governance, political economy, institutional development and economic regulation

Posts tagged ‘disinvestment’

Budget 2017 – say what you mean


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

Poor namkaran begets poor results

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

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

Clever acronyms can mislead


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

Words without momentum


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

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

BJP – get your mojo back

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

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

Keep the narrative simple, not simplistic

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

A trishul for action


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

Adapted from the author’s article in Asian Age January 11, 2017

Navigating India’s “perfect storm”



It’s final now. The run of good luck PM Modi enjoyed has tapered off.

The monsoon is likely to be deficient by 12%. This would be the second year in a row. True, agriculture only accounts for around 15% of the economy and didn’t grow much last year either. But when you target 7.8% growth every basis point, added or lost, counts.

Manufacturing and services growth is already slow. Companies are at best cautiously optimistic but the caution makes new investment sticky. The money and jobs spinning realty sector, driven earlier by negative interest rates, is in a slump.

To complete the “perfect storm” scenario there are two important state level elections around the corner-Bihar later this year and UP in 2017. Neither state has BJP governments currently, so doing well in these will inevitably be a metric of how strong the Modi magic remains.

The good news of course is that every threat is also an opportunity. This is PM Modi’s opportunity to show that he is the Lion we think him to be.

Fiscal stability disaster prone

First, more will need to be spent on drought relief; restructuring of bank loans for farmers and income support schemes for farm workers. Delhi, admittedly with a miniscule rural area, has already distributed Rs 50,000 per hectare as relief for the farmers hit by the April 2015 unseasonal rain. FM Jaitley is possibly right that the drought will be localized in North and Central India. But these regions account for around 45% of the farmers. Retaining the targeted revenue deficit at 2.8 % and public investment at 14% of the budget will consequently be tough.

Postponed subsidy reform

Second, it is unlikely that subsidy corrections will now be possible this fiscal. Cheap electricity, water and fertilizer are here to stay with a possible relaxation of the tight minimum support price policy of the last few years.

Higher wage cost

Third, a significant expansion in the wage bill looms. For the armed forces it is the One Rank One Pension promise of the PM.  For the Civil Service the recommendations of the 7th Pay Commission are to kick-in from 2016. Luckily the wage bill is low by international standards- 1.6% of GDP and 14% of the budget. But even small incremental increases, unless accompanied by efficiency enhancing restructuring, are not affordable this year.

This perfect storm of shocks cannot be wished away. Better to deal with it upfront. Here are five suggestions:

Winning the market perception battle

First, don’t be cowed down by stock market fluctuations or seek to pander to them. These are short term adjustments by speculators and not reflective of annual economic prospects. Consequently, rather than play down the “perfect storm” scenario it makes sense for the government to highlight the extreme shocks they are battling with to keep economic growth growing. Even in this David versus Goliath scenario, what is key is to share a plan of action on disaster management; income support; and realigning revenue expenditure to retain the revenue deficit and investment target.

Nothing much was heard about the recommendations of the Bimal Jalan, Expenditure Management Committee (August 2014). But it could provide some useful strategic, short term revenue expenditure rationalization measures.

Cut the Red Tape

Second, stressful times also create an environment conducive for administrative reform. PM Modi’s can quickly lick babudom into shape through positive strokes. He should consider setting up a lean but empowered “Decision Support Team” in his office, manned by ten senior Joint/Additional Secretary level officers selected for their expertise in key sectors; their ability to persuade and their flair for collaborative performance.

They would be mandated to speak for the PMO and be tasked to work with the key ministries and state governments to cut through red tape holding up investment decisions. Working against weekly targets with real time feedback to the PM, the mantra for this team should be “ANA- Achievement Not just Activity”.

Those taking up such high tension assignments should expect to be on the fast track to become Secretaries to the GOI.  The PM is known to be cagey about trusting officers beyond a tiny circle familiar to him. This is not surprising given that he has never worked closely with the babudom in Delhi. But he should experiment by subjecting a larger group to the “agnipariksha” of performance. He will not be disappointed with the results.

Forget the optics of who gets the credit

Third, the knotty problem, particularly in Bihar and Uttar Pradesh, is how to be proactive in the face of state governments, which have the incentive to rebuff such support as being politically motivated.

The farmer does not distinguish between the state and the Union government (Lokniti Survey 2013) – 58% held both the state and the Union government responsible for the sorry plight of agriculture. If farmers fall through the gaps of political finger pointing, they will punish both the BJP and the SP-in Uttar Pradesh and the JD (U)-in Bihar. The beneficiaries of apathy will be Bhenji (Mayawati- the BSP supremo) in UP and Lalu Yadav in Bihar. Doing little is not an option for the Union government despite some of the shine rubbing off on the SP and the JD (U).

