governance, political economy, institutional development and economic regulation

Archive for December, 2014

Auld Lang Syne

New Year

The Scots are a practical people. What’s done is done and best forgot albeit with a tipple. If only we Indian’s were as straight thinking, life would be easier. Why waste time worrying about the past when you have a lifetime ahead of you.

Of course Historians hate this approach since it does them out of butter and bread. Economists love it because memory loss ensures no one can identify how many times they got it wrong in the past.

As we head into 2015 for India it is most certainly time to forget. PM Modi has initiated a dual agenda. One which encourages us to forget our past cynicism and pessimism, dream big and work hard to realize the dream. The other is an agenda which cuts deeply at the strings which still tie us to the past; an immediate past of farcical socialism; a recent past of colonial subjugation and a more distant past of foreign invasions.

But it is difficult to forget selectively. The modern mind is so stressed and overloaded that blunt instructions work best. The “forget the past” strategy risks deleting the entire cache of history we have to our credit.

India is a composite of everything which has happened in the last 5000 years – some of it is fact and a lot is legend, myth and fables. Communist China adopted the “forget the past” strategy to forge a new national consciousness. The question is now being asked what is it all about really as China descends from the clouds of collective achievement to the reality of slowing growth, civil stress, corruption, mis-governance and the conundrum of choosing between discipline – the “old economy” driver and innovation – the basis for growth in an open economy.

But forgetting selectively has its problems. The mind is free to roam and no one can prescribe what people will remember and what they will forget. This is especially tricky in relatively new and heterogeneous countries like India where groups have a past of antagonism. Best then to forget wholesale and move on via a Truth and Reconciliation process.

There is some indication this is happening. The likely PDP-BJP link up in Kashmir to form the new government is the most recent example where pragmatism is trumping ideology and past political battles.

The warming overtones in the relationship between PM Modi and President Obama on the one hand and the warmth between him and President Putin are similar signs of putting the past behind us.

More of this bon homie would be visible domestically if the BJP recognizes that they have been voted into power for five years and their primary responsibility during this period is to deliver what they promised. Ensuring that they get another five years is a secondary goal and not the primary one. This is not merely rhetorical. Choices are being made every day between the two objectives. If the BJP chooses its longevity in office over delivery, how then would it be different from the “dynasties” it seeks to replace?

The good news is that the choice is simpler for the BJP than others. Voters perceive it as the party which delivers so that is the objective it should maximize. Of course in politics there is no guarantee of success. But following the “dharma” is at least as important as the results.

India is blessed. There can be no other explanation why we have remained a growing economy and a vibrant democracy when so many other countries have gone under. Much of this is because of the quality of our people and our institutions but a significant amount of credit must also be given to our leaders, present and past, all of whom did what they could in public interest.

So as the magic hour nears and 2014 fades into 2015 lets follow the Scots and fleetingly, remember old times and acquaintances, for we are nothing but a collage of everything they made us become.

PM Modi “let it be”

mother mary

PM Modi should consider listening to the “words of wisdom” in the famous 1970 Beatles hit –“Let it be”.

Of course in this cruel results centric world of ours, only those who get going fast and hard survive. But there are virtues also to sometimes take a call and just let things be.

Take for instance the manner in which BJP is keeping up the electoral rhetoric. Amit Shah the BJP President is everywhere exhorting voters in Bengali and Tamil to vote BJP. The adoption of “shock and awe” tactics- the use of such overpowering force that it leaves the enemy convinced that defeat is certain and thereby demoralizes them- is useful especially since the BJP is adept at using technology and has “Sangh boots” on the ground to realize this tactic in real life. Such tactics may work, but not against an extremely well organized and determined enemy- like the Afghans or Kejriwal.

In fact Kejriwal would welcome the adoption of the tactic in Delhi to magnify his underdog status and “David versus Goliath” effect. Ironically, in Delhi the BJP is painting Kejriwal as the “shock and awe” man with an Rs 100 crore election budget. Be that as it may but Kejriwal’s electoral base amongst the poor and the Muslims seems intact and he will give the BJP a rum fight.

