governance, political economy, institutional development and economic regulation

Archive for the ‘bureaucracy’ Category

Bimal Jalan reflects

Jalan book

 

exercises the writer’s privilege to box his reflections between three inflection points. The first is 1980, ostensibly because 1977-79 was the first time the Congress lost power at the Centre. The second is 2000, being the start of a new millennium. And 2014 is the bookend when the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) formed a majority government.
Obscure inflection points
Of these, the choice of the first two years as turning points is not immediately obvious. Conventional wisdom regards 1991 to 2014 as a near continuous development period, barring the fractious interregnum of 1997-99. In the 1980s, it is 1984 that dominates, as the end of an era with the assassination of Indira Gandhi and the beginnings of Rajiv Gandhi’s brief “Camelot” phase. The year 1980 is significant only because Sanjay Gandhi died in an air crash in June and Mrs Gandhi aged visibly. The choice of 2000 is similarly obscure, except for broadly coinciding with the start of Atal Bihari Vajpayee’s NDA government.
Dr Jalan – man for all seasons
But this is mere quibbling. The book is unconstrained by structural rigidities. It provides reflections, spanning Dr Jalan’s seven earlier publications since 1992.  It can’t get better. Dr Jalan was in the Rajya Sabha (2003-2009); the longest serving governor of the Reserve Bank of India (1997-2003) since 1992; finance secretary; secretary banking, chief economic advisor and India’s executive director to the IMF and the World Bank.
Seven key reflections
Readers would choose their own favourite reflections. But this reviewer was intrigued by the following seven.
Low public savings retard investment 
First, Dr Jalan favours the conventional view that the persistent gap between India and the fast-growing economies of Asia during the last four decades of the 20th century is explained by our low levels of investment. For this he squarely blames our ideological decision to invest in public sector industries, which failed to generate savings for future investment and instead bled scarce tax revenue to fund financial losses — a familiar story even today.
Colonial style administration ill equipped for challenges
Second, he red flags the fact that from the 1970s, we did very little to enhance the competence and efficiency of public administration. We still lack the required composition of skills and experience in the public space to provide 21st century results.
High expectation, poor execution
Third, he bemoans the fact that we unfailingly adopt best practice priorities — take the national priority for agricultural growth. But we fail miserably in making supportive policies and rules. We have throttled agriculture by ignoring the interest of the farmer to serve the interest of the consumer. Similarly, we prioritise a progressive fiscal policy. But the revenue from direct taxes stagnates while regressive indirect taxes are buoyant.
Sustained, high growth misaligned with political incentives 
Fourth, Dr Jalan’s term in the Rajya Sabha convinced him that deep political reform is the key to change India. And who could disagree? But some caveats apply. Decentralisation, as flagged by Jalan, is certainly desirable for enhanced effectiveness and public participation. But, it will not, by itself, serve to reduce the size of government. In fact, employee numbers and expenses are likely to increase as scale effects disappear.
Union government muscularity erodes state government autonomy 
In a similar vein, it is true that the Union government tends to erode the federal structure by misusing governors for narrow political ends. But constitutionally, we are a “Union of States with a centrist bias”, per political pundits, and not a federal state. Parliamentary norms and conventions are routinely subverted — a self-goal, since this reduces Parliament’s credibility.
Dysfunctional parliament erodes its own credibility
Dr Jalan cites 2006, when the budget was passed without discussion, illustrating political expediency of the worst kind. But it is open to question whether the existing process for annual Budget presentation and examination remains a productive exercise or has become mere form without substance. The cabinet system of decision-making, underpinned by the principle of collective responsibility, was undeniably subverted during the United Progressive Alliance government, since political power was dispersed beyond the government. But this was poor practice rather than a structural flaw. And it appears to have healed itself after 2014.
Judiciary – safeguarding the constitution 
Fifth, the judiciary, rightly, comes in for high praise, for progressive jurisprudence, safeguarding the principle of separation of powers, and the primacy of the Constitution. But entrenched territoriality in the judicial appointments process remains contentious.
Public sector banks – out of control
Sixth, Dr Jalan recounts, financial reforms after the Narasimham Committee report of 1998 enhanced the resilience of Indian banks. But he leaves the reader begging for more on what went wrong over the last decade to inflate stressed loans to crippling levels. Are not politicised leadership and boards the problem in public banks? And given the stakes, can UPSC selection – as Dr Jalan suggests – really be an effective bulwark? Would not ramping up private shareholding, with the government holding only a “golden share” be a more effective solution? More generally, how effective are the existing prudential norms, for limiting exposure to sector, corporate or currency risk?
Tax reform – only half done?
Seventh, Dr Jalan’s view that it is unnecessary to reopen the constitutional scheme for inter-governmental division of taxes is curious. Tax pundits advocate that GST be extended to alcohol and petroleum.
jalan 2
It is a broad canvas on which reflects, as befits one who has helmed public policy since the 1980s. Readers will look forward to his take on the more recent developments — that is, since 2014.

 

Adapted from the authors Book Review in Business Standard, September 18, 2017 http://www.business-standard.com/article/beyond-business/bimal-jalan-reflects-117091801405_1.html

 

Keeping our children safe

Kid security

Violent crimes against children are grabbing headlines. The latest is the sexual assault and murder of a student in a private school’s toilet in Haryana’s Bhondsi, near Gurgaon. However, Haryana is not the most dangerous state for kids. That dubious distinction belongs to Delhi, with a crime rate (crimes against children per 100,000 population) of 169. Chandigarh follows at 68. The safest states for kids, per the National Crime Records Bureau data, are Jharkhand, with a child crime rate of just three, followed by Bihar, at four.

Long term negative impacts of child abuse

The World Health Organisation estimates that in developed countries, six per cent of adult depression, alcohol and drug abuse; eight per cent of suicide attempts; 10 per cent of panic disorders and 27 per cent of post-traumatic stress disorders are due to abuse during the first decade of the victim’s life.

But there is scanty scientific evidence, in developing countries, of the drivers — the sources and location — of child abuse. David Finkelhor, a sociologist, tellingly comments that “there is more experimental science in the toilet paper we use every day, than in what we have to offer abused children or families at risk of abuse”.

