governance, political economy, institutional development and economic regulation

Archive for January, 2017

Fiscal courage needed on Feb 1, 2017

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In a welcome change of national focus, becoming rich is no longer enough unless the poor are taken along. Prime Minister Narendra Modi, who is very au fait with international headwinds, was prescient in his December 31 address. For the first time, it was not the youth, nor non-resident Indians, nor Hindus, that the PM was focusing on. His attention was primarily on the travails of the poor. He donned the mantle, first evoked by Prime Minister Indira Gandhi four and a half decades earlier in 1971, of a pro-poor proselytiser.

Recovering lost ground

Speaking in the shadow of the economic storm unleashed by the demonetisation of 86 per cent of the currency in November and December 2016, Mr Modi extolled the poor for their patience and resilience. They had shown, he said, “…even people trapped in poverty, are willing to… build a glorious India… through persistence, sweat and toil (they), have demonstrated to the world, an unparalleled example of citizen sacrifice.”

The finance minister would do well to gauge which way the wind is blowing when he rises to present the fiscal 2017-18 Budget on February 1. It is not as if the poor were ignored in the earlier three Budgets presented by him. But they only figured tangentially. Growth, macro-economic stability, infrastructure and jobs for the middle-class young, the usual Davos consensus, took pride of place.

A sombre 2017 ahead

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We face a sombre fiscal year ahead. The International Monetary Fund’s economic outlook — a source the finance minister has used previously to highlight India’s outlier growth performance since 2014 — has projected a growth of only 6.6 per cent in 2016 — one percentage point less than the 7.6 per cent estimated pre-demonetisation. Worse, even growth in 2017 at 7.2 per cent will suffer. Even this is dependent on the shock being temporary. The subtext is that if the ongoing jihad against corruption is extended indefinitely and indiscriminately, business sentiment will collapse. Corruption is a curse. But it must be tackled surgically by an army of savvy saints, who are hard to find.

Lower growth in 2017 would reduce tax revenues. Hopefully this can be compensated by taxing some of the Rs 4 trillion, suspected to be dodgy money, deposited in banks during demonetisation.

Sops only for revenue and economic return multipliers

This stash should also encourage the finance minister to take the risk of slashing income-tax rates to boost revenue through better tax compliance and boost demand. The maximum tax rate for an annual income between Rs 25 to Rs 50 lakhs should be 15 per cent (current rate 30 per cent), with suitably lower rates for lower income slabs. The tax on income between Rs 2.5 to Rs 10 lakhs should be broad-banded at five per cent (current rate 10 to 30 per cent). Tax studies show that the revenue dividend is more pronounced by reducing tax in the lower income slabs. This is probably because the proportionate cost of evasion reduces at higher income levels so it is tough to beat. High income wallahs tax arbitrage internationally via corporate earnings. So, they declare domestically only enough to justify their easily verifiable lifestyle and assets.

Lower growth also red flags the fiscal deficit as a percentage of GDP, which acts as a cap on public borrowing to spend. High fiscal deficits can lead to inflation and public indebtedness. But courtesy demonetisation money is cheap. Banks deposits have swelled by Rs 6 trillion since October 28, 2016. This is low-interest money waiting to be used by the government and its assorted entities. Inflation is well below the target five per cent. This presents the option for temporarily breaching the fiscal deficit target of three per cent for 2017-18 to infuse income into the poorest households.

Rich farmers, poor workers

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Sops for agriculture are falsely conflated with poverty-reduction objectives. Admittedly, investing in agricultural growth is an efficient strategy for reducing poverty. Eighty per cent of the poor live in rural areas. But this is too blunt an approach.

Fifty-four out of 180 million rural households (30 per cent) own no land and survive on manual labour. Benefits from agricultural growth are indirect for the poor. Scheduled Castes, Tribes and Muslims are overrepresented in this group. They need instant relief. Consumption loans of Rs 20,000 for each household, deposited into bank accounts, repayable by labour in village improvement schemes, can combine the advantages of a direct benefits strategy, coupled with the self-selecting benefits of the National Rural Employment Guarantee Act programme. This requires an allocation of Rs 1 trillion — three times the NREGA allocation. This would be a fit use for the demonetisation windfall.