The real question, is should PM Modi bother about Kejriwal? Some fights are best lost. After all India would lose its democratic plurality if every Indian state government from Kashmir to Kanyakumari became saffron-the BJP colours.

A ceaseless election rhetoric also has the downside that it does not allow the adversarial environment to cool down for the business of governance to commence. This the BJP can ill afford since it has built its election agenda around performance and shall be judged accordingly.

If Parliament cannot function harmoniously; if state governments get deadlocked in confrontation with the center, the development agenda, the BJP so desperately needs to implement, will remain just good intentions and plans.

The dilemma confronting the PM is starkly outlined by the Mid Term Economic Analysis 2014-15, the first document authored by the new Economics team in the Ministry of Finance, headed by Arvind Subramanian.

The Analysis notes that all through the period 2007 to 2010 it is private investment which led growth. It acknowledges that private investment has dried up. Corporates are deep in debt- partly due to their own greed in lapping up cheap debt because all through this period, inflation rates exceeded interest rates making it a no brainer to access debt- but also because investments have not resulted in revenues and remain locked in incomplete projects bedeviled by land unavailability; fuel shortages; contractual disputes; scams; and hold up in environmental approvals.

Rapid institutional reform (the underpinnings of good governance) could attract private investment for growth but the Analysis is starkly honest and pessimistic about the possibility of institutional reforms in the near term.  Apparently the PPP model is “broken” and cannot be fixed in the near term. Ergo the only available, albeit second best option, is to pump up public investment to compensate and hope to kick start private investments.

The efficacy of a public finance led growth option is not the topic of this post. The dangers are well known. No amount of public finance can fix a “broken” system. The more we rely on public finance led investment; national champions and a necessarily interventionist government; the deeper we slide into the morass of mega scams; gold plated projects; monopolies; tariff walls to “nurture” the consequential white elephants built using public finance and a further erosion of state credibility. This is exactly what the opposition wants to happen, so PM Modi should beware.

Political nirvana lies in sticking to the path the PM propounded when the country voted for him.

First, work doggedly to reform institutions in the near term. The near term is not as near as the next budget in February 2015, it is till end 2015 by when election fever will grip Bihar and then Uttar Pradesh. This can be done by building a team of selected state governments, the higher judiciary, Parliament and the trade unions all working to a minimalist institutional reform plan, which stops at causing unbearable (and uncompensated) pain to any one actor. That is the essence of democracy.

Second, PM Modi should rise above the metric of stock market numbers. What matters to him is an improvement in the lives of the average voter.  These are not people who live or die by what is happening on Dalal Street. Stick to the “micro economic” problem of making their lives better and here we have a problem. The ongoing deflation (reduction) in rural wages, as the Analysis maps, is not a desirable outcome for the poor, especially in an environment in which government servants are 100% inflation indexed.

But above all the PM has a political choice to make. Is it better for the BJP to continue to hog headlines via an adversarial electoral agenda or reserve the “shock and awe” effect for later in 2015 when preparations for Bihar and then Uttar Pradesh elections kick-in?

He would be well advised, in these troubled times, to “listen to Mother Mary and let it be”.

(This blog is dedicated to my Grand Nephew Angad Ahluwalia, age 6, whose favourite song is “Let it Be” and whose current ambition is to be a Lead Guitarist in a band.)

Get beyond the Lima “Lemon” to effective domestic climate governance

fossilfree

(photo credit: http://www.occup.now.com)

Climate change took the world by storm in 1995 –two decades ago in Berlin– with the 1997 Kyoto “club of doom” postulating devastation if carbon emissions- primarily from the use of fossil energy- were not reduced.

