governance, political economy, institutional development and economic regulation

Archive for the ‘Public Institutions’ Category

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First, in a post-ideology world, marked by rapid technological transformations, economic models become outdated even before they can be tested.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

 

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bureaucracy, Economy, India, Public Institutions

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Privacy – an elite fantasy

privacy

Elite concerns are usually disconnected from the ground reality. For the 1 per cent of Indian who live privileged, cocooned lives, the judicial right to privacy created by the Supreme Court yesterday will add yet another layer with which they can insulate themselves from the “barbarians at the gate”. So, here is what the rich may now be able to do which they couldn’t earlier.

Is the right to euthanasia next?

First, they may now be able to refuse medical treatment and die in their beds, peacefully, instead of being compulsorily hooked up to tiresome, life-saving machines in hospitals. But try explaining this “right” to the millions of poor Indians for whom just getting admitted to hospitals is still a dream and refusing treatment would be unimaginable.

Deletable past lives

Second, the well-heeled may now be able to press for being judicially forgotten – all traces of their past lives and identities expunged, giving them a fresh start without having to flee to distant London or arid Dubai. Contrast this with the Herculean efforts the average Indian makes to become part of a database and have an officially recognized identity – a voter card, a passport, a PAN card, anything which proves that she exists.

LGBT sex may become legitimate

Third, those with alternative lifestyles – the Lesbian, Gay, Bisexual Transgender (LGBT) community might now hope to be free of the notoriously archaic Section 377 of the Indian Penal Code, which criminalizes everything other than straight sex. But would this give them the right to marry a partner of their choice; adopt children or be socially accepted?

Evidencing crime will become harder

Now ponder the downsides. Law enforcement agencies struggle to manage terrorism, Naxalism, urban mafiosi, drug pushers and armed rural gangsters even today. “Privacy” concerns will provide a legal shield to undermine information collection, crime detection and investigation. Nothing less than the over-the-top, draconian Armed Forces (Special Provisions) Act – used today only in the “disturbed” areas in Kashmir and parts of the North East – would be effective. Since gangsters can afford to hire the best lawyers, the violation of their fundamental right to privacy in the process of enforcing the law, will now become a favourite ploy to keep these worthies free to wreak havoc.

How intrusive is the Indian State anyway?

Will this fundamental to privacy help the 200 million slum dwellers or the unknown millions who sleep under the stars on urban streets? Is not our fear of the “big State” overblown? The India I know is under policed, under governed and under regulated. There is a plethora of agencies, laws and rules to bind down anyone and yet very few – mostly the timid, those mindful of their public image and the law respecting middle class get intimidated by the legal spaghetti. The rich buy their way out of any mess and the poor are so inured to danger and risk that it is second nature for them to live with uncertainty.

Biometric targeting of beneficiaries to be abandoned?

Take the case of Adhaar for verifying the identity of those using the Public Distribution System (PDS). Recent studies in Jharkhand by responsible social scientists – Jean Dreze and Reetika Khera – found that 15 percent of the eligible PDS beneficiaries were excluded because of technical glitches or access problems in using Aadhar as a test of identity. But 85 percent of the beneficiaries were targeted correctly. If the right to privacy eliminates the use of Adhaar, we will be back to what Rajiv Gandhi famously called the 25 percent approach to poverty reduction – where 75 percent of the funds are siphoned-off by intermediaries. How and why would a reversion to a system which has huge inclusion errors (ineligible people getting benefited) be any better?

Big data to be throttled?

Finally, consider how retrograde is the fight by “right to privacy” advocates against big data. It is big data – the billions of pieces of information on human behavior and preferences linked to specific human demographics, which enables algorithms to predict trends, thereby aligning products and services with customer needs. This is what makes big data commercially valuable. In price sensitive markets like India, telecom and e-commerce penetration is being driven by the potential to monetize big data. Putting brakes on this process means putting brakes on the rolling out of technology services which will become more expensive if the actual user is to pay for them.

India lost an opportunity in 2014 when facebook- Bharti Airtel wanted to roll out free internet services on mobiles. TRAI regulations ensured that this venture never took off, thereby slowing down internet access for all except the 300 million people in the upper most income segments who can afford it.

Tilting at windmills

Nandan Nilekani is now an evangelist against “digital colonialism” in the context of tech majors like Google and Amazon aggressively expanding their presence in India. We should be wary of tech industry insiders playing the “anti-foreign” card. Similar attempts were made by the infamous “Bombay Club” to scuttle the 1992 economic liberalization. Their contention was that liberalizing the domestic market was fine but Indian industry should continue to be protected from foreign competition. We are fortunate that the government of the day paid no heed to this self-serving agenda.