Don’t rattle the private sector

Fourth, it would be a big mistake to take too seriously the campaign to paint the BJP as a consort of the corporate sector. When stern action is warranted, it must be taken transparently and without rancor or bluster. But a “Preet Bharara type” of regulatory action is not what we need. Jobs are what the average citizen wants, which only the private sector can generate them.

Strong arm regulatory actions against foreign investors are bad optics- both for investment and for citizen sentiment. If our regulatory agencies are seen to be handmaidens of the government, they lose credibility. But the government also loses by devaluing an efficient instrument for regulating the private sector in a hands-off, technical manner.

Sticky revenues

Fifth, boost revenue. The tax receipt scenario is grim. First, projections for the year were over optimistic at Rs 14.5 lakh crores (US$ 230 billion) around 16% higher than the previous year. Tax receipts are bound to slide with slow external and domestic demand and lower corporate profits, despite the 15% increase in the rate of service tax. A tax receipt equal to last year’s estimate of Rs 13.7 lakh crores (US$217 billion) or 9% more than the actuals of last year is the best we can hope for- 5% points due to inflation and 4% points due to growth of the taxable base.

Getting more tax payers into the net is a worthwhile but effort intensive option with limited upsides. In 2013-14 there were 47 million direct tax assesses. New assesses have varied between 1 to 3 million per year since 2011. Even doubling the number of new assesses helps only marginally in additional revenue.

Transferring the crown jewels to citizens

There is more upside in fast tracking disinvestment. Listed Public Sector Undertakings (PSU) account for 13% of the valuation of the Bombay Stock Exchange or around Rs 13.6 lakh crores (US$ 215 billion). Of this, some equity is already held privately by minority investors. But an additional 10% can be sold without diluting government’s majority control. The problem is that, in the past, Institutional Investors have been the primary takers for such shares. Retail investor appetite has been largely absent from the tumultuous stock market for some years now and market momentum has been primarily provided by Foreign Institutional Investors.

Selling PSU shares in large volumes, without transferring majority control to the private sector, dampens the market price. Even the private IPO market is slow. Government is wary of inviting the charge of crony capitalism by selling shares to large institutional investors at cheap rates.

On the other hand, selling directly to retail investors is more defensible even if the price is low. After all the “Crown Jewels” really belong to citizens. Dispersing the ownership of PSUs widely also meets multiple objectives. Why not borrow a leaf from Dhirubhai Ambani’s 1982 market making strategy and incentivize the retail investor back into the market?

Link disinvestment, as a sweetener, to the issue of government debt for retail investors only – special convertible bonds – with a fixed return for three years at the prevailing Government Bond rate. 50% of the face value could be optionally convertible on termination in 2018-19, into a balanced bouquet of public sector equity at a 15% discount to the then prevailing market price.

A sequenced, mega issue of Rs 1 lakh crores (US$ 16 billion) of an asset backed government security can reduce the short term risk profile of PSU equity investments and pull in finance from an alternative source.

Government must come out with an evidenced strategy to deal with the “perfect storm” India faces. Of course, the PM is a “lucky General”. The drought may not materialize; the world economy may sort itself out and the opposition in Bihar and UP may self-destruct. But waiting for this to happen may be pushing the Gods too far.

Babu-traps 101


Are scams babu made? If a “competent authority” is hell bent on making money, generally, there is very little babus, even honest ones, can do to stop them. But many “scams” are just the outcomes of poor decision making and in these babus cannot escape the blame.

Personal honesty is never more than, at best, a mitigating circumstance when poor decisions are made whilst discharging the obligations of high public office. Effective babus are those who take decisions which neither get them, or anyone else, into trouble. Decisions in government, especially commercial ones, are never a routine application of rules. That is the job of the CAG, CVC and CBI. A routine application of rules actually ensures that no decision is ever taken. Yes, we should have better rules of course but then the same goes for our un-implementable laws. The law is an ass and shall remain so. Public decision making must go on.

The job of the effective public decision maker is to first carefully think through a “decision tree”. Text book, best practice methods require working down a “decision tree” with a decision arrived at as a last step. This stuff is only for consultants to remain perpetually employed. Effective public decision makers (as opposed to researchers) know the decision they need to make in public interest. The problem usually is how to get there.

When citizens were at risk from the cyclone in Ganjam, Orissa, Naveen Patnaik and his team knew what they had to do, as did the Government of Delhi and the Government of India, when the Commonwealth Games had to be hastily put together in the last few months. Both events passed successfully. The fall out for babus however, comes later and depends on the strength of the supporting decision tree analysis and actions taken.

Once we know what is to be decided the effective-public-decision-maker works backwards, up (not downwards as in best practice) the decision tree. The Effective Babu Decision Tree (EBDT) looks like this:

(1) Work out which sequential set of rules will bar you from taking and implementing the decision.

