governance, political economy, institutional development and economic regulation

Archive for September, 2016

Plough deep for reform results

plough

Deep ploughing is necessary for reform results. Photo credit: hardrainproject.com

The government is stacking up its “reform credentials”. The long elusive Goods and Services Tax is now part of the constitutional scheme for taxes. This has been followed up with a double-punch by putting to rest the colonial tradition of a separate railway budget.

Bye bye separate rail budget

Rail budget reform was well received by the opposition, including the Congress and the Biju Janata Dal. In contrast Mr. Nitesh Kumar’s criticism that this will make the railways less autonomous appears to be reflexive dissent with an eye to the potential media coverage. Didi’s Trinamool Congress was similarly truculent. But Mr. Dinesh Trivedi, a previous minister of railways from the TMC, dulled the edge of the attack by not opposing the move.

The net budget support for the railways is just Rs 5,000 crore or one quarter of one percent of the annual budget. But having to get its budget passed, independently by parliament – a colonial tradition when the railways were a major public asset – exposes the railway minister to the inevitable “populist” demands to steer the budget through. This additional burden will now be borne by the finance minister – the redoubtable Mr. Arun Jaitley – whose reform credentials are growing by the day.

There is some concern that the granular information in the railways budget may no longer be available. But the concern is misplaced. The railways are reportedly implementing commercial accounting standards. Mr. Suresh Prabhu – the energetic minister for railways – could consider tabling an advance supplement based on the results for the first three quarters of the fiscal year- April to December, with the Budget documents for next fiscal followed up by yearly outcomes in the annual report tabled in parliament.

But let’s not kid ourselves. Well begun is only half done. Process reform, like the new rail budget mechanism, whilst necessary, is low hanging fruit. To show results process reform has to induce management and operational changes. In the age of “Big Data” access is not the constraint. It is using data to change behavior that matters.

1991 reforms had a narrow, central government focus

Some change in track is also necessary. Since 1991, the economic reforms have primarily focused on the sunrise sectors –  industry, commerce and finance. Tech grew under the governments radar because it remains export oriented. Inevitably urban boats have risen significantly. Two third of jobs are generated in cities, which explains the continuing in-migration from rural areas.

But connectivity and business as key drivers of growth blur the urban rural divide. Business is more concerned about seamless supply chain networks as the critical cartographic feature, not administrative borders. Similarly, markets do not end at the city limits, particularly if mass e-tailing is to grow.

SMART cities and dumb villages; broken supply chains.

We cannot hope that cities will be the sole engine of growth. There were nearly 19,000 villages, with a population of more than 5000 persons each and nearly 4000 villages, each with more than 10,000 persons, in 2001. Merely reclassifying these villages as urban spaces could increase the statistical level of urbanization from 31 to 50 percent of the total population. Estimates of the share of urban population in 2030 would then increase to 70 percent. But even the remaining 30% would constitute 450 million people left behind in villages. A significant market and a sizable vote bank.

The government has been diligent in rolling out new schemes to pull rural dwellers out of poverty. Financial inclusion via the Jan Dhan Yojna; economic and social security via subsidized insurance policies and the focus on public health and publicly financed housing are all positive moves. But most of these initiatives are still at the process reform stage. Tangible results – more disposable money in the hands of the poor – is still some time off. It is unclear, for example how many of the 200 million bank accounts opened under JAM are operational on a substantive manner. Enlarging the direct benefits transfer will make financial inclusion real. But last mile implementation is a slow process.

Unleash a reforms Tsunami to lift “rural boats” as well

rural-boat

Rural India : Seemingly placid but very uncertain.

Glimmers of hope persist. The Arvind Subramanian Report on price support for Pulses is a signal that government is shifting attention from urban centric reform areas, where progress is ongoing, to the neglected but high potential value addition sectors – agriculture, rural development and water. Agriculture needs to be brought out of the shadows where it has been consigned since the Green Revolution in the 1970s.

Visibility in rural and local governance is the first step

people-baiga

Baiga women at a meeting – listening passively to top down wisdom.

If the government is to lead, it first has to increase its presence in rural areas by decentralizing personnel, functions and finance to the sub-district level. Currently, on average, only one third of state government jobs are in local governments. The majority are centralized in the state capital and its deconcentrated offices, like the District Offices of various departments. This inter-se allocation of personnel needs to be reversed and officers reallocated closer to the people. This implies starting a conversation with state governments.

Mr. Piyush Goyal, the effervescent minister for power, coal and renewable energy recently successfully concluded just such a conversation around restructuring DISCOM debt. This model of cooperative federalism can be replicated for personnel reallocation – targeted central funds for measurable actions.

