governance, political economy, institutional development and economic regulation

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Success attracts its own supporters. Narendra bhai epitomizes the success of merit and dedication. It is not surprising therefore, that supporters, including erstwhile critics, both national and international, are thronging his doorstep for a darshan.

There are visible signs that the public adulation has not gone to his head. He has shot down an attempt to curry favor with him by BJP governments, by revising the textbooks with a chapter devoted to him as a role model. This is very welcome and good news.

But a big governance test will confront him over the next two months.

Can he support the Finance Minister deliver a “realistic” budget which does not fudge either revenue receipt or expenditure- two favourite tricks of budget managers to fool the public, adopted by the UPA2 in its last budget? Second, can he reduce the fiscal deficit below the level of 4.9% in 2012-13; the last “normal year” data available. The Fiscal Responsibility and Budget Management Act 2003 targeted a maximum Fiscal Deficit level of 2% by 2006. We never achieved that level. The best was 2.7% in 2007.  A plan to reach close to this over the next 3 years, by reducing it by 0.5% point every year is sorely needed.

Growth fundamentalists will shout that this is retrogressive. His advisors eager to “kick start” the economy and show dramatic results will advise him to throw fiscal caution to the winds and spend his way out of the economic downturn. But none of the growth fundamentalists can guarantee that “kick starting” growth by public spending actually adds jobs for the poor. Indeed the evidence is adding up to quite the reverse conclusion. Public spending windfalls (as in the Common Wealth Games), line the pockets of the top 1% of Indians, whose business margins soar and of shareholders, whose equity capital appreciates (on which there is no tax at all!). But the impact on jobs is likely to be lagged or minimal.

Narendra bhai’s best bet is to listen to his RBI Governor who is the protector of the poor and the salaried middle class, against the ravages of inflation. The PM should let the RBI Governor set inflation management targets and measures, without restraint. This approach is not sexy, stodgy and reminiscent of IMF style fiscal fundamentalism.

But the short term strategy of boosting the stock market and growth numbers through massive public spending, would be dangerously negligent for an economy, like India, where over 60% of the people are poor, unskilled and live mostly in rural areas and are unable to access jobs in the market economy. For 40% of the people living in urban areas, who are poor, inflation is a bigger calamity, because wages are stickier than prices.

Unearthing black money is being considered as a revenue earning measure, which could painlessly increase the spending power of the government. It also sounds like a “win-win” solution since it responds to the high moral objectives of good governance.

But Narendra bhai, must consider that, Black Money is the lubricant, which keeps the economy ticking today. There are more than 300,000 new, unsold flats clogging the inventory of builders and investors because growth prospects are uncertain. Much of the real estate boom was driven by Black Money fueled speculation, betting on high growth to keep the Ponzi scheme going. But the boom in construction activities did create jobs. A war on black money will directly impact any revival of the listless real-estate market, the economy and jobs. Timing is everything in successful governance reforms. Black money has many negative consequences. But the time to become like Denmark is in a boom, not during a bust.

There are no short cuts to fiscal stability. Cutting back on the governments wasteful recurrent expenditure (which comprises 80% of total expenditure); enlarging the tax base and better tax collection are key priorities.

In this context, good governance, would dictate that tough, unpopular decisions need to feed into the 2014-15 budget:

(1)    Target a real reduction in revenue (current) expenditure of 10% over the previous year. Over 50% of the current expenditure comprises interest payments and subsidies. Salaries account for only 8%. As a result, the wage bill is rarely targeted. But just by restructuring Railways into a corporation and the Postal Service into a bank and a corporation, nearly 50% of the wage bill can be taken off the public payroll. Other benefits from corporatization would also accrue.  

(2)    A majority of central government officials, including in the ministries of coal, power, steel, mines, oil and gas, chemical, fertilizers, civil aviation and telecom spend their time, second guessing, remotely managing or monitoring Public Sector Enterprises. This is a wholly unnecessary job. Transfer the lot of them to the concerned PSE. This will automatically reduce the size of most ministries. Appoint professionals to the Boards of these PSEs, instead of the “shoo-ins” we have today. PSEs are not the “jagirs” of the concerned administrative ministry. “Shoo-ins” are popular today, as Directors of PSEs, because the concerned Minister and the PSE management are comfortable with them. But they do nothing for improving the efficiency of the PSEs.

(3)    A second, large chunk of central government employees spend their time administering development schemes implemented by the state governments, but funded either wholly or partly. by the center (central sector schemes). These are wasteful tasks. Hand the task of monitoring such schemes over to NGOs. Send the concerned ministry officials to these NGOs on deputation and get them off the government’s payroll.

(4)    Cut back the long chain of command in Ministries. Today a file passes through at least five levels of scrutiny (i) Section Officer(ii)Under Secretary(iii) Deputy Secretary-Director(iv) Additional Secy.-Special Secy.(v) Secretary. This is way too long. The Secretary should be at most the third level dealing with a file and not the fifth.

(5)    Filter all incomplete and new projects for their private employment and poverty reduction potential. Fund only the ones with the best “social and economic returns” and review what to do with the “politically sensitive” but wasteful, other projects. Bridges to nowhere and empty but beautifully carpeted roads, are “pork”, not development.

(6)    Finally, target fitting the “core” ministries (External Affairs, Defence, Home, Finance, Power, Coal, Mines, Transport, Agriculture, Industrial and Urban Development, Social welfare and Women and Child development), into the space available in the glorious North and South Blocks, which was meant for them. Make space for them, by shifting the PMO into the Rashtrapati Bhawan complex, which is conspicuously vacant. Lease the vacated Bhawans, along Rajpath, to the private sector to earn additional revenue. This will also spare us the drab view of Soviet era, building blocks.

This is the nit-picky governance agenda which the UPA never attempted. A bloated central government, with lots of fingers pointing at each other, is not compatible with Narendra bhai’s ambition and our expectation of effective governance.

Achieving the Fiscal Deficit target for 2014-15 of 0.5% point below the 4.9% actual deficit in 2013-14 by reducing the current expenditure of the central government, is the PMs second test in governance.  

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Comments on: "PM Modi’s second governance test" (3)

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  2. […] PM Modi’s second governance test […]

  3. irvinder said:

    The point regarding cutting fiscal deficit is critical as inflation is a tax on the weakest.

    However an attack on the black economy is welcome and it will be good if real estate prices fall or stop growing. The high land prices in the country contribute to making the economy non competitive.

    The points regarding privatising railways, the postal department etc can unleash huge productivity gains.

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