governance, political economy, institutional development and economic regulation

Posts tagged ‘inequality’

Sustaining growth in an unfriendly world

unfriendly

Put it down to the heavy snow in Davos or to a rare case of blunt honesty by an international agency. Whilst sharing the good news of the revival of the world economy in 2017 and its expected continued growth till 2019 at 3.9 percent, Christine Laggard – the IMF Managing Director, cautioned that 20 percent of the developing world was not part of that revival, tempering the WEF celebrations with sobriety. Latin America and resource dependent economies, had suffered negative growth, even in 2016.

India’s growth angst

India’s angst is real with growth dropping to 6.5%, versus the 7% plus real growth of recent years. We are new to this business of high growth. The two decades from 1980 to 2000 only had a growth rate of 5.7 percent per year. It is only post 2000 that a growth rate of 7 percent per year become part of our expectations. In comparison, China’s high growth period of 8 plus percent per year – with minor annual deviations – began in 1977 and continued for over three decades till 2011.

Trade liberalisation and world growth – China timed it right

The 1970s and 1980s were a good time to grow. Under the General Agreement on Trade and Tariffs (GATT) the Kennedy, Tokyo and Uruguay rounds of negotiations (1963 to 1993) reduced average tariffs from 22 percent to 5 percent. World exports as a share of world GDP increased by 40% between 1972 to 1982 (from a level of 14% of world GDP to 19%). Over the next two decades, till 2002, world exports further increased by nearly one third to a level of 25% of world GDP. The bulk of Chinese growth happened during this period of trade liberalization.

India – a growth laggard, got the timing wrong

India lost the favourable two decades from 1962 to 1982 to domestic political headwinds. We liberalized, tentatively, from 1985. But reform put down roots only from 1992. By then world growth had tapered off. During the quarter century after 1992 till 2016, only in four years, did the world grow at 4% per year or more. In the quarter century before 1992 there were 14 years when growth exceeded 4% per year with 1964 being the high point at 6.7%. India has struggled against the declining trend in world growth to pull itself up. Fresh challenges can be expected over the next decade.

Can India replace the broken “open economy” model

The world grew rapidly using the “open economy” model over fifty years till 2008. Is it now broken? And did rising inequality within economies kill it? And are we now left only with the long, dark alley of “directed Chinese capitalism”, as a viable “growth model”?

Yes it can, if only we collected more tax revenues

India can offer an alternative model aligned with the “open economy, freedom, democracy” matrix, if we can boost our tax to GDP ratio to generate the resources required for “sharing growth”. The combined revenue receipts, in India, of governments at all levels is 22% of GDP.

Meanwhile public outlays are critically short in health by 4 % of GDP; education by 3% of GDP; infrastructure by 3% of GDP and defence by 2% of GDP. This adds up to 12% of GDP.

Around one third of the additional fiscal resources could come from continuing to grow at 6% per year – an achievable target. Another one third could be met from non-tax receipts like from privatization and savings on pro-poor subsidies by targeting and distributing them better, including digitally. But we cannot escape increasing our tax to GDP ratio (all of government) to 26 % of GDP.

The broad anti-corruption framework offers hope

The drive against corruption; stricter adoption of banked transaction norms and the increasing popularity of digital transactions and online marketing are expected to ensure that tax collection in fiscal 2018 meets the budgetary targets of Rs 19 trillion (including state share of Rs 6.7 trillion).

This is despite a reduction in the budgeted nominal growth of GDP over last year from 11.8% to 9.5%. This buoyancy gives hope that continued rationalization of tax rates; improved assessment and review processes and fairer and faster settlement of tax cases will induce better tax compliance.

Specific incentives for officials can seed growth filters in local decision making

We should learn from China how to devise local incentives for enhancing revenues. 99% of the 50 million Chinese officials are locally recruited and are never transferred away. They are truly a “permanent” bureaucracy.

Secondly, a significant part of their pay is linked to the fiscal health of their local unit. A healthy unit means higher bonuses and benefits for employees. Fiscal downturns bring austerity even in the take home benefits for employees. This close and sustained identification of officials with local offices and the localities where they exist, creates a shared bond between citizens and the officials – all of whom sink or swim, together.

Recruit officials locally & keep them there, for better identification with local needs

In India, officials are birds of passage, even at the village level. Their take home pay and benefits are completely unlinked to the fiscal health of the local office or the locality they serve in. It is no surprise then that rent gouging is widely prevalent with no concern for making the locality or the employing organization fiscally healthy.

“Authoritarian” China is effectively more decentralised than “democratic” India

The Chinese government does not habitually, bail out bankrupt local governments. They must work themselves out of the holes they dig for themselves. At the same time, the government does not hesitate to formally allow policy departures, at the local level, driven by exigency. Ironically, this makes “authoritarian” China, extremely decentralized and participative, whilst India – part of the “free world”, looks hopelessly rigid and centralized in general. We must build up the bright exceptions.