A second conversation also needs to be started for levying Income Tax on agriculture. The tortuous but eventually successful negotiations around GST provide the replicable model for this thorny issue. States may be happy to let the central government impose the tax and share the proceeds- for them a windfall gain with no political downside..

rural-rich

End untargeted agriculture subsidies or tax agricultural income.

Use NITI Aayog strategically

As in everything else, leadership counts. The Prime Minister should consider shifting the attention of his “A” policy team – NITI Ayog – to agriculture, irrigation, rural development and social protection. Currently it seems flooded with all manner of residual work. It could usefully focus on delivering tangible, measurable outcomes from its two key task forces on agriculture and poverty alleviation set up way back in March 2015.

Recommending which PSUs to sell; planning new tourist islands and ensuring 50 gold medals in the next Olympics, can be done elsewhere just as well. Surely creating jobs in rural areas and putting more income in the hands of the poor rank higher in the priority list. There is not enough bandwidth to run all races simultaneously.

team-india

Adapted from the authors article in Asian Age, September 28, 2016 http://www.asianage.com/columnists/rural-jobs-growth-key-lasting-reforms-308

Book Review

 

parag-khanna

Connectography: Mapping the Global Network Revolution, Parag Khanna, Weidenfeld and Nicolson, 2016

In the 1980s, Disney World, Florida offered a gripping, virtual journey as viewed by a blood corpuscle as it rushes through the arteries, veins, into and out of organs in the human body. Parag Khanna’s fourth and latest book –Connectography: Mapping the Global Network Revolution – does much the same for the world of physical and digital infrastructure -roads, railway tracks, power lines, communication cables, oceans, rivers, canals and electrons joining suppliers to customers, uniting families physically and virtually, whilst creating ever widening value enhancing networks around mega cities.

In this world, national borders are little more than irritants; national sovereignty a barrier to be overcome; national passports a poor substitute for global identity options and the ownership of land valueless, unless it is part of global supply chains.

Global citizen

parag-khanna-2

Parag is a self-confessed global citizen. He was born in India, grew up in the United Arab Emirates, studied in the US, works in Singapore but feels at home anywhere – chatting with Chinese workers in Tibet, Turkish Gastarbeiters in Germany or breakfasting with the President of Mongolia in Ulan Bator. There are around 300 million others like him. This book describes the way the world could be from the view point of global citizens. A world without borders or intrusive governments; self-regulating businesses kept customer friendly by competition; open markets allowing capital and goods to move freely, perpetually in search of optimizing costs and maximizing value.

Open economy

The virtues of the “open economy, networked” universe are generally accepted today, even if most peoples’ view on markets is similar to their opinion of democracy – not the best option but better than anything else available.

Parag hammers away at re-establishing these generic concepts with relentlessly energy via a high octane delivery, interspersed with a wealth of granular information to buttress his argument. It helps that the book is extensively researched. Its bibliography lists nearly 500 references and almost each page has a quotable quote. An added attraction is the 38 color plates which illustrate what connectography could look like. Maps or traditional cartography which represent geographical or political features, actually tell us very little about the world. These are of little use beyond being partial navigational aids. Consider that Singapore is a mere dot on the world map with just 0.1 percent of the world’s population. But if countries were mapped to scale on the size of their GDP, it would be twice the size of Bangladesh. Does Singapore’s land size or population determine its function in the world today or its economic heft?

Connectivity is key

The book is divided into five parts. Part one dwells on the truism that connectivity and not territory or resource endowments, are the arbiter of how nations grow. In a riposte to the reasons listed by Paul Collier of why nations fail, Parag argues, that countries can overcome the disadvantage of poor geophysical endowments. There is hope even for land locked nations, like Rwanda. Despite being resource poor, it is one of the fastest growing economies, in Africa, because it actively searches out opportunities for becoming part of global supply chains.

The withering Nation State

Part two posits controversially, that the nation state is an artificial construct whose longevity is explained by inertia rather than any irreplaceable value addition ascribable to it. This is especially true in nation states which spend much time and effort to reconcile mutually antagonistic and parochial domestic stakeholder identities. Far better then, to devolve power away to homogenous, smaller sub entities – tribes, communities, companies and cities which, in any case, are the basic framework for solidarity and common interest.