Crime data

In India, where the general standards of personal security and protection of human rights are low and public resources are stretched, child abuse can easily become just another statistic. Crimes against children increased from 14,975 in 2005 to 94,172 in 2015. Over the same period, violent crimes increased at the rate of 5.5 per cent per year — much faster than the growth of the population. Sadly, the proportion of crimes against children to total violent crimes, increased from seven per cent in 2005 to 28 per cent in 2015. Our children are increasingly more unsafe.

With whom does the buck stop?

Preventing such crimes is a shared responsibility. Initiatives include regular oversight and counselling of risky families by specialised agencies; early identification of high-risk adolescents to aid them through high school; imparting life skills training to make children streetsmart and reducing access to alcohol, drugs and weapons.

Inevitably, poorer kids are more at risk than rich kids. The same applies to other population segments at risk — senior citizens and women. The well-off can cocoon themselves from a prevailing ecosystem of insecurity. But for other vulnerable groups, it is the State which must step in to offer protection.

First, increasing the effectiveness of policing aimed specifically at controlling crime on the street and in public spaces is the key. Predators seek out low-security havens — parks, lonely lanes and unoccupied spaces to strike. India is historically under-policed. The UN standard is 222 police personnel for every 100,000 population. India has never crossed 140. Singapore — that haven of orderliness, which all Indians marvel at — has 1,074; disciplined Japan has 207; the European Union has around 347 policemen per 100,000 population.

Even this aggregate data exaggerates the level of police available for citizen centric, local policing — beat patrols, traffic management, crime prevention, detection and investigation. In India 60 per cent of the police are occupied guarding government buildings and assets (such as CISF & RPF); patrolling the borders (BSF, ITBP, SSB); quelling riots, fighting insurgency or doing VIP bandobast (CRPF and state armed police). Local policing must be strengthened much, much more.

The police is too busy with other stuff

police action

Comprehensive police reform has never been tackled seriously despite a series of commissions — starting with the National Commission on Police Reform, 1978, and ending with the Second Administrative Reforms Commission, 2007, all of which recommend broadly similar measures. The police mandate is fractured between states and the Centre, leading to silo functioning. The Central police forces are significantly better resourced than the state police forces, though the latter are directly concerned with controlling crime. The buck often stops with the police. But they are poorly led. Senior police officers skip from helming one complex area to another, where they may have no prior experience and no long-term allegiance to the specialised force they command. Even junior officers and constables are neither specifically recruited nor are they permanently slotted in specialised areas, like crime detection and investigation; communications; community policing; traffic management; cyber security or intelligence and riot control.

The “danda” is still the primary instrument of policing

Second, the use of technology to identify high-risk locations and victim behaviour and profile potential predators is constrained by the low educational qualifications of the personnel. 86 per cent of the force consists of constables who have merely passed their Class 10 or at best Class 12 exams. The officer cadre is thin and inadequately skilled. Service conditions are terrible. Police personnel regularly do 10-hour to 14-hour long shifts, with no weekly time off. Police housing, of indifferent quality, is available only for just one-third of the personnel. Worse, the police force is highly politicised and tends to rely on fear and the use of brute force, rather than by earning the respect of citizens — a colonial hangover. These conditions are not conducive to attract committed, qualified recruits.

Too few first responders to save lives and manage trauma

PS tent

Third, improving the first responder reaction, can save lives and minimise damage by getting victims to healthcare facilities. But there are just 15,500 police stations across more than 650,000 villages and road links may not be the best. Of these nearly 10 per cent lack even a wireless link. There are only 164,000 vehicles with the state police forces. Their spread across locations is likely to be highly uneven and concentrated in the major cities.

Better oversight by government of security arrangements in schools

Other than improving policing, viable short-term options include better oversight by the government education departments over school administrations. Value-add community participation, like authorising Parent Teacher Associations to certify the school’s adherence to minimum safety and security standards, can help.

Decentralise security to groups of parents & kids

cop teaches

Get kids and parent groups to collectively enhance their own security. Readers may remember the captivating proactivity of kids in outwitting, admittedly bumbling, adult, minor criminals from the 1950s era, in Enid Blyton’s Secret Seven and Famous Five series. Fiction can become a reality — once the imagination and interest of the kids is ignited. Herein lies the fastest and most effective route to making our kids safe.

Adapted from the authors article in The Asian Age, September 15, 2017 http://www.asianage.com/opinion/columnists/150917/to-keep-our-kids-safe-all-have-a-role-to-play.html

 

Will NITI get it’s hands dirty?

Rajiv-Kumar-NITI

Rajiv Kumar, the new vice-chairman of the Niti Aayog, has made development of an organic, Bharatiya model of development as his mission. He is likely to encounter three problems in this endeavour.

A new, local model of development is doomed from the start in a globalised world 

farmer 2

First, in a post-ideology world, marked by rapid technological transformations, economic models become outdated even before they can be tested. In these uncertain times, feeling the rocky river bed with one’s feet carefully, while crossing turbulent economic and social currents, seems the wisest option.

Second, isn’t this what Bharat has always done. We have been obsessive about the “uniqueness” of India, which seemingly requires all international experience to be adapted for use locally. This is not necessarily a bad thing, though it has its downsides.

Scaling up rapidly more important than localisation

school lunch

Consider that in the five decades after Independence we have stuck, like leeches, to the Nehruvian development model of ersatz socialism based on a massive industrial public sector accompanied by the outrageous neglect of agriculture, private enterprise or international quality education and health facilities. This, when most other emerging countries, in East Asia, Southeast Asia and Latin America, switched over to a modified Anglo-Saxon, neo-liberal strategy from the 1970s and reaped the benefits of rapid growth.

To be sure, even after 1991, the reform model we followed was Bharatiya. Its core ingredients were incremental rather than big-bang reform — a strategy Russia followed with disastrous results — and careful sequencing of sector reform to minimise the pain from reforms.

It is unclear, however, whether Bharatiya incrementalism helped the poor. Chancel and Picketty (July 2017) estimate that over the period 1980 to 2014 the share of growth accruing to the bottom 50 per cent of adults was 11 per cent in India; 13 per cent in China and only one per cent in the United States. Meanwhile, the top one per cent of adults garnered 29 per cent of the growth in India. China did better by containing the share of this segment at 15 per cent, while the US did worse at 34 per cent. More worryingly, the next nine per cent of adults, from the top, garnered 37 per cent of growth in India, significantly more than in China (29 per cent) and the US (32 per cent). Where we failed spectacularly was in protecting the middle 40 per cent of adults, who got only 23 per cent of the growth versus 43 per cent in China and 33 per cent in the US.

