistan’s Manmohan Singh; a good man heading a bad outfit? Only time can tell.

For India, the current situation is impossible. There is little to distinguish the Pashtun dominated Taliban from Pakistan’s military de-facto rulers. This is why, traditionally, India cozied up, during the anti-Soviet war in Afghanistan (1980s), to the “Northern Alliance” comprising the Hazara, who are determinedly opposed to Pashtun rule; the Tajiks who are today represented by Abdullah Abdullah, the number two leader in the Unity Government and Abdul Rashid Dostum, the indomitable Uzbek leader- who is currently allied with the Pashtun, President-Ashraf Ghani.

Any talk of an Afghan government, propped up by the Taliban, cannot be music to either India’s ears or acceptable to Abdullah Abdullah. This is especially so because China does business with Pakistan quite happily and is unlikely to have any qualms about doing the same with the Taliban. In this calculus any gain for the Taliban, is a gain for Pakistan and for China and a loss for India.

In the shadows is Putin’s Great Bear which is constantly sniffing about for a pot of honey in the great game. India and the Soviets have a long association of friendship which can become the basis for a coalition of the “underdogs” in Afghanistan. India is also friends with Iran, which it uses to trade with Afghanistan. The Russia, Iran, India (RII) axis will become India’s fallback option if the US continues to duck its responsibilities in South Asia. The result will be the “RII axis” playing “spoilers’ with consequential instability and strife in Afghanistan.

The silver lining is that India’s PM Modi has already signaled a preference for a more positive strategy of alignment with the set of countries which represent the shared ideals of democracy, markets and private sector led equitable growth. This approach advocates caution and restraint in committing our scarce resources to secure our near-abroad, whilst we still face enormous challenges of dealing with domestic infrastructure and poverty.

PM Modi stressed during his recent US visit that there can be no “good terror (read Taliban) and bad terror (read IS and Al Qaida). The networks of terror and the resources available to them are fungible and transmute constantly to escape identification. In simple language, a Leopard cannot change its spots. The only option is to isolate and confine it once it turns man eater.

What is unknown is whether President Obama has his ears tuned to South Asia or will the IS and the Middle East pre-occupations distract him completely. Will he be forced to soften his currently anti-Sunni terror stance by turning a blind eye to the Sunni-Taliban in Afghanistan? Great powers have to choose their battles and prioritise across options.

If the choice is between completely browning-off Saudi Arabia and its cohort of Sunni Middle Eastern countries by pursuing Sunni-Terror doggedly, on the one hand and worrying about how this approach could impact India’s interest, we know which way he will jump; and who can blame him for that.

If India is actually part of the “big boys club” we must mobilize pressure from constituencies who have similar interests in containing terror to force the US to not “step off the plate”. If this fails, as it probably shall, the option is to build a coalition against terror with China, which is similarly affected by it. Testing times loom for India’s diplomats.

multifaith

(photo credit: http://www.en.wikipdia.com)

By polishing shoes at Bangla Sahib Gurudwara, in New Delhi, as “Kar Seva,” the refreshingly ordinary Lt. Governor, Najeeb Jung and his wife, have raised the bar for people in high public office.

A “Kar Sevak” is one who volunteers to provide pro-bono service for a religious cause. That a deeply religious Muslim couple should choose to do so in a Sikh gurudwara, showcases the best practice role model for our plural society.

Critics will dismiss it as mere tokenism. But in a country starved of demonstrated public consciousness amongst the high and mighty, even tokenism is helpful in building bridges across our social divides.

In a similar vein, PM Modi launched his Swachh Bharat campaign by sweeping a poor colony of the kind that the Mahatma used to prefer to live in on his travels, to show solidarity with the Dalits; again tokenism of course but of the right kind.

Pseudo secularists of course would prefer to build a more religiously sanitized society where religion becomes purely a personal affair and the State keeps away consciously from religious events.

To expect this to happen in the near future is “pie in the sky”. Indians of all denominations are a deeply religious people. Even those, like the “Dalits” who were once doomed to be the dregs of society, under the orthodox Hindu caste system, rebelled not by abandoning religion altogether but instead chose to became Christian in earlier times, inspired by the egalitarian society of the Christian faith. More recently they choose to become Buddhists, led by Bhenji (Sister) Mayawati of Uttar Pradesh.