The recent splintered vote in Britain, with London, Scotland and Northern Ireland voting to remain in the European Union whilst the rest of the country voted to exit, seems to illustrate the inherent fragility of nation states in the face of sharp internal divisions based on self-interest. The nation state is similarly powerless against the loss of sovereignty to larger regional aggregations- earlier the United Nations, cold war alignments and now regional trading blocks. Better connectedness and communications fosters this trend towards aggregation, driven by Metcalfe’s law that the value of a network increases proportionately to the square of the number of interconnected users. Scale is everything.

Sub- national entities are stable

Part three asserts that a future world of connected sub-national entities aggregated into large regional entities, is a more stable and competitive arrangement than the present geopolitical architecture. Sovereign nations seem besieged by split mandates and dissidence at home whilst simultaneously assaulted by external threats. Competitive connectivity trumps national sovereignty. There is no incentive for destabilizing any actor because all are connected for mutual gain. In comparison, Orwellian instability is built into the DNA of competing nation states.

Snap shot of a connected future

Part four fleshes out the future as a landscape of connected megacities. Multinational businesses will be replicas of the Dutch 19th century colonial empire – a web of small enclaves – business hubs for a global supply chain. The nodes of growth would be the four thousand Special Export or Economic Zones, which dot the world today and are also the foundation of China’s extraordinary economic growth.

….and everything else

Part five is mixed fare – an overview of current issues in the digital economy; the genetic transformation resulting from human cross breeding inherent in the physical movement of more people across the globe than ever before- provocatively titled “a mongrel civilization”- and how to best deal with the competing needs of conserving nature and welfare enhancing growth.

For resilient readers only

This is not a book for the faint hearted. The style varies from the explanatory; the exhortatory to being chattily conversational. Some parts are too dense for a lazy afternoon’s read. Others, particularly where the author links his own experiences to more generic issues are lucid and revealing. Editing is unfortunately, lackluster. Rwanda is not a country which is natural resource rich as claimed on page 94; the lead paragraph on page 337 under the attractive title “The digital identity buffet” is an incomprehensible, single sentence of seventy-one words! Deng Xiaoping’s reforms kicked in during the 1980’s in China, not the 1970s as page 380 claims.

Read this book if you are interested in knowing more about the intersections between globalization, geopolitics, business, technology, urbanization and culture. If you are looking for deep knowledge in any one of these areas, you are likely to be disappointed. If you are looking for a new theory of development or growth, it isn’t here. What you do have is masses of information brought together anecdotally in a narrative format.

This is a tour de force of contemporary world trends with attractive, self-explanatory titles to each of the seventy-eight sub chapters. Each of these is self-contained so you don’t have to read the book sequentially. And don’t miss the quotable quotes. My favorite is “a smart rabbit keeps three holes to hide in” to explain why large numbers of Chinese citizens invest in the US or Canada as a safe haven option.

If you are looking for advice on very long term business investments, check out the heat map on plate 31. Be warned, India, China, Africa, Southern Europe, the US and South America may all be deserts by 2100 dried out by the ravages of climate change – unlivable but good for generating solar power. Think instead of investing in Canada, Greenland, Northern Europe, Russia and Western Antarctica, where the climate is expected to be salubrious and the resources plentiful for the depleted population which manages to emigrate there.

This book review by the author first appeared in Swarajyamag, August 2016 http://swarajyamag.com/

 

Prabhu tightens “free lunches” in Indian Railways

indian-maharaja-train

If Suresh Prabhu has his way this is how Indians would travel routinely on vacation. Today these luxury trains are expensive immersive “period” experiences for foreign tourists. Photo credit: http://www.2luxury2.com

The 28 million passengers who use the Indian Railways daily fear March as much as ancient Romans feared the Ides of March. This is when the prospect of the impossibly low rail fares being hiked looms, and then usually abates, as political parties compete to “safeguard the people’s interest”. Indian Railways charges passengers, on average, just 29 paise per kilometre of travel, whereas in China passenger fares are four times higher. The Railways lose around `30,000 crores annually from carrying passengers, but makes up some of that by charging freight rates that are almost double the cost incurred. In China, freight rates are around half of ours. Add to this better roads, bigger trucks and fierce competition, and you can see why road transport has weaned rail freight away. The golden goose of freight revenue funding the Railways is dying.

Tariff not related to the cost of the service

Indian Railways increased passenger fares in June 2014 by six per cent soon after the Narendra Modi government took charge. The Opposition outcry was fast and furious. Around 20 million vocal suburban commuters, a critical vote bank, use trains as a lifeline in Mumbai, Kolkata and Delhi. The Delhi Metro (run separately by the Urban Development ministry) hasn’t revised tariffs since 2009. This ranges from Rs 10 to Rs 30 (around a Nickle to 50 pence US) for secure, fast, air conditioned travel with sparkling terminals. And yet commuters who cavil at the cost think nothing of getting into a shared auto rickshaw and paying `20 for a 2-km slow, pollution infused ride home.