Be shrewd and businesslike not ideologically shortsighted

One Bharatiya innovation which succeeded spectacularly was the phased introduction of currency and capital convertibility. This modified-market approach was validated by India escaping the ill-effects of the 1997 East Asian currency crisis. It is significant that Malaysia followed our innovative approach, endorsed by Jagdish Bhagwati, by reimposing capital controls after 1997, and Iceland did similarly in 2008.

Similarly, our choice of shying away from “big bang” privatisation of the public sector, unlike Latin America in the 1980s and Eastern Europe in the 1990s, worked well. We chose instead to liberalise controls over private investment, thereby enabling private companies to grow and compete with the public sector. This strategy has paid dividends in civil aviation, telecom, minerals and electricity generation. Incremental private sector investment now dominates these sectors and a competitive market-based economy has emerged.

Simultaneously, we contained the social cost of reforms. But a similar policy has not worked in banking. We were too hesitant to give up the political power which comes with the government owning public sector banks. Private banks today account for just one-third of banking assets. The massive economic problem of stressed loan accounts, amounting to around 14 per cent of publicly owned bank assets, is a consequence of our not following through by liberalising the financial sector. Bharatiyata has, unfortunately, become synonymous with crony capitalism in banking.

Aping the turtle gives time to pull a reform coalition together

The GST is operational today due to a strategy of incrementalism, driven by the need for building inter-government consensus. Early indications are positive both on the increase in revenue collected and the enhanced compliance by taxpayers. But the jury is out till the final results come in by April 2018.

In a nutshell, Bharat’s economic policies have always been unique and contextual. Some observers would even say we obsessively reinvent the wheel. It will thus be a tall order for the Niti Aayog to evolve a new Bharatiya model of development, which is completely unknown to us, or the world.

Don’t fix what isn’t broken

Third, do we need a new model of development? The existing model has served us well. The areas for deeper reform are well known and agreed. Indeed, many are already on their way. Hopefully the 15th Finance Commission will continue the task of decentralising fiscal resources, by increasing the share of devolved resources from the 42 per cent existing today towards 50 per cent. This would push the Union government to be more selective in its interventions based on the time-tested principle of subsidiarity — not doing anything that can be efficiently done at a lower level of government. The government is already allocating more resources to agriculture, education and healthcare, which had fallen through the gaps earlier, while also stepping up allocations for defence and infrastructure.

Avoid the temptation to centralise functions – There is enough to do for all.

At the helicopter level of grand plans and policies, there is no gap which the Niti Aayog can address. In fact, it would do well to exercise forbearance in areas where individual ministries are better equipped to take the lead. Where Niti can add value is in addressing the root causes of poor implementation. Tony Blair’s Service Delivery Unit did this to marvellous effect in the UK. Malaysia and Tanzania thereafter copied the template.

Check the plumbing in government. Massive efficiency gains are low hanging fruit

dirty

Niti should focus on the nitty-gritty of getting the plethora of good intentions, embedded in policies, implemented on the ground. This goes beyond close monitoring of targets or punishing laggards. The devil lies in clogged delivery chains, poor metrics to measure results and misaligned incentives, all of which need to be painstakingly mapped and then innovatively declogged. It’s a plumber’s job that needs to be done. Is the Niti Aayog willing to get its hands dirty?

Adapted from the authors article in The Asian Age, September 7, 2017  http://www.asianage.com/opinion/columnists/070917/is-niti-aayog-willing-to-get-its-hands-dirty.html

 

Indian Railways: Slow and unsafe

suresh prabhu

It seems to be raining rail accidents these days, with two in swift succession. The hapless Suresh Prabhu is a good general but an unlucky one. He made sweeping changes in Indian railways (IR) since November 2014 when he became Minister. Most dramatic was his willingness to diminish his “empire” by merging the rail budget with the national budget. Similarly, far reaching was his delegation of financial powers for purchase and contracts away from the moribund Railway Board to the General Managers of the sixteen different railway systems which manage operations. Good management practise, yes. But more importantly it severed the ministerial potential for graft. Not many ministers have done similarly elsewhere.

Suresh Prabhu – a good but unlucky minister

Mr Prabhu has offered to resign owning up moral responsibility. Prime Minister Modi may have to let him go, reluctantly. Such is the dharma of politics. Having another accident on his watch would be unacceptable! Of course accidents are unlikely to stop merely by replacing the minister. Data collected by the National Crime Records Bureau records that in 2014 IR suffered 28,360 accidents or 78 accidents per day. So the chances of an accident happening, anytime, are high.

IR is low on transparency 

IR would have us believe otherwise. In a document titled “Transforming Railways, Transforming India” issued in 2016, reviewing achievements since 2014, the number of accidents over the period 2009-2014 is mentioned as an average of 135 per year which resulted in 693 deaths. The National Crime Record Bureau data puts the number of deaths from railway accidents in 2014 as 25,006, with an additional 3,882 people injured. The discrepancy between the IR and the NCRB database is due to creative use of data by IR, which reports only “consequential” accidents involving derailments or collisions. The NCRB data is comprehensive and based on the First Information Report filed with the police for all accidents connected with rail travel.

IR not to blame for 62 percent of accidents

To be sure, not all the 25,006 railway accidents in 2014 were due to the fault of IR. 62 percent of these accidents occurred due to “people” error – travellers walking negligently on railway tracks and getting run over or falling from over full trains. But even around 11,000 accidents  year is worrisome.

Rail still safer than road transport

To be fair to IR, their safety record should be compared with the other option available to travelers – road travel. The safety record of road travel is even worse. NCRB data for 2014 records 450,900 road accidents in that year with 141,526 deaths and 477,700 injured. The combined length of the National and State Highways, which carry the bulk of the traffic, is around 220,000 km or twice the length of rail track. The number of accidents however is 16 times more; the number of deaths is 6 times more and the number of injuries is 123 times more. Whilst the safety of road travel is a poor metric to use, it does provide a perspective of the objective conditions, in which IR operates.