The previous such “natural resources” doomsday club of scientists was the “Club of Rome”, which famously predicted in 1972 that oil would run out in in their life time. Some of them may still be around to ponder the recent historic reduction in oil prices, courtesy new age shale-oil development in the US.

In between, as the global doomsday industry gained strength in 1994, it predicted the “next war” would be over water shortages. Peter Gliecks, Pacific Institute<www.worldwater.org> faithfully features a list of over 400 water related conflicts since 3000 BC of which 219 happened post 1992. But the list is underwhelming. It includes every conflict with a “water” hash tag in it, none of which are of grave significance.

Take the case of water hungry Egypt, which has not gone to war against the nine other Nile basin countries upstream. Instead it was torn apart by a war against its own despot, propped up by the army. A far more worthwhile endeavor but infinitely more difficult, especially since no one organizes meeting in glitzy South American capitals, over Pina Coladas, for people who are fighting their own tyrants. The brouhaha over water related conflicts seems oversold.

Climate change-science or voodoo

Some scientists, not too many though, hold that the Climate Change science and predictions of doom are similarly dodgy. To believe that a 2 degree Celsius temperature increase is a red line the world must not cross and that the way to do that is by reducing carbon emissions, is very much like an article of faith.

Lay persons, like me, unable to understand the science, are not inclined to pay for avoiding global warming. The average citizen reaches for her wallet only after triangulating dire scientific predictions with her own experience to validate the “scientific” view.

After all we see a volte-face by “science” almost daily, diluting the credibility of science to change human behavior. Take the changing scientific view on (a) the usefulness of eggs as a food (b) Marijuana as an injurious relaxant (c) the amount of fat we should ingest (d) the virtues of jogging (e) data security levels in the cloud and social media apps to name just a few. Science, of the public goods kind, loses credibility every day because it can be secretly manipulated to set self- serving international agendas.

I spend a fair amount of time in the Ranikhet-Almora area of the Kumaon hills (in the State of Uttrakhand, India). Over the last two decades, the prevailing sentiment about the state of the local environment, was of doom and despair – all ascribed to the inevitable consequences of global-warming. Apples, a staple harvest two decades ago, had stopped growing as the volume of snowfall declined and ceased altogether below around 7000 feet.

Call it coincidence, a miracle, or an exception which proves the rule, but over the last three years snow has returned after a gap of 15 years to Dhamas-Khunt village, situated at a height of only 5600 feet and this year it is 4 inches deep already. No one there will attend a global warming seminar today, trudging through the snow underfoot, unless they are paid to do so.

The rich are tech savvy and green

Global problems and prescriptions have merit of course, as does a consistent process of trying to optimize solutions. But it is hard to disentangle global slogans from genuine problems and even harder to assess solutions.

PM Indira Gandhi famously said in the 1972 Stockholm Conference that “poverty” is the biggest polluter. She was not quite right, but made her point tellingly. The Planet has been degraded by the rich as the Climate Change science illustrates. In fact it is the patience and resilience of the poor that has enabled the rich to free ride on their environmental passivity.

If everyone on this Planet consumed at least as much energy as the minimum per capita energy consumption in the rich world, we could already be in the midst of an ecological disaster.

Access to technology, is at the heart of both becoming rich and being able to be environmentally correct. Had the rich world been willing to bear the pain caused by their environment degrading, industrial success they could have junked older, polluting technology; rapidly replaced it with “clean” energy technologies and started using them domestically to provide the scale effect to drive down costs internationally.

Risk averse and rich, Germany junked Nuclear Energy post the Fukushima Nuclear disaster. But not-as-well-off France, next door, continues to rely on Nuclear power.

More importantly it is utopian to expect rich, foreign governments to behave differently from the rich citizens in our own country.

Walk the talk

The way ahead for India is to stop the perpetual, sequential, sabre rattling, whimpering and whining we do in international fora and derive false pride in having thus “led” the developing country agenda. Let us implement, domestically, the environmental governance regime we want to see internationally. We can do this by stopping “environmental free riding”.