Neo-middle class vulnerable to sliding back into poverty

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But income support is a short-term mechanism to reduce poverty. The World Bank assesses that the Indian growth strategy, whilst effective in pulling people out of poverty, is less effective in keeping them out of poverty. By 2012 poverty levels were down to 22 per cent, from 45 per cent in 1994. But an astonishingly high 41 per cent in the neo-middle class were vulnerable to sliding back into poverty. Even in the go-go years (2005 to 2012) around seven per cent of the neo-middle class slid back into poverty. Sudden economic stress, like the loss of jobs, can significantly increase this proportion.

Reduce multidimensional poverty through better services 

Vulnerability to sliding back into poverty can be fixed if the poor get steady jobs, which are more likely if they are educated. Shocks to household budgets can be mitigated by access to healthcare. Nutrition can be improved through clean water supply and sanitation. Lower tax on low-income earners reduces the effective cost of labour versus capital, making labour competitive in the formal sector. Public services, which reduce the multidimensional index of poverty, can be ramped up by the private sector, if the government provides viability gap funding.

Junk low economic return schemes & protect the poor from shocks

India can be on track, to meet the interim sustainable development goal of reducing the level of extreme poverty to nine per cent by 2020, if we safeguard growth and cocoon the poor from shocks by providing access to better public services. The finance minister must identify the allocations specifically for the core objectives and discard the chaff generated by the testosterone of high growth.

Adapted from the authors article in Asian Age January 20, 2015 http://www.asianage.com/opinion/columnists/200117/safeguard-poor-bring-india-back-on-track.html

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Public sector angst

So, what is it about social media which gets sarkari types hyperventilating about their gripes and grouses? First, we have members of the para military forces seeking sympathy for the poor living conditions they suffer on duty. Next, we have a General, passed over for promotion, pedaling conspiracy theories around his being overlooked. To cap it all the managing director of Air India laments that a CBI investigation into improper procurement could sabotage the critical turn-around of the publicly owned airline. 

Why for instance do the owners and employees of private companies not do the same. Why didn’t Mr. Ratan Tata wring his hands on social media about the underhand way his successor was cutting the ground from under his feet? Or, for that matter, why hasn’t Netaji – Mulayam Singh Yadav – done the same about the goings on of his son? Why don’t we get to hear more stories of backstabbing, sell outs and short-circuited ambition from the private sector? I suspect the private sector guys feel that exposing their angst on social media is unlikely to generate any public sympathy for them. Working to improve the bottom line of a private company does not gel with the popular concept of national service. Never mind that using resources efficiently and maximizing output and productivity are the corner stone of growth oriented, competitive economies. In India “profit” remains a dirty, exploitative word.

Not even bumbling saints

At the very least public sector officers could be bumbling saints – role models of honesty, diligence and accomplishment. But forget efficiency most do not even have the basic attributes of rectitude. We saw this in the abandon with which public sector bank employees participated in the conversion of old black into new black recently during notebandi. The reasons why more sarkari types do not conform to the ideal are complex. Low organizational expectations from them; a performance system which provides huge rewards for competing successfully for the market (getting a public-sector job) but virtually no rewards for competing in the market (continuously improving performance in the job); lax disciplinary procedures for miscreants and low accountability, all serve to cocoon the public servant in an impregnable miasma of collective might versus citizen demands.  

Antiquated management systems

Continuously improving public sector systems are part of the job of a public servant. But India, today, has possibly the most antiquated public management processes. This despite the availability of funds for purchase of equipment, procurement of technical expertise and the powers to make changes in existing rules being pervasive. But for years the job of managing the household efficiently has taken a backseat to racing ahead with announcing new initiatives for public good and spinning old initiatives into new ones.

High overheads

The overhead cost or, tail to teeth ratio, is very high in the public sector. Just the expenditure on salaries and pensions is around a quarter of the net revenue receipts of the central government. The administrative costs of managing offices – purchase of consumables, electricity, purchase of new equipment, maintaining and constructing offices and government houses, travel and communication costs are additional. 