Keep India open for competition

India is a big economy with very shallow industrialization. We need to remain open to all economic actors – domestic and foreign who want to invest in India. It would be a huge mistake to emulate the xenophobia of the United States and draw up our bridges. Data is the new oil. Data security needs to be ensured, irrespective of whether data is stored in India, or overseas. But generating anti-foreign hysteria is not in our interest as we try to integrate into global supply chains and become a part of the global value creation eco-system.

It is easy enough to legislate rights. We have many notional rights. Creating a level playing field for all citizens to enjoy these rights, equally, is another matter altogether.

Also at http://blogs.timesofindia.indiatimes.com/opinion-india/privacy-an-elite-fantasy/

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Economy, India, Law and regulation, poverty, Public Institutions, technology

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Well begun is half done

BOOK REVIEW
India Transformed
25 years of Economic Reforms
Rakesh Mohan – edited 
Penguin Viking 
670 pages; Rs 999

 

India Transformed
Curating 31 essays into a story on India’s economic reforms can be a giant yawn. But Rakesh Mohan, a videshi economist and a veteran of four major government committee reports, is up to the challenge. 
THE PLUMBING WHICH CHANGED INDIA
Indians believe that the actions of civil servants determine the future of India. This is an abiding fallacy. The truth is, starting from Jawaharlal Nehru to Narendra Modi, it is politics and political leaders that set the tone, whilst civil servants dutifully follow with the plumbing. This book is not about the broader political economy of reforms. Those stories have been told elsewhere. Instead, this book examines the practices and processes — back-office stuff — that achieved reform objectives. Expectedly, therefore, essays by civil servants and public intellectuals dominate this compilation. 

 

INDIA TAKES CHARGE OF MACRO ECONOMIC STABILITY
C Rangarajan marks 1991 as a watershed moment in the Indian economic history. Montek S Ahluwalia agrees and debunks the J Bradford DeLong (2001) and Dani Rodrik Arvind Subramanian (2004) proposition that the 1991 reform process was overhyped; that merely becoming business-friendly would have been sufficient to yield the maximum value; that external liberalisation was merely genuflecting to the Washington Consensus. He asserts that the reform architecture responded to the local context and was designed for medium-term results. Y V Reddy deconstructs the role of fiscal federalism in stabilising state budgets. Laveesh Bhandari evidences this by citing best-fit policies and programmes innovated by states using these additional devolved resources. Jaimini Bhagwati reviews the process of capital market liberalisation that was key in enabling competitive industries to grow. 

 

USING THE GROWTH DIVIDEND
Top diplomat Shyam Saran traces the post-cold war, benign, unipolar world that gave India breathing room to grow till the 2008 financial crisis. His successor in the foreign office Shivshanker Menon establishes how economic growth engendered new foreign policy options for India — a view endorsed by Martin Wolf, who advocates even greater proactivity in world affairs. Sanjaya Baru links the recalibration of India’s security matrix to the new-found confidence from successful reform. Tarun Das points to the quiet success of Track II initiatives in forging defence and nuclear cooperation. Harsha Vardhana Singh, details how substantive tariff rationalisation opened domestic industry to competition. However incomplete, domestic factor market reform shackled export growth and enhanced the trade deficit. N K Singh and Jessica Seddon illustrate how public and private roles moved from mere co-existence to co-evolution, especially in infrastructure development. 
THE MARGINALISED 
 
rural India
But the benefits from economic reform did not accrue symmetrically. Rakesh Mohan postulates that domestic labour market and regulatory rigidities continue to dull the growth potential in small manufacturing. Ashok Gulati argues that liberalisation of the exchange rate, lower industrial tariff and private investment norms never benefited agriculture due to institutional rigidities. Devesh Kapur documents that enlarged access to education was not accompanied by quality enhancement. Naushad Forbes rues the stagnation of Indian R&D spend as a proportion of gross domestic product and the skew towards science research, rather than technology development, which can constrain innovation. Nachiket Mor et al are sceptical that stepping up private investment alone can result in catching up on health outcomes. Sarwar Lateef argues for deeper governance reforms to benefit the disadvantaged. Vinayak Chatterjee laments that the PPP (public-private partnership) model died because of unrealistic asymmetric expectations between government and private developers. 