Religion is here with us to stay, just like man’s selfish nature or inequality. The real issue is how the downside of a deeply religious society can be minimized. As in matters economic, a vibrant society requires the push and pull of competing religions for people to choose from. Reform and change is often sparked by enough people “voting with their feet” to cross over to an alternative group or religion, whose sentiment resonates better with their current aspirations. If this was not so, religions would atrophy and become preserves of elites preying on the ordinary people. This, in fact, is the problem with theocratic states. There is little room or opportunity, for reforming the State religion. The only real choice is to exit the country.

Clearly a plural, traditional country like India cannot offer such blunt choices to its citizens. Hinduism is a fairly elastic religion and can fit all manner of beliefs. This is why, despite 700 years of Theocratic State rule, till 1947, by non-Hindu, monarchic or colonial governments, Hinduism has flourished even in the North and the East where these theocratic rulers were most firmly in power. This is also illustrative of the essentially extractive objectives of these theocratic government. So long as people paid their taxes and did not expect to share in political power, their religion mattered not a whit to the non-Hindu rulers.

It is odd, therefore, that in modern, democratic India, Hinduism should be perceived to be under threat. The real truth is that being the dominant religion in India, Hindu leaders have not felt the bite of competition to keep them on their toes.

If Christian missionaries could expand their fold by providing public services (education, health and social equality) what has stopped Hindu religious leaders from being similarly socially active? If Madrassas can attract poor Muslim kids with the promise of a free education and care why are Hindu institutions not able to compete and retain their market share of adherents?

An areligious State is not anti-Hindu. Similarly a State which does not recognize the deep reverence of Indians for religion can only be blind. Till now we have sought to covertly protect one religion or the other whilst pretending that in State matters religion does not exist. This is hypocritical. Let us confront the issue frontally.

Most Indians would want a State which deals with religions in an even handed manner. Here are five  ground rules we could establish to illustrate that the State has no religion.

First, establishment of new religious shrines should require the consent of the entire community resident around an area and must not be undertaken on public land. If people want a new Temple, Gurudwara, Mosque or Church, they must find the land for it privately and do so in a manner which does not create opposition.

Second, all those entitled to fly the India flag officially, must be required to participate in religious occasions in their local areas to give visible proof that the State respects all religions. Whilst in such high public office, officials must eschew public demonstration of their private religious faith. People judge intentions by how a leader behaves not by the rhetoric. Leaders have to be areligious whilst in public office if the State is to be benign to all religions. Being areligious means being accessible to all religions, including for their key events.

Third, the State must intervene forcefully to protect and facilitate inter-faith marriages, so long as they are legal, including being based on choice. The current trend is highly regressive where the Police act illegally to dissuade such marriages. Choice is the corner stone of liberty so long as it is exercised within the boundaries of the rule of law. By subverting this ideal we are subverting the very basis of democracy.

Four, affirmative action by the State (reservations) must be available to all religions on a common economic and social basis. So long as the basis of affirmative action is based on belonging to Scheduled Tribes and Castes or Other Backward Castes, they must not face the prospect of losing the benefits of affirmative action on opting for an alternative religion.

Five, the convention of rotating the positions of formal power (President, Governors, nominated members of Parliament) across all the religions is a fine, albeit symbolic gesture. Similarly, maintaining proportionate representation of all religions in such formal positions is an excellent convention which should be upheld.

No one knows better than PM Modi the power of symbolism. He is the symbol of New India: aspirational, confident, eager for change and enabled to compete in the World. In our race to “catch-up” with the World we must not repeat the mistake that China made of a black and white choice between tradition and modernity.

The “Big Mac index” only works if there is sufficient diversity in the World. If all countries were clones of each other it would not be needed. Innovation is the preserve of alternative minds and evolution the consequence of differentiated genes.  Let us preserve and grow both in India. More power to the elbows of “cross-religious Kar Sevaks”.

Obama Modi

(photo credit: article.wn.com)

Charismatic leaders can mould crowds like putty. Bill Clinton’s March, 2000 “US and India are natural allies” address to the Indian Parliament; Barrack Obama’s University of Cairo “New Beginnings” address to the Muslim world, June, 2009 unleashed a Tsunami of optimism and “feel good”. In much the same way, PM Modi-the man with an agenda of Big things for Small people- in his recent Madison Square address, won over the hearts and minds of a “massive” (by US standards) crowd of 18,000 Indian-Americans in New York and an even larger audience back home in India.

For many Indian expatriates, including us in India, it is a relief to have a Prime Minister who radiates strength, speaks extempore and from his heart. It also helps that he is a consummate performer, who draws energy from the crowd and returns it to them magnified many-fold.