In public sector accounting, employees matter more than machines. Getting boots on the ground and waving the flag is more important than empowering the employee. That is why Bollywood delights in stereotyping the bumbling cop who ambles up to a crime site gamely swinging nothing more than a lathi. A lathi costing Rs 300 is the sole piece of equipment the average policeman has. Never mind that the average police constable costs the government upwards of Rest 20,000 per month. Providing jobs is a means of empire building for politicians and far too often becomes a lucrative business for the recruiters.

It is no wonder then that “zero based budgeting (ZBB)” never took off. How could it? ZBB is based on the axiom that you can always do better. The past is nothing more than a sunk cost which must never hold back good decisions making in the future. But our public sector operating mantra is to never accept that a mistake has been made which needs to be corrected. Government auditors view all mistakes as evidence of waste. Never mind that individuals only learn by committing mistakes. A baby who is fearful of falling would never walk, let alone run. 

So, what is it that we can do differently in the public sector?

First, by providing cradle to grave employment, even at the officer level, we create a collective (the cadre) where only individuals need exist. Government must dispense with the cadre system for recruiting officers, which is at the heart of the problem. Recruit instead for specific positions against specific eligibility criterion. Open recruitment, on contract, would keep the officers on their toes. 

Second, adopt cost accounting metrics for budgeting. This would make operational systems more efficient and facilitate performance evaluation across verticals.

Third, decentralize financial and administrative powers extensively whilst making the reporting chain flatter. This is the first change Suresh Prabhu made as Minister for Railways in 2015. The beneficial impact is already visible. The IAS should be as adept at organizational development as at strategy or policy making. The incentive today is to shine in service delivery achievements. This is self-limiting once the low hanging fruits have been plucked.  

Fourth, we should experiment with flexible budgeting by broad banding expenditure allocations across schemes. This would enable the executive to maximize the physical impact of budgetary allocations based on the performance of schemes in the field. Parliamentary approval should be limited to setting the macro variables (primary deficit, revenue deficit, fiscal deficit, current account deficit, debt to GDP ratio and the assumption of economic growth) and approve the specific tax proposals. The specifics of how the money is spent should not be held hostage to Parliamentary approval. Parliament must safeguard the macroeconomic bottom line not become part of the executive in micromanaging expenditure via the power to allocate expenditure. 

Lastly, disciplining of errant public sector staff can be salutary. Mistakes happen. What is more important is that they should be corrected once they are detected. Severe sanctions should apply for those who commit rule infractions themselves or those who turn a blind eye to infractions by their subordinates, whilst managing to keep their own desk clean. Conversely, rewards must accrue for others who adopt a positive and proactive approach to rule infractions made without mala fide intention. Greater rewards should accrue, for those who can propose thoughtful changes in rules to plug loopholes and avoid repeat infractions in future.

Managing a government is very much like managing a large, noisy joint family. A combination of encouraging pats, dissuading slaps, a great deal of open discussion and well intentioned decisions made in public interest are the failsafe ingredients for a happy and productive public sector family.

 

 

Budget 2017 – say what you mean

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Some pictures may be worth a thousand words. But when the two are put together, as in a video, they evoke deep emotions and convey subliminal messages. Watch the master of the spoken word — Barack Obama, in his January 2016 address on the mundane subject of gun control in the United States and you will see what I mean. It is unfortunate, that despite the best talent in branding and outreach we fail to use words which convey our intent unambiguously.

Poor namkaran begets poor results

Consider the name of the government department, which is supposed to privatise the public sector. It was created in 1999 under the BJP-led NDA regime and helmed by finance minister Arun Jaitley. Even way back then, it was clear it would not take root. Mandated to raise capital through privatisation — it ended up being named, hypocritically, the department of disinvestment. “Divestment” would have been more proximate to the intent. But the fuzzy name, matched the lack of sustained resolve for a big-bang approach to privatising the public sector. It muddled along till, mysteriously, in April 2016, it was cumbersomely renamed as the department of investment and public asset management (DIPAM). It does nothing of the sort. Its core mandate remains to sell the industrial Central public sector. Public sector investment and asset management continue to be the mandate of every line ministry, for the state-owned enterprises (SOE) under them. No wonder then that the Central public sector not only lingers but grows.