Suresh Prabhu, who took over as railway minister in November 2014, is a battle-hardened, savvy veteran at reforming utilities from his days as power minister in the Atal Behari Vajpayee NDA government. Learning from his predecessor, his first Railway Budget in 2015 skirted around the vexed issue of hiking tariffs. His second budget, in 2016, was no different, except that he had developed a track record for delivering on passenger amenities — on cleaner coaches and stations, digital food orders; better on-time arrivals and departures; easier freight booking/handling; and a minister-on-tap app, that has almost become the leitmotif of the Modi government.

Only upward flex in IR’s new tariff 

Even last Saturday, addressing the Indian Merchants Council in Mumbai, Mr. Prabhu gave no hint of the thunderbolt he would unleash on September 7, with the new “flexi-fare scheme” for Rajdhani, Duronto and Shatabadi trains. To call this a “surge pricing” scheme, as most of the media has done, contrasting it with state governments banning flexi fares for radio taxis, is a little misleading. “Surge pricing” transmits both benefits when demand is low and higher costs during peak demand. There is very little “flexi” in the Railways’ scheme. Fares, even if trains are empty, will never fall below existing rates. The railway flexi fares only incentivise travelers to book well in advance, as the base fare increases by 10 per cent after every block of 10 per cent of available seats gets booked. There is a cap of 40 per cent hike for AC-3 possibly because this category, even at existing rates, is the most profitable for the Railways.

But valuable unwritten message: the value of time saved, via fast travel, does not come free

For all other passengers there is a 50 per cent cap on hiked fares, including for those travelling in non-air conditioned sleeper class (2S or SL) on fast premium trains. It is this last category that is interesting. These are truly the aam aadmi (common man) or students, who take a bus or shared auto home on reaching their destination rather than a taxi. By making even them pay what it costs for secure, fast, inter-city travel, Mr Prabhu has set the right tone for the inevitable future increases. After all, if the value of one’s time is low, shouldn’t one be taking a slow train instead at cheaper rates?

So why is Mr Prabhu trying to do a Ronald Reagan rather than playing with a straight bat? Why so much secrecy in tariff hikes, with no explanation of how the new rates relate to the cost of providing the services. Mr Prabhu is a master communicator, but the Railways appear to be still mired in a colonial mode.

colonnial-raiway

The Bibek Debroy Report 2014 is the only the latest in a long line of reports which has urged IR to restructure and modernise. But the Railway Board remains in comfortable colonial mode.

Independent Railway Regulator: Pending since 1989

Independent electricity regulators set up when Mr Prabhu ran the power ministry set tariffs transparently. The costs of offering different services and corresponding tariffs proposed by utilities — mostly publicly owned, like the Railways — can be downloaded from the Internet or a copy obtained from the commission. Then consumers can individually or collectively file comments and/or objections to the proposed tariffs. The process is transparent, access to information is assured and participation is facilitated. This is because Parliament legislated such provisions in specific laws relating to telecom and electricity.

The Railway Act 1989 also provides for a Railway Rates Tribunal to set tariffs in a quasi-judicial manner. This has never been operationalised by previous governments. Mr Prabhu said in his 2015 Budget speech that an “independent mechanism” for comprehensive regulation of the railway sector is needed. This is significant as it acknowledges that a precondition for bringing private capital and enhancing competition is the hiving off of regulatory powers from Indian Railways. The exhaustive Bibek Debroy Committee Report of June 2015 on restructuring the Railways similarly strongly backed such a regulatory system. But the elusive search for the best appears to have come at the expense of the good.

Charged political environment encourages “reform by stealth”

Even in the absence of a regulator, the government could have engaged directly with the public before a tariff increase. But the surcharged political atmosphere, with two major state elections around the corner and the prospect of delay, may have dissuaded it from opening a window for political protests. But someone needed to bell the cat.

In this country’s political shadow play, a proposed rate hike inevitably incorporates a rollback margin. So hope for a rollback in the cap from a 50 per cent increase to a cap of possibly 25 per cent. But be prepared for an era where the railway station is no longer the place to look for a free lunch.

new-station

Adapted from the authors article in Asian Age August 9, 2016 http://onlineepaper.asianage.com/articledetailpage.aspx?id=6283706

 

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