 

LISTENING TO THE “ANIMAL SPIRITS”
The voices of the intended beneficiaries from reforms — consumers and domestic suppliers — are jammed into the last segment of the book. Rama Bijapurkar caricatures the new Indian consumer, cannily devouring cheap Chinese goods and luxuriating in retail therapy, financed by the deep pocket of e-commerce start-ups. Gita Piramal points to the churn in private business league tables as illustrative of the competitive forces unleashed by reforms. Omkar Goswami adds that the concentration of business accelerated as companies sought scale economies. Services benefited disproportionately, being less constrained by the continuing hurdles in acquiring land or access to quality infrastructure. 

 

Deepak Parekh narrates how HDFC seized new opportunities in banking and insurance using its core competence in customer-friendly financial services. For Mukesh Ambani, economic reform was instrumental in fulfilling his father Dhirubhai Ambani’s dream of a global scale of operations. Kiran Mazumdar-Shaw — a first mover — lucked out. With just Rs 10,000 in her wallet, Biocon grew into a $1-billion listed company by 2004. Sunil Bharti Mittal, a spunky, first-generation entrepreneur, seized every opportunity available to establish India’s first multinational telecom company. If every second American truck has a Bharat Forge axle, Baba Kalyani has economic liberalisation to thank for it. For Narayana Murthy, liberalised import of hardware and current account convertibility alone were enough to make Infosys fly. R Gopalakrishnan recounts how storied firms, like HLL and the Tata group, also restructured and diversified. 

 

INDIA – THE QUINTESSENTIAL REFORM DEBUTANT
shy
T N Ninan describes navigating reforms in India as the impossibility of cooking an omelet without breaking the egg. Vikram Singh Mehta similarly recounts the broad consensus but only for shallow reforms in the petroleum space. Some of this reticence was because of the dharma of coalition politics. This constraint no longer exists. Will the consensus deepen now? And will it now be our time to eat?

 

Adapted from the author’s book review in Business Standard, August 17, 2017 http://www.business-standard.com/article/beyond-business/well-begun-is-half-done-117081501123_1.html

 

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Book Review, Economy, India, poverty, Public Institutions

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Template Rashtrapati

Rashtrapati Bhawan

Presidential elections in India are a ho-hum event for the average citizen. At best, this is a moment when the government “signals” its political identity or its governance style. The BJP-led NDA government has succeeded in the former but not the latter.

Shivshankar Menon, national security adviser in Dr Manmohan Singh’s government, uses the “minimum cost, maximum benefit” strategy as the defining principle of India’s foreign policy. This applies equally well to identify the political incentives behind presidential nominees.

Why Presidential nominations are the outcome of a MinMax strategy

The ruling party’s biggest nightmare is to nominate a candidate who loses. This is not only egg on its face, but it opens a Pandora’s box of future antagonisms between the government and the head of the state. It has never happened thus far. But it is wise to budget for minimum risk, especially when the upside of having “your own man (only one of thirteen Presidents has been a woman) in the Rashtrapati Bhawan are limited.

The Constitution severely limits action, independent of the government, by the President. But the potential for being deviously obstructionist exists. James Mason — the distinguished political scientist — credits Babu Jagjivan Ram – the original dalit face of Indian politics – with the insight of how to do a “Putin” in the Indian context and acquire covert, unconstitutional political power. The only redress against a malevolent President is to impeach him in Parliament. Whilst theoretically possible, it requires a two-thirds majority. That is tough if the President is politically savvy and actively conspires to defeat the motion, including by requesting MPs to merely abstain from the vote.

Unrealised political ambition is not an asset for being President

In the heady days after Emergency was lifted, the Janata government — a loose coalition of political interests, opposed to the authoritarian rule of Prime Minister Indira Gandhi — came to power. But it splintered. Prime Minister Morarji Desai lost his majority and resigned. Y.B. Chavan and Charan Singh sequentially failed to build their factions into a majority. President Neelam Sanjiva Reddy (1977-82), instead of giving Babu Jagjivan Ram — leader of the largest rump of the Janata Party — a similar opportunity, dissolved the Lok Sabha and ordered fresh elections. This was, at best, presidential over-reach to force an early conclusion to the drift. At worst, it was intentionally muscular, to induce an election, in anticipation of an uncertain outcome, which would allow then the President to manoeuvre and put a “pocket” government in power.