In 2015, there were 235 operating SOEs. But an additional 63 were coming online. One-third of the operational SOE made a loss of Rs 27,000 crore in 2015. The data for 2016 is yet to be publicly shared. But there are unlikely to be surprises here. Named badly at birth, the department lingers on much like the loss-making SOEs.

Clever acronyms can mislead

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Consider also the new government-sponsored payments app named Bharat Interface for Money (BHIM) created by the National Payments Corporation. The app was ostensibly named after Babasaheb Bhimrao Ambedkar — the learned dalit leader and constitutionalist. A payments app named after Babasaheb is quaint just as launching a human rights initiative in his name would resonate. The app is more likely to be associated with the brute power of the legendary Bhim from the Mahabharat conveying that the app is safe and impregnable. Yes, security is one important feature of an app. But it must also be nimble, adaptable, scalable, efficient and convenient to use. Bhim of the Mahabharat was none of these. Legend has it he was pretty resource-intensive — gobbling up nearly as much as all his four other siblings and was difficult to discipline, much like an invincible Robocop. “Killer app” is how kids term an outstanding app. But slang shouldn’t be taken literally to name government initiatives.

Words without momentum

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Prime Minister Narendra Modi, in his New Year’s Eve address to the nation, fell into the same rhetorical trap of belting out a preachy sermon but chose the wrong words. He stressed purity, pain and renunciation as key processes for exorcising evil — in this case black money and corruption-fed terrorism, Naxalism and Maoism.

Left unanswered was who should feel the pain more and make sacrifices — the honest many or the dishonest few? Also, conflating Maoism and Naxalism with terrorism, drugs and loss of human rights is okay if you are a right-wing, conservative American. But in India, these misguided socio-economic movements are the consequences of state failure in providing a basic level of welfare to the poorest of the poor. One cannot simultaneously romance the poor for their virtues — fortitude and honesty; finger the rich for their vices — dishonesty in evading tax, wallowing in luxury in big city bungalows — and yet denounce social movements which seek to give voice to the marginalised, however unpalatable their senseless violence may be.

BJP – get your mojo back

The BJP came to power in 2014 as the voice of reform and growth. It has traditionally been private sector-friendly. This resonated with an India fed up with populism and ersatz socialism, unemployment, poverty and a low quality of life. Touting the cause of the poor by pulling down the rich was never meant to be the BJP’s trademark. The Communist parties and the Congress fight from that shrinking corner of the electoral base. The poor versus rich genie will now be difficult to put back into the bottle. This will be particularly so if growth disappoints and economic stability suffers — both of which are near-term probabilities.

A strong government can trample over many citizens’ rights so long as it can stuff the mouth of citizens with money — as in China. But no money, no jobs and no rights are the fertile grounds on which violence, Naxalism and Maoism thrive.

Keep the narrative simple, not simplistic

Multiple objectives in public governance are a recipe for disaster. One hopes that in the waning days of this fiscal the government will shed some of the fluff it has accumulated. Focusing on infrastructure, macro-stability and private sector-led growth is the only option for creating sustainable jobs and reducing poverty. If an all-out fight against corruption is a must, because of electoral promises, let it begin where corruption breeds. This is in the public and not in the private sector.

A trishul for action

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Three initiatives are overdue. First, make the funding of political parties open to public scrutiny. This is a far more important political reform than having simultaneous elections. Second, exorcise the public sector of corruption before terrorising the private sector. The bribe-giver is the victim of an unresponsive governance system. It is the bribe-taker who is delinquent. It is public sector banks, public service departments, the police and the lower judiciary which need to be “purified”, not the voting public. Third, restore the credibility of regulatory institutions by respecting Chinese walls purposefully built between them and the government. The Reserve Bank of India seems to be the latest victim of executive activism in the demonetisation snafu. Let’s ring the curtain down on disruptive, executive muscularity.

Adapted from the author’s article in Asian Age January 11, 2017 http://www.asianage.com/opinion/columnists/110117/to-create-new-india-3-initiatives-overdue.html

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