Why not have a national “Environmental Sin Cess (ESC)”. Those with a yen for acronyms will not miss that ESC is the button you press on your keyboard when you have got your computer into a mess.

The ESC could be in the nature of a “user charge”, levied on the electricity consumed by high-end domestic consumers only so as to insulate business and the poor from any inflationary impact. A similar tax could be levied on the supply of petroleum products to states and 1 million plus cities, which have higher than the national average per capita consumption of petro products. Building in progressivity could distinguish between states consuming marginally more than the national average and those at the very top end. State level regulators would be expected to pass through the tax to the targeted consumers.

This cost disincentive for committing “environmental sin” could drive behavior change in consumers. Cynics would say higher taxes never stopped smoking or drinking. The difference is that unlike cigarettes or alcohol there are substitutes available for fossil fuel based services, albeit not as cheap nor as convenient; energy efficient transportation, lighting and climate control services or applications or those powered by green energy: riding on a bus instead of driving; cycling or walking rather than riding or driving; LED bulbs for lighting; movement and heat sensitive switches; solar electric cars, scooters and pumps; solar heaters and air conditioners.

The tax collected should be corralled in a special account to avoid it from being drained by government expense. It could be managed by a new, independent “Sustainable Energy Innovation Authority” to develop a slew of fossil energy substituting; saving; efficiency enhancing options: human energy based transportation (walk and cycle paths); motorized public transportation; electrification of railways; solar street lights; operational cost subsidy for innovative renewable energy suppliers; energy efficiency initiatives and life-line energy access for the poor.

FM Jaitley should consider this SMART option for the FY 2015-16 budget. Growth is down and demand needs to kick started. But whilst presenting the usual array of “economic revival instruments” it would be good to also provide for incentives to delink fossil energy consumption from economic growth.

That such incentives would not be a “freebie” but would be financed by a cess on relatively rich users of fossil energy, is not only fitting but aligned with the principle of equity. The honeymoon is over. The immediate elections have been won. Time to talk “tough love” now and walk the talk in the budget.

Gov. Rajan gets it wrong this time

Gov Rajan

(photo credit: economic times.com)

RBI Governor Raghuram Rajan got it horribly wrong when he amended PM Modi’s “make in India” program by adding a “make for India” byline in his FICCI address yesterday.

What on earth could he have meant? Was he implying that the domestic economy should be further insulated from foreign competition? That is the only way domestic industry can be induced to make only for India, rather than for the World, including India?

How does this “home centric” approach fit with his view, reiterated in the same FICCI event, that the economy needs to be more open. In an open economy business “makes” for markets worldwide because production and value chains are transnational and product standards, designs and prices converge across the globe squeezing out fat.

Indian industry did “make for India” pre the 1991 liberalization. The result was a small, fat big-business set; high prices; shortages and shoddy goods. The biggest achievement of liberalization is a convergence of product standards towards international levels because of import competition and the ample and ready availability of goods- except where government erroneously continues to believe that fixing maximum prices for goods and services can work. It does not, as we can see in electricity supply and now in drugs and pharma where shortages are resurfacing.

Exhorting Indian industry to restrict itself to the domestic market is an ominous sign of the export pessimism rampant in the pre-liberalisation period. Does this also mean that Governor Rajan will keep the INR unreasonably strong to keep imports (petroleum products) cheap at the expense of export competitiveness?
Surely the defence manufacturing we are initiating is not just meant for domestic consumption. Unless Indian armaments are in regular use in conflicts and wars internationally, how can we possibly be sure of their quality or get the “consumer” feedback for quality enhancement?

Maybe Rajan’s “rock star” status as an economic wizard got the better of him. After all, PM Modi’s penchant for acronyms and by-lines has now become national mania, rendering intelligible conversation impossible, littered as it now is, with 3AAA and 5Cs. But trying to best the PM can be fatal, even for an outstanding, independent regulator. Even the US President would look askance at the Fed. Chair speaking, out of turn, outside her circumscribed official ambit.