Other than the likely moving out of Suresh Prabhu and the resignation of the the Chairman of the Railway Board, the other – more worrisome fall out – is going to be a typical short-term, defensive response of putting safety above all else. No private utility could have survived without doing as much, routinely. Consider,how tangled the Nuclear Power negotiations became when government legislated to put the onus of criminal and civil liability for accidents on the private sector suppliers of nuclear power equipment. But government service providers have more leeway in avoiding criminal action against them for safety lapses.

Safety or speed – a false binary

But the fact is that choosing between fast, modern trains and safe travel is a false binary. The populist, Luddite approach of slowing down the speed of trains, to avoid mishaps, is like asking car owners to go back to Ambassadors to reduce the risk of accidents by traveling slower. Technology allows you to travel both faster and safer. Air travel is for example both faster and safer than road travel. The Hyper Loop, when it arrives, is expected to boost both safety and speed at lower cost. The Indian Railways compete with other means of transport like road and air. It must provide the expected level of speed, convenience, comfort and safety which comparable transport options already embed. It has failed to do that, thereby losing marketshare to road transport over the last two decades.

Just as high-speed highways and the growing network of air routes has changed the way Indians travel, the Railways must also offer a bouquet of services to suit the differentiated needs of specific routes and category of customers. High-speed, premium railway transport on high-density routes radiating out from the hubs of Delhi, Mumbai, Kolkata and Chennai can transform travel by rail. Similarly, the rapid expansion of metro lines is a smart option to reduce the urban carbon footprint and road congestion.

Both speed and safety are a function of reliable track infrastructure adequately insulated for unregulated traffic ingress and suitable rolling stock. The planned high speed, dedicated, rail traffic corridors intend to achieve precisely these objectives – much like expressways do in highways.

Sans investment, neither safety nor speed is possible

None of this — speed, safety or security — is possible, unless we step up investment in Indian Railways. We cannot manage the 108,000 km of track and 11,000 trains which run daily, by jugaad, penny pinching, dodgy maintenance schedules and techniques, antiquated rolling stock, poorly trained and equipped personnel and management systems, which have not changed since the first train ran in 1853.

Corporatize IR for efficiency enhancement

Indian Railways must be corporatized so that it can shine like other public-sector companies like National Thermal Power Corporation, Indian Oil Corporation and Steel Authority of India. This is impossible as a government department because the administrative and financial rules are unsuited to the dynamics of running a business.

rail repair

Shun politics – Let IR become commercially viable

Railway tariff cannot be subject to politics. The same passenger who has no problem paying Re 1 per km for bus travel between cities pays just 28 paise per km of second class, rail travel and 45 paise per km in reserved sleeper class. Suburban rail travellers pay just 18 paise per km. This is an unsustainable and unnecessary subsidy, undeservedly enjoyed, mostly by the middle class. Rail tariff for non-AC travel must be increased to remunerative levels, thereby generating funds for improving the quality of services.

The spate of accidents has focused public attention on the need to restructure IR. What needs to be done is well known – using technology across the service delivery chain – track development and maintenance; signaling; rolling stock; communication; disaster relief and management systems. But none of this will happen unless Indian Railways is set free from the bureaucratic constraints which bind down its management cadres today. We can save lives, reduce the fiscal burden, improve rail services and make the economy more efficient by corporatizing IR.  Time to walk the talk on good economics also being good politics.

Adapted from the author’s article in The Asian Age, August 24, 2017 http://www.asianage.com/opinion/oped/240817/making-trains-safer-and-faster.html

Retribution – the missing R for resolving bad loans

Courtesy Arvind Subramanian, India’s Chief Economic Advisor, the 4R (reform, recognize, recapitalize, resolve) approach to manage the corporate bad loans problem, has captured public imagination. But he soft peddles a fifth R, that of retribution. The big stick must be wielded for reform to be credible.

jail2

Public sector banks – flabby, politicised ATMs providing easy money to elites

Banks are flush with money. But “liquidity” for borrowers, even those who have a “special relationship” with banks, is low. The shadow of stressed loans – missed loan repayments and interest payments- makes the usual, clubby way of doing business suspect. Banks operate on big margins – between interest paid on deposits and interest received on commercial loans – of up to 5 percent, in our cartelized banking architecture, dominated by publicly owned banks. But, despite high margins, public sector bank ratings suffer. The more loans they give, higher is the volume of bad loans.

Bad loans are an outcome of shoddy risk appraisal followed by poor loan account oversight. The ugly habit of kicking the can down the road by rolling over bad loans has been the norm.  On average, only around 26 percent of bad loans and accumulated interest are recovered. Using this metric, banks stand to lose around Rs 9 trillion (6 percent of our GDP) by recognizing and resolving bad loans of around Rs 12 trillion.

If corporate loans were recovered like consumption loans for cars, there would be no problem

Once a loan becomes stressed there is little a bank can do, except to recover as much as it can from the borrower; divert the proceeds to a better borrower and black list the delinquent borrower. But Indian banks rarely operate on this “sunk cost” principle. A long history of covert support to keep diseased loans and borrowers alive, under the guise of retaining jobs, has not helped. The spectacularly unsuccessful, Board of Industrial and Financial Reconstruction was still alive till January 2016. Unfortunately, so were hundreds of companies ripe for corporate euthanasia. We now have a new Insolvency and Bankruptcy Act, January 2016. But its effectiveness remains to be established.

RBI oversight of banks comes up short

Disappointingly, the Reserve Bank of India, instead of taking the bull by the horns and directing banks to start bankruptcy proceedings for bad loans, has taken the soft approach – giving banks time, till the end of 2017, to resolve the stressed loans themselves. Amusingly, to nudge bankers into doing unfamiliar, unpleasant things, extraordinary measures are being taken, to provide them administrative cover, from ex-post facto audit, vigilance and CBI investigations. Clearly, retribution against those bankers, who approved and over saw the dud loans, is not contemplated.

Loan waivers without retribution for the complicit create moral hazard

Economists, including RBI Governor caution against the problem of “moral hazard” that loan waivers create in the context of agricultural loans being written off by state governments. Apparently, forgiveness without retribution, is bad for rural borrowers, but ok for corporate borrowers. Sadly, retribution is sorely needed for commercial borrowers too, who account for 75 percent of the bad loans.