Petulance can warp Presidential efficiency 

Later a petulant President Zail Singh (1982-’87), a “trusted” political follower of Indira Gandhi, used obstruction as a mechanism to show his annoyance at being politically ignored by the debonair, apolitical Prime Minister, Rajiv Gandhi, who stepped into his mother’s political legacy, but wanted no part of its earthier political roots.

Ego is a killer for normative functioning  by the President 

President K.R. Narayanan (1997 to 2002) was a “working President”. Nothing was further from his intent than subverting the Constitution. In fact, he felt a heightened sense of responsibility to keep the ship of state credible and morally enlightened in the face of unstable minority governments. He possibly felt, albeit unwisely, that the President, being elected by an electoral college much wider than the Lok Sabha, had a stronger, deeper representativeness. He was also decidedly uncomfortable with the BJP holding the reins of power — a hangover from the post-Independence demonisation of the Hindu right-wing party. This mutual distrust led to his public speeches and media interviews being interpreted as being critical of government policy. He departed from his prepared and vetted speech at a state banquet in New Delhi and seemed to hector President Clinton of the US – the chief guest, on the proclivity of great powers to play “headman”, quite contrary to the government’s intentions.

The game is rigged so that nominees of the Union government win elections

The process for Presidential elections is constitutionally rigged in favour of the Union government. The Lok Sabha, where every Union government has a working majority, has a vote share of 35 per cent. The Rajya Sabha — where the government, like the present one , may not have a majority – has a smaller vote share of 15 per cent. State legislative assemblies have an aggregate vote share of 50 per cent. But the weight for each state Legislative Assembly varies and is indexed to its population. Just 10 of the most populous states — out of a total of 31 states — together have a 37 per cent vote share in the electoral college. An MLA from Sikkim has vote value of seven versus 208 vote value that an MLA from Uttar Pradesh commands. This is one reason why political parties go all out to capture elections in state legislative assemblies.

Union governments have traditionally played safe and fielded nominees whose reliability trumps their candour. Political placidity is preferred to ambition. Being of an age close to permanent retirement is a key qualification.

President elect Ram Nath Kovind – the perfect fit

Ram Nath Kovind 2

Ram Nath Kovind, the BJP’s nominee and the 14th President of India, is a perfect fit. He is non-controversial and low-key. His Hindutva beliefs seem to be personal rather than aggressively political. Like President Narayanan, he is a dalit and hence a symbol of continued dalit empowerment. He is the first President from Uttar Pradesh — the most populous Indian state with the largest population of Scheduled Castes. His election reiterates that Uttar Pradesh, Prime Minister Narendra Modi’s adopted karam bhumi, remains close to his heart.

Thus far the average age of Presidents, at the time of election, has been 71 years. Mr Kovind is right on the button being 71 years of age. The youngest at 64 years was President Neelam Sanjiva Reddy. His subsequent actions reiterated that unrealised ambition is not an asset for this position. But age alone is no assurance of placidity.

K.R. Narayanan — never “a rubber stamp President” — shares the honour of being the oldest at 77 years, with R. Venkataraman (1987 to ’92).

Ironically, 81 per cent of India’s population is less than 44 years of age and 97 percent was born post-Independence. But all our Presidents have been from the pre- 1947 colonial period. It doesn’t need to be that way.

The minimum age to be elected President is 35 years. But till we effectively depoliticise the presidency, by defining a code of conduct with detailed guidelines for presidential action (an Indian Magna Carta), the potential for youthful ambition to seize power covertly, will dissuade governments from taking the risk of electing a youthful, erudite President, as the face of Bharat which is India.

children

An opportunity lost for being transformative

The government has played the “minimum-maximum” game to perfection. The irony is it didn’t need to do so. This was a low-risk opportunity to reinforce its commitment to cooperative federalism and to broaden the ambit of governance by pulling in apolitical talent. At the very least, it should have tried harder and negotiated in good faith, to get President Kovind nominated by all parties, rather than making him contest an election. Admittedly, there is no political tradition urging it to do so. But Mr Modi did not start out trying to be a template Prime Minister.

One hopes he will resist the institutional incentives to lapse into a transactional, rather than his earlier, transformative mode.

Adapted from the author’s article in The Asian Age, July 21, 2017 http://www.asianage.com/opinion/columnists/210717/template-rashtrapati.html

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Democracy, elections, India, Public Institutions

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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/

 

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banking, bureaucracy, corruption, Economy, India, Public Institutions

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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

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Book Review, bureaucracy, corruption, Democracy, Economy, India, Law and regulation, Public Institutions

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