But on matters more related to his current charge, he got things right, as usual. In a downturn, especially with inefficient and wasteful government machinery, it is a better to leave income in the hands of the earner rather than transfer it to government via higher tax rates. The “income effect”, enhanced by the low inflation target of Gov. Rajan, induces consumers to spend and feeds into demand led private investments which is good for jobs and growth.

The conundrum, if tax rates are to be relaxed or if tax exemptions for savings enhanced, is how to balance the budget?

Here is a list of the “low hanging fruit” available.

First, our traditional expertise in going around with a begging bowl is best. PM Modi is prescient in aggressively seeking external grants and concessional funding from the word go. The challenge now is converting pledges into cash flows.

Second, ruthlessly cut revenue expenditure, particularly on general administration. This is a necessary “evil” to show that the government means business.

Third, our annual public investments are barely 12% of total expenditure. This requires stopping gold-plated construction and using the existing space better. Witness the new, palatial External Affairs Office complex in Delhi, which remains underused because it is far from the South Block-located-PMO. Anyone housed in the new office attracts the unwelcome tag of being farther from the powers-that-be than even the mother ministry.

Using the available space rationally, simply by squeezing government servants together can help. Today, senior officers occupy office rooms often much larger that the living room of their government allotted homes. Notice how even mid-level government officers do not work in “row cubicles”, as in private firms and there are no common-use spaces for work meetings. Every office is designed to accommodate a “durbar” suitable in size for the concerned officer – this is reminiscent of the hierarchy of “Princes”, established by the “Raj”, based on the number of guns fired in salute of a Prince.

Slashing perks like liberal use of office provided phones and cars and a cut on travel budgets are also necessary, albeit symbolic measures, for flagging the need for economy.

Fourth, more substantively, using the existing government investment in State Owned Enterprises (SOEs) more aggressively can help. For starters, increase the dividend payout ratio from 44% to 66%. This adds around Rs 25,000 crores to revenue – only 1.4% of the total budgetary resources – but sufficient to increase the central plan expenditure by a hefty 25%.

Higher payouts and consequential constrains on accessing internal resources will also force SOEs to become leaner and look for alternative PPP models for financing operations and investments. Listing more SOEs on the stock exchanges and launching an aggressive privatization program can leverage the economy; attract foreign and domestic private investment and create more fiscal room for Greenfield public investments.

Governor Rajan in right in predicting strained economic circumstances in the near term. But hiding behind the default option of producing only for our huge domestic market and hapless domestic customers, is not the answer – nor is tight market segmentation between the domestic and overseas markets possible. God save us from anyone advocating a back-to-the-future strategy of turning resurgent India into a fortress.

Give Us Energy Mr. Putin

coalfire

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

India has negligible resources of oil and gas in the context of our future needs and from the perspective of the currently available extraction technology. Oil markets are liquid and sufficiently deep not to worry about oil availability so long as one has the USD to purchase it with. Oil, gas and petroleum product imports account for around one half of our exports. This could be worrisome in an environment of export pessimism. But expectations of enhanced competitiveness do not align with such pessimism.

If 25% of our energy needs are to be met by gas-one of the cleanest fossil fuels- we will have to ramp up our gas imports. Today 10 GW of power capacity is stranded because of shortage of gas supply. Households still cook on wood, charcoal or kerosene because domestic gas supply is constrained by availability.

Gas, has a very shallow and illiquid international market. Whilst 67% of the oil produced is traded only 30% of the gas produced is traded internationally. The bulk of gas trades are settled by gas being piped to the customer. Liquefied Natural Gas (LNG) – the option to piped supply of gas- accounts for less than one third of total gas trade (exports).