80% model borrowers, 20% delinquent addicts of “easy money”

home

The reality is even more nuanced. The bulk of borrowers, across sectors, are gold standard risks. Despite gross mismanagement of large corporate loans, 83 percent of the bank loans, valued at Rs 63 trillion, are serviced on time by borrowers. Moral hazard affects borrowers selectively in India. This is because retribution is also selective. Access to bank finance for small borrowers is cut off if they become delinquent and recovery proceedings are harsh. For large borrowers and the influential, more favourable terms apply.

Are only babus to be held to account?

handcuffs

Last month, a retired Secretary of the Coal Ministry and two other senior colleagues, were convicted for criminal conspiracy, by a trial court. The charge and the punishment meted out was completely out of proportion to their misdemeanors – less than adequate diligence in discharging their duties. Why this double standard for holding public officials to account? Rs 12 trillion of accumulated stressed loans against annual loan approvals of between Rs 3 to 5 trillion, indicates a deep rooted “conspiracy of silence” within public sector and co-operative banks; their patrons in government and the borrowers themselves.

These stressed loans, whether in industry or in agriculture, must be taken off the books of banks. But the concerned loan sanctioning and account oversight chain, whether present or retired, must be held to account on a standardized, transparent metric to establish active connivance to cheat the bank or lack of adequate diligence. This is the only way to delink quick resolution of the stressed loans from the problem of “moral hazard”.

Blacklist actively negligent founders

Second, deals need to be urgently struck with borrowers to resolve loans without access to the lengthy judicial review process. These can only happen if the big stick of sanctions is available to the negotiators. Founders, actively negligent in servicing loans, should be made to exit management positions, as a precondition for future access to bank finance. Delinquent individuals, who have been given opportunities earlier, to reform, via “greening” or rolling over of loans, should be debarred from access to bank finance.

Hold banks to account for bad loans

The argument against sanctioning bankers is bogus. It is feared bankers will stop taking decisions if sanctioned, thereby freezing the lending cycle. Till two decades ago, bank trade unions, routinely used the threat of striking work, to stop computerization or extract better wages. It was the Supreme Court which defanged them in 2003 by ruling that the right to strike is not absolute, particularly in the case of public services. No need to turn the clock back.

Stringent action against the bureaucracy has not adversely affected the functioning of government. Enshrined bureaucratic safeguards are most often the refuge of the incompetent or the corrupt. Those working transparently, in the public interest, rarely need such support. There is no reason why banks should be different.

Needed an empowered financial sector, “clean up” champion, to wield a long broom

Jaitley grimace

“Moral hazard” in bad loan resolution becomes a problem, only if we do not deal equitably and transparently. Elitist cliques, spanning politics, business and agriculture, must be weaned-off, the vice of bank financed “easy money”. Swift, impartial, standardized resolution of bad loans, with judicious retribution, can drain this vicious whirlpool, which saps national wealth and reeks of inequity.

Adapted from the authors article in TOI Blogs, June 23, 2017 http://blogs.timesofindia.indiatimes.com/opinion-india/retribution-the-missing-r-in-resolving-bad-loans/

 

Can GST make Hasmukh Adhia smile?

Hasmukh

Hasmukh Adhia, India’s revenue secretary, is finance minister Arun Jaitley’s chief aide for rolling out the Goods and Services Tax. Contrary to his first name, he never smiles, at least not in public. But even he can now take a break and smile. The GST juggernaut is careening ahead. In just over a week, India would have leapfrogged into the league of economies which have walked the talk on rationalising indirect taxes.

Noose tightens on black money generation

card pay

Photo credit: Imagesbazar.com

So what will Mr Jaitley and the GST Council have achieved on July 1, 2017? First, this collegial team of finance ministers, across the Central and state governments, would have fired the first, potent salvo against black money. Demonetisation; tax raids; getting back overseas black money caches — all pale in significance, compared to the institutional impact of GST. Consider, that the most vocal protests against GST have come from dry fruit traders, cloth merchants and jewellery makers. These businesses have been traditionally cash heavy. Of course, the intrepid evader will still have tax leak holes left open. Agriculture, food items and the business in booze remain yawning gaps in the tax revenue security architecture. But the message is loud and clear: the rope is shortening. So watch out!

Lower net indirect tax, lower prices to spur demand

shopping

Photo credit: Imagesbazar.com 

Second, the massive discounts being offered on pre-GST clearance of the stock of consumer durables suggests that prices of these goods will reduce. An entity, empowered to investigate and ensure that net tax reduction benefits are passed on by manufacturers and dealers to consumers, is in the offing. The history of such clunky, intrusive executive action is not encouraging. Due to information asymmetry, determining the cost breakdown of products externally, is invariably inefficient. Either the enforcement agents get compromised or they end up harassing manufacturers and suppliers for trifling results.

But in truth, it really doesn’t matter. Inflation levels are at historic lows — below three per cent per annum; the monsoon is progressing well and global demand remains damp. Babus and their counterparts in the public sector — around 18 million households — have all either been given or will soon get pay revisions. They are itching to spend the windfall.

Clunky “inspector raj” to check price rise – a bad idea

Even if the entire tax rationalisation bonanza is retained by manufacturers and dealers, it will still generate surpluses for private investment — in debt servicing, realty and equity markets. Improving the revenue steam of corporate India is vital for getting over the gargantuan NPA problem, which is bad cholesterol for growth. The good news is that most product markets are competitive. Digital marketers have cut retail margins to the bone. Even the market for services is hyper competitive — think telecom. This makes it tough for corporates to retain extra normal profits.

SMEs & Trade pay the price for becoming accountable – high compliance cost

Also, undeniably, tax rationalisation has come at a cost. The actual transaction cost, for business, to comply with digital GST processes is unknown. But GST provides a huge opportunity to India’s IT developers to innovate low-cost compliance and oversight options — particularly for value segments produced by small and medium industries. These could be perfected at home and marketed worldwide as context-specific solutions for developing countries. In 2013, at a conference in Washington, the World Bank president asked Nandan Nilekani why he wasn’t rolling out Aadhaar across the globe? Mr Nilekani responded that he was too busy at home and had no time left for solving the problems of the world. This single statement projected India’s enormous domestic, digital market potential far better than the glossies, which international consultants and governments routinely produce touting themselves. These digital opportunities have multiplied by several degrees with GST.