Those looking for suave wit and a sophisticated exposition of geo-political gyan were sorely disappointed. Modi was deliberately folksy and simplistic. He capitalized on his strengths magnificently, just as Indira Gandhi, the last Indian PM with an international stature, used to do more than three decades ago.

Of course, it helps if one can live on water endlessly and still have the physical ability and mind space to go through a deliberately, whirl-wind program. By doing so Modi has become a live bill-board for the low carbon footprint potential of solar energy. His eschewing food altogether, through the trip, was akin to the Mahatma wandering through the London chill in his sparse loin cloth, protected only by the churning energy generator in his mind.

Till now the West has been wowed by India’s IT skills, thanks to our Silicon Valley diaspora. Next, we are likely to be branded as Yoga maestros all and expected to perform never-before feats of physical endurance.

But it was not all plain sailing.

Three areas where plain speaking-PM Modi’s forte, would have helped, are listed below.

First, what exactly is our stand on joining the fight against Islamic Terror and the linked approach to Afghanistan? The message coming through till now is fuzzy. It seems India is likely to carry on in much the same muddled way we have done till now; remaining visible in Afghanistan, but primarily as well wishers, bringing development to the people of Afghanistan. This is clearly dissatisfactory and unrealistic in the context of the impeding US withdrawal and the likely security turmoil courtesy the unresolved political contestation between the Ashraf Ghani and Abudullah Abdullah groups. National governments are prone to fail. Similar recent experiments in Nepal, Zimbabwe and South Sudan illustrate the illusive nature of such options for “externally enforced” stability in the face of unresolved local contestation.

Our interest lies in clearly establishing that we view the Taliban, the Pakistan Army and Militant Kashmiri jihadi groups as part of the same set of Islamic Terrorists, which are a direct and existential threat to us and our secular, plural democratic system. We must be willing and able to take the most effective action in our near abroad to crush Islamic Terror. But where Islamic Terror is not a direct threat to us (as for example the ISIL) whilst any UN endorsed initiative will have our support, we do not have the resources to join a plurilateral initiative against global terror. This is strictly for the big boys; the US, its NATO allies and China.

PM Modi has been at pains to explain that on this trip that whilst he has been trying for more than the last two decades to get the US to recognize the global consequences of Islamic terror, they took cognizance only after 9/11, when it hurt them directly. The fact is we must be similarly discriminating in unbundling Islamic Terror into immediate and distant threats and not be distracted by the enormity of global threats and ignore focusing on managing immediate threats, closer home.

Plain speaking about our threat perceptions, our limitations and our determination not to be cowed down by terror would have helped.

Second, the message on trade and investment needs to be distilled better. The economic opportunities in India are well known. The demographics; the steady economic growth and resultant demand and our democratic architecture.

Unfortunately most foreign investors live in the present. No international manager has a business perspective beyond a decade-even if they draw up beautiful thirty year perspectives. What big business looks for is leadership level facilitation to get their specific project up and running quickest with commercial and political risk minimized.

Tardy environmental clearances; tax opacity; poor infrastructure and most recently, the extended ambit of judicial review of contracts are big dampeners. Many of these constraints are institutional and require structural change, which is long term. What we need are near tern solutions, of the fire-fighting kind, to establish the enabling business environment. Selective but transparent tweaking of dilatory process is an obvious option but there are challenges even here.

At the leadership level, “successful tweaking of process” requires political credibility that the selective attention is in national interest and not another manifestation of crony capitalism. Consensus building between the executive and the judiciary of the acceptable envelop of “process tweaking”, in national interest, is key for retaining the credibility of the executive and the independence of the judiciary, whilst simultaneously ensuring that the judiciary does not get drawn into settling political scores.

PM Modi is best placed to manage the optics on this score. At the operational level, he will need the support of a highly skilled and empowered team of state government officials working with counterparts from the Union Government, to pilot the tweaking process towards accelerated launch of projects.

What should constitute the government’s decision matrix for determining the “hurdle rate” for projects to be eligible for tweaking the “way we do business”? In such circumstances it always helps to have narrow objectives. “Employment and poverty reduction”, both of which are urgent near term investment related goals, present themselves as excellent “filters” for evaluating and identifying proposals which merit the highest level of facilitation.