India is poorly situated to avail of piped gas from Qatar, Iran, Turkmenistan,  Russia or Australia-who control more than 50% of world gas reserves. Sub-sea pipelines account for a marginal amount of gas trades across oceans due to the higher costs and associated technological challenges. The real option till 2025 is LNG import.

Enter Russia: President Putin could be the White Knight meeting India’s LNG demand. Of course selling gas to India is propitious. The post Ukraine sanctions are hurting Russia and it needs to have reliable, long term arrangements for selling gas and oil. India is not a party to the sanctions and it is in its self-interest to focus on energy as what it wants from Russia during the Modi-Putin talks in New Delhi this week.

Russia hasn’t exactly been sitting on its hands to counter the US sanctions. It has already mended fences with China with whom it has concluded oil and gas supply deal. More generally it is leaning towards China, as a natural partner, in the global clustering against the US led set of allies. It would like to induct Iran and India as partners in this grouping.

India is a marginal player in this “great game”. It would be a complete mistake to barter our acceptability to all sides by putting our eggs into one basket. If Australia-a close US ally, can depend on China to absorb its energy exports and keep its economy humming, there is little reason for India to choose between the Great Powers.

It is to our advantage that we have extraordinarily good relations with Japan and other East Asian allies of the US. A long term contract for Russian LNG can be used to swap Russian LNG cargos (meant for India) with LNG coming from Qatar to Japan, cutting transportation costs for both. This could become a trilateral arrangement between Russia-Japan and India once the sanctions get diluted.

Nuclear Energy is the second area where we badly need Russian help. India needs an additional 10 GW of Nuclear Power. The State Owned Nuclear Power Corporation of India (NPCIL), which is the monopoly operator of all civil Nuclear assets in India, has lobbied to ensure that the Nuclear Liability Act 2010 approved by the Indian Parliament exempts the “operator” from all risk and liability in the event of a nuclear incident and loads it instead on equipment suppliers and project developers. This has effectively ensured that no private Insurance company would be willing to bear the unlimited risk of a nuclear mishap and private Banks would not finance such a project.

The only players left in the field could be State Owned Corporations both Indian and Russian. A State Owned Indian General Insurance Corporation could provide the Insurance cover and a Russian State Owned Project Developer could build the plant. Implicitly the risk will devolve onto the Governments of India and Russia and Bank finance would view this as a Sovereign risk. Clearly this is not a commercially palatable deal but it can be the classic outcome of G2G cooperation, in the spirit of the Russo-India friendship, where Russia helps India out of a jam of its own making: Bangladesh liberation (1971) being one such.

Will sealing these two energy deals brown-off China and the US? Russia delights in browning-off the US in any case whilst its relationship with China is at best of “mutual transactional benefit”.

In the case of India, we are perpetual wafflers and fence sitters who hop from one transactional advantage to another. This is perfectly aligned with our relatively diminutive economic stature and pressing domestic concerns. No one expects different from us.

PM Modi has been warmly congratulatory about China’s economic and poverty reduction achievements. It would help if we were also more respectful of China’s international status, since China is so status conscious. But this is difficult, because we have a completely different political and social environment and a vastly different institutional architecture. Our unresolved border disputes add fat to the fire.

There is however no reason to blur mutual economic self-interest with ideological compatibility. It makes sense for India to use its growing markets to bind China more firmly to the India growth story much like China has done versus the US. It is false ego to be at pains to keep China out of South Asia, just to protect our “dominance” in the Region.

Regional dominance has to have economic underpinnings. China has the fire power. We don’t. Trying to wean our neighbours away from China can end up “immiserizing” India. More importantly why even try?

Regional trade and output enhancing strategies need to willy-nilly include India because of its size and central location. Assured access for Nepal and China to the Indian Ocean; for East Asia assured access via Bangladesh, India, Pakistan, and Afghanistan to Turkey, all serve to bind the economic interests of our neighbours with our own.