Multiple rates align with multiple objectives 

Third, the agreed-upon somewhat clunky architecture for GST reflects compromises made to achieve the twin overriding concerns — protecting the poor and ensuring fiscal neutrality for all governments. In the absence of a direct cash transfer framework, continuing tax exemptions on mass consumption goods and services is a reasonable policy option. Given the federal structure and the plurality of our polity, there never was an option to the consensual approach adopted by the GST Council. Meeting the revenue concerns of state governments has inevitably led to six GST rates. The highest rate of 28 per cent is designed to be used for neutralising any revenue loss for state governments.

Multiple rates result in efficiency loss due to tax leakage from misclassification of goods to a lower tax rate. A good example is the amorphous classification of a storage battery as a computer peripheral (lower tax rate) versus use for backup lighting needs (higher tax rate). Multiple rates also increase the accounting load for keeping track of tax credits and debits. But the economic benefits from early implementation of a less than perfect solution far outweigh the opportunity lost from a prolonged wait for the BJP to come to power in all the states, thereby enabling a best practice single rate template to be imposed from above, China style.

Fourth, GST is good for jobs. It gives a boost to “Make in India” by withdrawing the tax advantage for imported manufacturers. Importers pay Central state tax at four per cent as special additional customs duty. But domestic products are taxed at the rates of state sales tax, which are generally higher. This disadvantage for domestic production will vanish with GST. Imports, in addition to customs duty, will pay additional customs duty at the GST rate applicable for domestic products.

Flexible implementation arrangements – to muddle through the knots

Finally, the finance minister has consistently adopted a firm but nuanced, practical stance on the implementation schedule. Recognising that small-scale industry and traders are lagging in preparations, he has agreed to defer the filing of returns by two months. Assurances have also been given that the GST rates could be adjusted if the net tax burden gets distorted or gets unbearable. A government that is open to negotiating beneficial outcomes for all stakeholders and still retains the will to keep the national interest foremost is quite clearly operating at the tax-related good governance frontier. Smile, please.

Adapted from the author’s article in the Asian Age , June 23, 2017 http://www.asianage.com/opinion/columnists/230617/its-time-to-smile-gst-to-usher-in-a-new-era.html

Jaitley black money

India’s pressured public institutions

BOOK REVIEW
Rethinking Public Institutions in India
Devesh Kapur, Pratap Bhanu Mehta, Milan Vaishnav (Eds)
Oxford University Press
548 pages; Rs 995

Rethnking Pub Inst in India

Public institutional reform has a stale air about it. There are plenty of options but little action. The sombre packaging of this book adds to this gloom. Possibly, the “monkish”, value-for-money branding is a consciously adopted tactic, setting it apart from the current trend favouring glitz and hype. The authors appear to be flinging a dare — that in their case substance needs no gloss. They are right.

PBM

The editors’ academic pedigree is reassuring. Pratap Bhanu Mehta is the best-known of them, a public intellectual extraordinaire and the acknowledged voice of evidenced, liberal political thought.
Devesh
His co-editors Devesh Kapur and Milan Vaishnav are US-based academics.
milan vaishnav
This new publication is a follow-on of a 2007 publication Public Institutions in India: Performance and Design co-edited by Messrs Kapur and Mehta.
The contributors are an eclectic mix of UK-, US- and India-based academics and Indian civil servants, serving, repositioned or retired. What is common is their deep and systematic association with public institutional development and an enviable record of publishing their work and opinions.
Are public institutions in India doomed?
So, are central public institutions going to seed? And does that explain India’s future challenges? The introductory chapter, written by the editors, provides an elegant, broad sweep of drivers and trends in institutional malaise, highlighting areas where performance has been dangerously below par. But the helicopter view is a mite too one sided, veering to a dark view of the state of national institutions.
Institutional resilience outnumbers the failures 
A more nuanced and refreshing view emerges from the succeeding chapters, each about a single institution. James Manor, writing on the Presidency, exquisitely details how this apex institution, despite the occasional failures of individual incumbents – think Fakhruddin Ali Ahmed who signed on the dotted line to impose emergency in 1975 and Giani Zail Singh, who was not averse to being actively political – has been a steady hand, safeguarding constitutional propriety and citizen rights from potential executive and legislative transgressions.
Errol D’Souza, reviewing the Reserve Bank of India, describes its pugnacious success in enlarging its regulatory space, solely through its performance-driven credibility. E Sridharan and Milan Vaishnav pen a fluid and attractively rendered tale, about the Election Commission of India, which has similarly earned its spurs. Eighty per cent of Indians trust it because of its remarkable conduct of timely, fair and efficient elections. Madhav Khosla and Ananth Padmanabhan describe how the Supreme Court has nurtured the public’s trust by courageously and consistently ruling in favour of equity, inclusion and fair play. However, they warn that dark clouds loom unless justice is delivered more efficiently.
Navroz Dubash writing on new infrastructure regulatory institutions – the Central Electricity Regulatory Commission (CERC) and the Telecom Regulatory Authority of India (Trai) – acknowledges that in the initial years both had to fight severe challenges from publicly-owned monopolies and their patrons in government. Two decades on, they are the arbiters of positive change. The CERC has overseen competition in bulk electricity supply. The Trai has curated highly competitive private telecom customer services and tariffs. However, Dubash correctly points to the need for enlarging the regulatory space such that all actors – the Parliament, Judiciary and the Executive become active players in negotiating regulatory outcomes, with the Regulator playing the balancing role,
Institutional failure more visible in sub-national entities
“State failure” is a malaise more visible in sub-national institutions, which have failed to imbibe the positive changes taking place in related central public institutions. State governors, legislatures, the lower judiciary, state public financial management institutions, electricity regulatory commissions, vigilance departments, and election commissions are often severely blemished. T R Raghunandan woefully records that institutions of local government remain ignored, underfunded and underused, except in Kerala, Karnataka and West Bengal. Consequently, inclusive growth suffers and an opportunity is lost for embellishing and inculcating local traditions of results-based democratic functioning.
But there are black sheep at the national level too
Not all national institutions, despite inherited advantages, have developed benignly. Parliament is one such. M R Madhavan ruthlessly excavates the reasons it has lost the public trust. R Shridharan similarly unravels why the Central Vigilance Commission, India’s anti-corruption agency, and its investigative arm, the Central Bureau of Investigation, have failed to establish their credentials. The former is merely a tool, to be used selectively, by the executive against its own officials. The latter is at its nadir. The moniker “caged parrot” accurately reflects why it has lost credibility in the fight against corruption.
The Comptroller and Auditor General (CAG) of India, the supreme audit institution, gets mixed reviews from R. Shridharan and Amitabh Mukhopadhyay. The CAG is uniquely placed and significantly empowered, to guide and assist Parliament to exercise granular oversight over the executive. Its path-breaking exposure, under Vinod Rai, of massive inefficiency and financial impropriety in spectrum and coal allocations lifted its public profile. But, in its “independence”, also lies the danger of it being ignored, through a “conspiracy of silence”, between a dysfunctional Parliament and a pliant executive.
The civil service, particularly its elite component – the All India Services (AIS), which constitute 0.03 per cent of the total civil employees and just 1 per cent of the Group A employees of the Union Government – have unambiguously failed. K P Krishnan and T V Somanathan admit that nothing has changed for the better over the past decade. Recruited on merit, this tiny elite thereafter enjoy the rents accruing from that initial, one-time achievement. But the authors shrink from endorsing that the AIS be phased out and its functions reallocated to the specialist cadres of the Central Services — these constitute 99 per cent of the Group A civil employees, who currently fester despondently.
This is a multi-layered, exhaustively referenced publication, which surgically exposes the dark side of public institutional dysfunction. But it also provides sufficient evidence of institutional resilience, on which an enlightened political leadership can build. A must-have, for all those who either belong to, or wish to join, the frustratingly uplifting community of public institutional developers.
Adapted from the authors review in Business Standard June 15, 2017 http://www.business-standard.com/article/beyond-business/public-institutions-under-scrutiny-117061401505_1.html
raj ghat
Raj Ghat – Gandhi ji’s memorial keeps the flame of “independence” alive