50 projects; 5 million jobs; US$15 billion investment can be the rolling target with automatic replenishment by new proposals as projects get launched. Unfortunately, we missed the opportunity to generate the frisson of excitement which the project based approach generates.

Third, plain speaking on our environmental and energy policy would have helped. It is clearly in India’s interest to clean its water bodies and rivers; reduce air pollution and reverse the denudation of forests and degradation of land. Degradation of these natural assets has immediate economic and social outcomes usually with adverse poverty consequences. It is the poor who are impacted negatively when water bodies and rivers become polluted because they use them directly for personal needs and business. The poor similarly suffer the most from atmospheric pollution because they are incapable of insulating themselves and their children, from such ambient pollution. Unregulated deforestation robs the poor of their eco-system and their livelihoods. Combating land degradation, like increased salinity often caused by unsustainable use of ground water and poorly managed large irrigation schemes, is a costly undertaking, which is often beyond the financial ability of the poor.

On energy our big concern is energy security. The use of coal is likely to remain a staple component of our energy profile. Similarly, more aggressive utilization of the hydro potential in India and in South Asia is an efficient option. Embedding passive energy efficiency building design is another significant option. Urbansiation levels are relatively low but there is a big stimulus in the offing under the PMs target of a house for all by 2022.

More generically, India is committed to technology choices which are congruent with our two, often conflicting, goals of reversing the degradation of natural resources whilst ensuring energy security. An increasing share of wind and solar energy is one such technology choice. Increasing the share of public transportation by railways relative to roads is another which the government is pursuing. But capping India’s carbon footprint at an unrealistic level is similar to capping food subsidy at historical prices which India has already rejected.

The mantra for plain speaking on the Indian strategy for managing terrorism; enlarging trade and safeguarding the environment is to rely on the simple rule of first reserving the fiscal and the physical space for the developing world to “catch up”, before providing breathing room for the developed world, who have abetted and often perpetrated all three global problems, by agreeing to hold them harmless.

“Class” in diplomacy

coffee

(photo credit: http://www.dreamstime.com)

“Diplomacy is not instant coffee” said the official spokesperson of the Ministry of External Affairs yesterday. He is right of course. If you are the “instant coffee” type,  you are unlikely to be invited to join the international high table.

This doesn’t mean though that, if our MEA mandarins switch from Coffee Board brew to private caches of Hacienda La Esmerelda (US$104 per lb.), the Chinese troops camping so brazenly at Chumar would vanish instantly. The diplomatic high table respects what you do at home not what you pretend to do when you are abroad or what you pretend to be, whilst mixing with the rich and mighty. “Class” is a social stamp affixed to your entire family, not just you, which sticks tighter than glue.

As in diplomacy, class at the individual level, is also increasingly about where you are going rather than where you have come from. The American dream best illustrates this change since the early part of the last century. “You can be what you want” so long as you have fire in the belly.

Ironically, the Soviets had the same ideology, but not the instruments. They ended up with a classless but skewed society where Party based patrimony and cronyism became more important than merit, tested by competition.

The Chinese corrected for this gap between ideology and practice and have prospered since 1979. The results are visible. One third of the people pulled out of poverty in the last decade by job creating growth, are Chinese. A classless “poor” society is becoming a classless “rich” society. To be sure this has resulted in growing inequality, but inequality is to growth, as wine is to cheese.

India has not been far behind in effecting a quiet social revolution with its unique brand of positive affirmation for the marginalized and merit based competitive entry for the excluded, into the heady domain of the powerful via public service jobs.  PM Modi is the best example that this policy has been reasonably satisfactory in giving entry points to make individuals upwardly mobile.

But as a nation, so long as 70% of our population is poorer than the admittedly blunt, international standard of US$2 per head per day (or more colorfully, poorer that the proverbial “Church Mouse”); so long as our external account is fragile and so long as our political parties don’t align, like magnetic strips, in a single direction with respect to foreign policy, we are doomed to remain mere “guests” at the high table. We may be thus honoured for our future potential, but we will continue to be subtly excluded from substantive current decisions, till we become paying members of the club of “classy” nations.

We are years from getting there. We are still grappling with the fundamentals of infrastructure development and growth. How to make PPPs work? How to integrate world class assets into a creaky frame? How to scale up manufacturing and join the international value chain? These are our current 101 concerns. We have targets for infrastructure: (1) A fast train to Arunachal Pradesh by November 2014- a riposte to President Xi’s rather heavy-handed assertion of brute power by making the Peoples Liberation Army troops pitch camp in a border area, which both China and Indian patrol, even whilst he himself was savouring the delights of an Indian welcome last week.  (2) Fuel supply issues to be sorted out to enhance capacity utilization in electricity generation. (3) Faster project clearances (4) Easier environmental clearances and so on.