India has to boogie with the US, China and Russia, but openly recognize that in this group, we are the “little fish”. We can be a “large fish” but only in some other a small pond with shrinking water levels. The question is which pond serves our national interest better.

Our relationship with Russia has principally been of dependence for armaments and collaboration in diplomatic fora since we have no clashing international alignments. The defence cooperation is destined to transform into a commercial one since India is opening up to becoming a defence manufacturer rather than just an importer. Business interests will invest in India depending on the competitiveness of the opportunities available.

The energy link between Russia and India is about the only slender but substantive chain, which can bind state owned gas exporters in Russia and gas importers in India. It is time to forge this chain to retain the warm glow, older Russians still feel, when Raj Kapoor’s films are screened.

Can Modi Copy Deng?

China

(photo credit: http://www.deeshaa.org)

The thought of Modi, an original and innovative doer if ever there was one, copying anyone, is so implausible that the first instinct is to perish the thought at birth. But it is interesting to list how Modi could “do a Deng” for India.

Deng Xiaoping inherited a China wracked by the inefficiencies, but blessed by the upside of Communism. Principally, five decades of communism had deadened the innately entrepreneurial spirit of the Chinese and sank the economy under the weight of a burgeoning State. But communism had also proliferated a highly disciplined party cadre across the country-much like India’s bureaucracy-except that the Chinese Communist Party marches to a single drumbeat; that of the President/General Secretary/Chairman. In contrast, the Indian bureaucracy is a discordant orchestra with multiple political conductors.

Mao built his Party cadres to weed out all those who either were, or could become, dissenters to his thoughts. Deng used the very same party to unleash the Chinese “animal spirits”. Municipalities and provinces competed viciously with each other to achieve the highest growth numbers in a no-holds-barred, single minded commitment to the bottom line, which could put the partners of Lehman Brothers in the shade.

The extraordinarily successful U turn was not surprising. Party foot soldiers are rarely ideologically committed. On top of it, if there is something in the change for them, they take to it with gusto. The Party took to “capitalism” with a vengeance. It is only now- two decades later- that President Xi is trying to unravel the resultant bundling of public and private interests.

When Deng Xiaoping became the President of China, per capita Gross National Product (GNP) was double of India’s but only around two thirds of Indonesia and Philippines (1996 WB data). By 2012 China’s per capita Gross National Income (GNI) had become nearly four times that of India; more than 1.7 times of Indonesia and nearly double of Philippines. Poverty declined in China from “Indian levels” to just 3% by 2012. Rapid economic growth based on exports, manufacturing and jobs was Deng’s mantra. But we musn’t forget the sacrifices of the Chinese people, who suffered personal and economic deprivations at the altar of national economic growth.

Can Modi do a Deng for India?

Unlike China, India is a soft state. Our citizens live in an asymmetric economic and political environment. On average, our citizens are as economically deprived as the Chinese were. But they have become accustomed to significant levels of personal and political freedom, more typical of a developed democracy. The State “includes” everyone in its warm embrace through food, fuel and income subsidies, which successive governments have honed to a fine art. Significant interest groups all receive a special package of subsidies tailored just for them. The package may not be individually very substantial. It may be threatened by inflation and increasing public fiscal stress. But the important thing is that it exists as a symbol that the State “cares”.

The only way of getting citizens to vote beyond subsidies is to rapidly enhance their individual incomes to a level where stagnating subsidies no longer mean much. For this private sector jobs based growth is the key.

Unfortunately, the world economic environment is now even less supportive of inefficient economies than it was in the “go-go years” till 2008. India remains a hugely inefficient economy because of the high transaction cost of doing business, even by domestic entrepreneurs. Some of this is due to a very inefficient and decentralized but systemic corruption.

The magnitude of corruption grabs public attention. It is unseemly but it is not the main impediment to job creation, growth or poverty reduction. In an imperfectly regulated economy, with a large State sector, regulating corruption to reduce its incidence and impact is more important than eradicating it. East Asia in general and indeed China itself, illustrates this.