Taming killer highways: Booze ban a marginal solution

booze bar

Thirsty travellers on highways are going to miss the inviting LED signboards offering “cold beer” to alleviate their boredom. But ask those who have lost a loved one in an accident, or been maimed in one — and they will enthusiastically support the Supreme Court’s ban on the availability of booze along our state and national highways. When the issue is emotive, the reflex response of both the judiciary and the executive is to do anything that appears adequately responsive. What could be easier than banishing booze from the highways, knowing full well that this could be just optics.

Target drivers and the owners of vehicles with punitive action

Traffic police

Curbing drunken driving requires that drivers, a small fraction of all travellers, be targeted. Most travellers are passengers. It doesn’t matter whether they tipple or not. Many of those at the wheel are licensed, professional cab, bus and truck drivers — much like commercial pilots. Surely the owners of these commercial vehicles should be held criminally accountable, along with the driver, for accidents caused by drunken driving, unless they can prove that they test their drivers randomly. This would automatically incentivise owners to use drivers who don’t drink. But this is a narrowly targeted option that requires follow-on administrative action and effective policing. Far splashier, instead, to go in for a blanket ban on booze —  and never mind if it causes collateral pain.

Our bias against booze is vested in the Constitution

Directive Principles

The origin of our half-hearted approach to the problem lies in the Directive Principles of our Constitution which enjoin the State to implement prohibition. These define the higher moral ground that we all must aspire to. But they are not mandatory and need a law to be passed to become implementable. We implement these only selectively — like universal education —  where there is near complete consensus. But we ignore others, like prohibition, where a consensus is missing. Hence the tension between the constitutional directives and reality.

We do not have a fundamental right to drink or sell booze. We do so only at the pleasure of the State. It can be withdrawn at any time. Many would argue it should not be summarily withdrawn, specially when it will disrupt ongoing business. And because other options exist to curb drunken driving. If we are uncomfortable with the ideals specified in the Directive Principles, then the correct approach is to amend them and expand the fundamental rights to include the freedom to drink responsibly. But who will support such an amendment?

We are not French – we have no tradition or social acceptance of booze

indian meal

Mainstream India has no tradition of the neighbourhood bar, from where it is all right to stagger home, helped along by acquaintances or friends. Yes, there is communal drinking in tribal areas and on special occasions in villages, where there is a lot of staggering about. But these are rare occasions. In the plains of India, most regular tipplers are men as drinking is done outside our homes. It is the anonymity of highway drinking that is attractive for furtive, male drinkers.

Economic impact of booze ban marginal – because tipplers will find a way to drink

How terrible will the booze ban be for the economy? The measure simply aims to make drinking and sale of liquor physically invisible from highways. Tippling will shift a couple of minutes away onto back streets, possibly with far worse consequences for public order. But its revenue impact will be negligible. Businesses will adjust. Web-based apps will guide travellers to back street bars and booze shops; private caches of pre-mixed booze in flasks will proliferate as will the illicit supply in dhabas along the highway.

Judiciary not the culprit – amend the constitution if you want a right to drink

Blaming the judiciary for ham-handedness is the easy part. But the Government of India and several state governments, including Delhi, Madhya Pradesh, Andhra Pradesh and Telangana, have accepted the verdict. Eighteen other states didn’t bother to contest the decision. This shows that the judiciary is aligned with the national and state-level executive in moving India, gradually, in the direction to which the Directive Principles point us.

The real culprit is drunken driving- only intelligent policing can help

Drunk driver

But without effective patrolling, behavioural change among drivers is highly unlikely. Ask any highway traveller. There is nothing more reassuring than regularly passing by a police patrol car, specially at night. Drunken or irresponsible driving can only be curbed if the Centre, with the consent of all state governments, directly polices all our national highways. Centrally-monitored and controlled mobile patrols, responsive to distress calls and SMSes like the National Ambulance Service, equipped with paramedic and trauma support teams, should be frequently visible along the 90,000-km national highway network.

Create a National Highway Police & Trauma Support System- NHP&TS

NHP

A National Highway Police Force should be created and empowered to regulate traffic; challan errant driving; provide trauma support in case of accidents and keep the highways free of crime and irresponsible social behaviour. Back-of-the-envelope calculations suggest that an officer-oriented, multi-skilled force of 11,000 employees would cost Rs 1,000 crores annually in overheads, maintenance and salaries, with a one-time capital cost of Rs 800 crores for equipment and housing. Sounds expensive? Implemented over a period of five years, it is just 0.3 per cent of the annual revenue expenditure and 1.5 per cent of the capital expenditure for the police in the Union Budget.