(2) Determine which of the following “Acceptable Rule Diluting Tools” (ARDT) are to be employed to surmount the obstacles: (a) Creation of a committee to dilute individual blame, build consensus and inter ministry commitment for the decision. (b) Legal precedents (opinion of Law Ministry) which could dilute the impact of the obstructive rule or differentiate its application away from the decision in question. (c) Identify potential regulatory vacuum, where no rules exist and fill this in with best practice application of the basic principles of competition, equity and transparency (d) Employ neutral third party experts to define best practice (eg. what should be the rate of discount while present valuing a future stream of revenue?)

(3) Always record a speaking order/note, carefully outlining why a particular decision is in public interest and indeed is the most feasible decision under the circumstances. Please note shortage of time, overload of work, cost of analysis not done, reliance on out of date or incomplete analysis, or the fact that your superior has asked you, whether in writing or verbally, to decide in a particular manner are poor and indeed no defense from personal blame.

(4) Look carefully at the set of actors who would support and oppose that decision and their relative “voice” in the media and on the streets.

(5) Tweak the decision to reduce the “spoilers” or “nay sayers” to the minimum, thereby reducing opposition.

Sounds logical doesn’t it. Why then doesn’t it happen routinely?

Five key babu traps operate to subvert the process.

First, most Mantris and babus are lazy or under work pressure, they neglect to record detailed “speaking orders/notes” which literally speak for themselves and are unambiguous. Failure to follow through the tedious decision tree process described earlier is fatal. This trap can be avoided. This is illustrated by the record of Arun Shourie, the Sun Tzu (author of the masterful Chinese classic: The Art of War) of India, as Minister Disinvestment from 1999 to 2004. He and his team of babus; Pradip Baijal, Pradeep Bhide, P.K.Basu and Amitabh Bhattacharya privatized Modern Foods, BALCO, HTL, CMC, VSNL, Paradeep Phosphates, HZL, IPCL and a bunch of publicly owned hotels even in the face of lack of popular support within the BJP. With the coming to power of UPA I in 2004 the “oversight wallahs” (CAG, CVC, CBI) took over with their “forensic audits” and tried desperately to find fault. The privatization team, Minister downwards, was personally clean as a whistle. This certainly helped. More importantly, the team, shepherded by the Minister, had been so diligent and wily in negotiating the EBDT that no institutional or personal, adverse comments could be made and the entire disbanded babu team went on to higher office.

Second, an astonishingly high number of babus fall into the “complacency ” trap of thinking that when a decision is reverted to them by a superior authority for a rethink,  they have already done their bit on file and the rethink on superior guidance, distances them personally from the outcome of the rethink. This clearly is contrary to EBDT rule 3 above. The buck always stops with you for what you have written on file. Citizens expect each babu in the decision making chain (usually there are three to four), to independently record their own opinion so that when the file reaches the “competent authority” she can benefit from the string of babu opinions.

Third, babus often fall into the trap of “domain inconsistency”. This includes independently rethinking and changing a decision, taken previously by a committee. This violation of the sanctity of committee work can spell trouble. Once you have created a committee to take a decision, any rethink must be reverted to that very same body. Even if a babu chaired the committee, she cannot abrogate to herself the right, or buckle under, to directions to personally rethink the original decision, which rightfully belongs to all the committee members. Remember, time pressure is no defense against violation of the basic principles of participation and transparency.

Fourth, babus often subvert their “high formal obligations” to their “low informal status” in Mantri-oriented ministries. They succumb to the “shock and awe effect” of directions from superiors. This is traceable to excessive interference by the Advisers in a Mantri’s office, public disenchantment with babus and systematic media “downgrading and disregard”. Recently a senior editor referred to a Joint Secretary, GOI- a position regarded in babu circles as the fulcrum of government, as a “middle level officer”.

Lastly retirement, especially from natural resource, Finance, Trade and Industry related Ministries, opens up mouth-watering options. The most correct and honest babu may, after a long 35 year, largely thankless career, spent protecting the public interest whilst practicing relative austerity at home, become susceptible to seeking a little material happiness. Whilst self-restraint and sensitivity to optics, is advisable, post retirement, golden parachutes are a trifling issue, if EBDT is religiously followed whilst in service.

The good news is that millions of babus in local government, district administration, state government secretariats and central government ministries religiously and successfully follow the EBDT in public interest during service and live happy and productive post-retirement lives. An efficient babu personnel management system would ensure that only the “greats” in the “efficient babu index” rise to the top. In its absence, too many of those who actively collaborate to subvert public interest or those who stoically remain personally clean, but succumb to being institutionally compliant, rise to the top. Neither category is of much use in taking decisions whilst avoiding scams.

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