But bitterly contested democracy does not allow the ruling party the luxury of “plain policy speak” based on cost benefit. A well publicised war against corruption better satisfies the masses that tax money is not being wasted.

More substantively, a policy of adopting increasingly higher levels of transparency and the  depoliticisation of economic regulation by transferring powers to autonomous, technical regulators, can significantly reduce the space for “crony capitalism”.

PM Modi, whilst condemning the “hate speech” of his errant Minister Niranjan Jyoti urged the Rajya Sabha: “let’s get back to work”. His words could well be heeded by government itself. Five fundamental institutional changes can create a Team Modi for targeting poverty; enhancing growth and increasing private sector jobs.

First, Captain Modi has to radically change the manner in which appointments are done in the Union government and adopt a transparently merit based system. For starters PMO should have an HR anchor identifying and tracking potential officers for these positions, using a variety of indicators.

Second, for improving the sustained effectiveness of the Union government, the PM has to ruthlessly prune the political executive and the bureaucracy, of elements who are, or have been ineffective or complicit in corruption. This is not about launching a witch hunt for the corrupt. It is more about identifying effective politicians and bureaucrats (of which individually there is an oversupply) and putting them in the right positions.

Third, it is not enough to improve the Union government. PM Modi has to talk Turkey with those CMs, who are similarly inclined to grow their states. Some, but not all, will be BJP governments. But the real issue here is to form alliances, not for political survival, as was the practice in the past, but for national growth. Network economies spill over across state boundaries and business uses such opportunities to locate where land is cheap, labour is abundant and pre-existing infrastructure is nearby.

CM Naidu previously used this model of cross border spill-over from Karnataka and Tamil Nadu to Andhra Pradesh’s benefit. Western UP and Haryana have similarly benefited from the economic dynamism of Delhi, irrespective of what their State Governments were up to. It is not necessary to have every CM on Team Modi’s Bench. Just getting 50% onboard, sprinkled across the country, can generate strong growth impulses nationally.

Fourth, a institutional focal point for getting CMs on board is needed. The National Development Council exists, but needs support. At the heart of the change is the willingness to share with the states, the fiscal and administrative powers available in the erstwhile Planning Commissions. How it’s is structured will be critical. Yet another anemic Think Tank is hardly fit for purpose.

Fifth, the key administrative unit, at the cutting edge level are the 604 Districts in rural areas and around 3255 “towns”. It is at this level that all reform and change is implemented. Unfortunately, this level of administration remains completely divorced from the direct responsibility for achieving the three point agenda of growth, jobs and poverty reduction in their own areas. This has to change if we are to “Do a Deng”. China determines local targets for national objectives. We must do the same.

PM Modi must provide incentives to States to “push back” senior officers from clunky state secretariats to the field. State secretariats (as also the Union Secretariat) must be slimmed down and District and urban Local Bodies strengthened. This can restore technical competence and gravitas to district and local body administration. The minimum service in field postings for IAS/IPS officers, before they can go to the State Secretariat must be increased to 15 years from the 9 years necessary today.

Every District and Town will also need base line studies of jobs, poverty levels and the size of the local economy. Their annual growth and poverty reduction targets and achievements must be available publicly. The share of local resource allocation must increase and be aligned with the path to achieve these objectives at the local level.

Today District Plans are just local segments of state government projects with specified outputs but with less than adequate linkage to the three overarching objectives. Local “Planning” is more about appeasement of local politicians rather than about achieving national objectives. More rigorous project selection guidelines; filters for assessing poverty reduction, growth and job creation potential; better oversight of expenditure and public participation in decision making are the underpinnings of success.

PM Modi does not have a centralized Party based executive to rely upon, as Deng did. But he can forge a Team of politicians, bureaucrats and non-government professionals who have a passion for lifting India out of poverty via economic growth and private sector jobs. Many are waiting for his call.

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