But we have no targets as yet for poverty reduction. We spend more “intellectual” effort in arguing about the nominal base line for poverty than on getting people to cross the line and remain above it.

An alternative strategy, one advocated by Mahatma Gandhi, could have been to put poverty reduction foremost. Bullet trains, highways, better airports, more electricity may all be inputs in the log frame defining the sequential path to achieve this key strategic objective. But why is the log frame and the thinking not shared with the public? Do we have a “poverty filter” in place which can help government rigorously evaluate and rank alternative investments for their poverty reduction potential? If we do not, then how can we be sure that our scarce capital resources are being allocated and spent well aligned to the principle of “value for money”?

Diplomacy is really about getting better deals with international partners that would be available automatically given the international market. Our external business strategy should be similar to that followed by the Dalai Lama and earlier by the Mahatma. This would be the 3H strategy characterized by Humility, Humanity and Holding Harmless.

Humility is the ultimate signal of strength. The Mahatma, clad in his spare loin cloth, demonstrated this whilst winning over the world with his message and his thoughts.

Humanity is of the essence to Indian philosophy. Given the extent of poverty and the depth of inequality, the relatively low level of social disorder is striking. The origins of this social-cohesion lie in an essential Rousseauian mind space, which views human nature as essentially benign; which accepts the dirty underbelly of humanity-greed, ego and excess, as human frailties; which accepts that the world is an unfair place; that differences in resource endowments and the standard of living are natural but draws comfort from the belief that there are countervailing social forces, which bring about social justice in the long term. This philosophy was recently well applied to our external relations by Minister Sushma Swaraj in a suave but home-spun manner “There are no full stops in Diplomacy”

Holding Harmless is the classic strategy of a democratic, heterogeneous, soft state and segmented economy like ours. Progress and reform yes, but not at the cost of unbearable pain even for significant minorities and always aligned to the principle of “None Left Behind”.  In external affairs just as we seek differentiated responsibilities to allow us to “catch up” with the rest of the World so must we recognize the special needs of others who are worse off-particularly select countries in South Asia.

How does 4H translate into practice?

First, we must learn to observe, listen, absorb and adapt from the experience of others rather than spend our time, preening and preaching about our practices and policies overseas. Our ways of doing things are contextually good, primarily for ourselves. They do not become better just by marketing them aggressively overseas. Nor do we need overseas endorsement of our ideas and policies.

Second, our officers overseas must resemble tradespeople; annoyingly nosy; curious; people-persons; seeking out deals in national interest, rather than haughty, remote representatives of the Indian State. False pride can be our fall.

Third, PM Modi is right in declaring “make in India” as his leitmotif. Indian big business should heed this call. There is nothing edifying about earning money in India but investing it overseas. It is neither a coup for big Indian Business nor for the government. Rather, it is a cop-out for the country. It illustrates that Indian business has more faith in foreign business environments and opportunities that in those available in India. Such transactions may also be suspect due to the opportunities they provide for “havala” (extra-legal export of either illegal earnings in India, or to evade income tax through dodgy invoicing of imports and exports). The national duty of Indian business is to leverage overseas funds for investment in India.

Fourth, before we wade into securing the World against terror; or showcasing India’s “naval might” it would be prudent to spend a decade on building up our military assets; modernizing our equipment; re-stocking our armories and re-skilling our personnel. Indian peace keeping forces abroad do us proud but that is because of their personal valour and fortitude. They do so despite shoddy personal equipment and arms. We have too many security related issues to resolve at home, to have the mind space or the financial muscle to police the world.

“Class” as a social identity is increasingly an outdated concept everywhere except within the government where such Colonial traditions survive. We must work to restructure government to eliminate class based identities. Baby steps in that direction could be abolishing separate toilets for senior government officers in government buildings. Staff lunch gatherings in offices, at least twice a week is another way to socially integrate senior officers with their junior colleagues. Switching over to digital offices systems and denuding officers of personal secretaries and messengers, is another. We must work hard to replace the steaming Coffee Board brew, currently served by a waiter in colonial livery, with a plebian coffee dispenser at the end of each corridor, although stocked with- what else but Esmerelda?

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.

 

 

 

 

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