Compare this with the avoided cost of Rs 1,400 crores, being the value of lives lost (42,000 persons in 2009) in accidents on national highways, computed on a present value of Rs 3.5 lakhs per life lost, based on the average per capita income, over a residual working life of 20 years. The avoided cost of injuries to 1.5 lakh people (2009) is around Rs 180 crores, assuming medical treatment and lost wages at two months’ wages per injured person. The cost of vehicles and goods lost and cost of trauma suffered is over and above this.

The economic payback of a NHP&TS system is under one year

An international-quality high way security and trauma support system makes economic sense. More important, it is yet another bond sealing the social compact between Prime Minister Narendra Modi’s government and the travelling public — urban immigrants, business people and tourists —  estimated at around 230 million passengers in 2016 (assuming an average lead of 75 km) by the National Transport Development Policy Committee in 2013. There can be no better social impact investment than one which offers an economic payback of under one year.

Adapted from the authors article in Asian Age, April 8, 2017 http://www.asianage.com/opinion/columnists/080417/tame-killer-highways-liquor-ban-just-optics.html

grief

Basic income transfer- Modi’s next big thing?

poor woman

Irrespective of its economic virtues, demonetisation — an aggressive, unprecedented initiative of Prime Minister Narendra Modi, brought rich dividends for the BJP in the Uttar Pradesh election. Above all, voters were impressed with his determination to punish those who have become fat on black money. That the move also “punished” those who had no black money — via extended inconvenience, loss of business or employment — was collateral damage.

An incredible 41 per cent of voters gave a thumping majority to the BJP, including possibly those who were collateral fodder or the target — proving, yet again, that in politics, good intentions trump technically appropriate action.

The next frontier

So what can the Prime Minister do next to shock and awe the Opposition and win minds and hearts across India? Elections loom in Karnataka in 2018, currently ruled by the Congress, and national general election is in 2019. The chosen programme must be elegant not clunky; effective not merely palliative; quickly deliverable and fiscally prudent.

The Union government currently uses clunky, partially- or fully-funded schemes, implemented by the state governments, to establish its human face. There were 1,500 such schemes, which the Modi government has pruned to around 657. Most are massively inefficient. Arvind Virmani, a former chief economic adviser, claims they follow the one-third rule. Only one-third for the targeted beneficiary, one-third for administrative expenditure and one-third for corruption.

Mind you, it is expensive to provide access to public services and goods even via a cash support mechanism. Prof. Abhijit Banerjee of MIT assesses the average administrative cost, across countries, of cash support programmes at 50 per cent of the amount delivered.

A universal, unconditional income transfer in cash to all citizens is the most efficient option. But it suffers from bad optics. The same amount of money is given to a beggar as to a real estate baron. But Sudipto Mundle of NIPFP argues that select exclusions are possible without massively retarding efficiency. The most obvious exclusion is anyone in urban areas. The average income in urban areas is consistently higher than in rural areas, where 80 per cent of the poor live.

Substitution or additional support

Others, like Jean Drèze, are sceptical about the cash transfers, specially for food support. We know food prices spike during drought. During such extreme events, the transferred income would be insufficient to buy the targeted amount of food. Those living at the edge cannot afford to be caught in such a situation.

Clearly, basic income transfer is not a substitute for all other existing social support mechanisms in education, health and social protection, but it can substitute those mechanisms which are the most wasteful and poorly targeted.

Reform wasteful, leaky de-merit schemes 

The Economic Survey 2017, lead-authored by Arvind Subramanian, chief economic adviser, does signal service by evidencing the problem of misallocation of fiscal resources in the existing schemes. The share of the districts, where 40 per cent of the nation’s poor live, in allocation for anti-poverty schemes, like the mid-day meal scheme is just 20 per cent and just 24 per cent in the Swachh Bharat Mission. Such misallocation is wasteful.

SEWA pilot shows the way in MP

SEWA

A pilot done by SEWA in four villages in Madhya Pradesh, over a period of two years, covering 6,000 people along the universal coverage principle, transferred Rs 3,600 per year to each adult, with lower amounts to children. The results are impressive. The most significant outcome is that even four years later, many of the initial achievements with respect to the enhanced decision-making role of women; sustainable income from assets — mainly livestock — and the continued productive use of income remained strongly in place. Similar pilots are being done in Africa. But the caveat is that pilots involve significant handholding and oversight without which, as in Ghana, sustainable income enhancement is negligible. This cautions that even with a universal basic income scheme the role of handholding will remain.

A first for India

India could become the first country in the world to use a “qualified-universal” basic income transfer to end poverty. The real problem is how to find the money. Arvind Panagariya, the Prime Minister’s key economic adviser and vice-chairperson of the Niti Aayog, however, highlights the fiscal requirement. At just Rs 10,000 per year per person the cost is equivalent to the government’s entire revenue of 10 per cent of GDP.

Use second best options – sequential implementation; finance the poverty gap

But there are viable second-best options. First, smaller amounts could be transferred. The poverty gap has been estimated at around Rs 3,500 per poor person per year as in the SEWA pilot. The Economic Survey records that an annual transfer of Rs 3,240 to every female would cost one per cent of GDP. The cost can be reduced further by a quasi-universal scheme focused on females only in rural areas, with girl children getting less and women getting more, as in the SEWA pilot.

Subsidy reform is overdue. The Prime Minister had also adopted the approach of “subsidy tyaag” the voluntary giving up of subsidy by those who were well-off. It is also possible to make it administratively more difficult to access demerit subsidies like on cooking gas; fertiliser and income-tax exemptions with the target of eliminating them altogether.

In the meantime, a “quasi-universal” basic income transfer scheme can be started by allocating just Rs 75,000 crores (just 0.3 per cent of anticipated GDP in 2017-18) to one-third of the poorest districts. The programme can be expanded to other districts by allocating just two-fifths of the incremental revenues, especially if growth trends upwards beyond eight per cent per year.

PM should grasp the moment

Prime Minister Modi is not one to be hesitant about funding innovative ideas in the public interest. The quasi-universal basic income scheme is one door that he should consider walking through, specially if he is confident that India shall grow at above eight per cent.

Adapted from the author’s article in the Asian Age, March 31, 2017  http://www.asianage.com/opinion/columnists/310317/basic-income-transfer-modis-next-big-thing.html

poor children

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.

 

 

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