PARAM IYER

 

No job is too dirty for me

Parameswaran Iyer, Secretary, Government of India, a sanitation specialist, recruited from the World Bank,  walks the talk, by demonstrating that composted pit latrines are no longer dirty. Commitment to field level results and competence in action.

 

Resilience to overcome future challenges comes from open-order economies, promoting innovation and flexible structures

The WEF has cautioned that the near-term future is full of security, climate, technology and economic risks. They advise that resilience is the best antidote to risk. For complex organisations, enhancing resilience means embedding flexible, modular structures and business relationships, which allow the freedom to alter the scale of operations to fit demand and to cultivate innovation and the capacity to work at “the edge” of the frontier. Tellingly, none of this is aligned with a heavy top down, centralized, cookie-cutter, approach. Change is upon us. We must bend lest we break.

Adapted from the the author’s opinion piece in TOI blogs, January 28, 2018 https://blogs.timesofindia.indiatimes.com/opinion-india/sustaining-growth-in-an-unfriendly-world/

Fiscal 2019 -what the tea leaves foretell

Jaitley Adhia

The four years since 2014 have been chock-a-bloc full of fiscal and financial reforms. India needs a rest from such frenetic reforms. It’s time to take a deep breath, consolidate and pull all the loose strings together. One hopes that fiscal 2019 (April 2018 to March 2019) is devoid of breaking news, dull as ditchwater but fulsome in terms of outcomes.

Full marks for restoring fiscal stability

The most successful reform of the Narendra Modi government has been the restoration of fiscal stability. The Union government’s fiscal deficit is down to the targeted 3.2 per cent of GDP this fiscal (2017-2018), from a high of 6.5 per cent in fiscal 2010, post the 2008 financial crisis. The revenue deficit has similarly trended down to 1.9 per cent of GDP. Consumer price inflation has been tamed at sub four per cent. This achievement burnishes the credibility of the government’s fiscal management.

State governments get a bigger share in revenues, now also spend more

Significantly, fiscal discipline was enforced despite a reduction in the net tax resources. The 14th Finance Commission had enlarged the share of state governments, in the divisible pool of Central taxes, to 42 per cent from 32 per cent effective from Fiscal 2015. State government expenditures have consequently increased rapidly.

State governments now collectively spend 87 per cent more than the Union government (Mishra and Singh, NCAER 2017) compared to just six per cent more in 2011. Some of the increase was due the UDAY scheme for restructuring electricity utility by state governments absorbing their debt of around Rs 1.4 trillion, in 2016 and 2017. The collective state government fiscal deficit ballooned from less than two per cent in 2012 to nearly 3.5 per cent of GDP in 2016.

Tax receipts have been stagnant at 11 percent of GDP

Tax receipts have been a traditional fiscal Achilles heel. Union government tax receipts are near stagnant at around 10 to 11 per cent of GDP. State governments additionally collect six to seven per cent of GDP as taxes. But there is a silver lining now. The Goods and Services Tax is likely to disrupt this placid tax regime, because it introduces positive incentives for paying taxes via the tax credit provisions. Honing the multiple GST rates to the specificities of India’s political economy will remain an ongoing exercise. Once the tax revenue stabilises, the government could consider reducing the multiple tax rates, thereby harnessing the efficiency gains of simplification.

Direct tax collection over the first three quarters of 2017 grew at 18.2 per cent over the previous year, versus a target of 15.7 per cent, courtesy the clampdown on cash transactions. India’s direct tax rates are not extortionary. There is little scope to provide tax breaks. In fact, existing tax breaks could be ended, like those for capital gains on equity held for just one year. The stock markets are defying gravity. So, this is a good time to tax capital gains.

A tax on capital gains in equity offers revenue potential

It is nonsense to argue that taxing capital gains on equity is double taxation because corporates already pay tax on income. Yes, taxing dividend distribution is double taxation and wholly unjustified without allowing credit on the corporate tax already paid. But capital gains relate to the market value of a share – which has many more determinants than the book value of the share. Taxing capital gains on equity also aligns with reducing inequality.

But more generally, a consistent rules-based, capital gains regime across asset classes is required. The current tax rate on long-term gains, other than equity, is 20 per cent. Short-term gains are taxed at the applicable income-tax rate. The case for taxing capital gains at a lower rate than income, is sound — it provides an incentive to take risk and invest. Inflation indexation of the capital gains and a common tax rate of say 10 per cent — across asset classes, would be eminently sensible.

We could step up social sector expenses if only private investment built infrastructure

India spends very little on education and health. While throwing money at either is not guaranteed to improve services, low allocations are a serious constraint. More fiscal space could become available for social sector spend, if private investment and management could do the heavy lifting in infrastructure and manufacturing. State-owned enterprises are strewn across transportation, telecommunications, power, coal, oil and gas, steel, metals and other minerals. Nearly all could usefully be privatised and the capital receipts utilised more gainfully in core sovereign areas. But India’s political economy has, for long, enshrined the perks and patronage, derived from public ownership of industries, as the fruits of being in power.

What about the quality of expenditure? Capital expenditure lagged, and revenue expenditure surged during the period 2010-11 to 2014-15. Under the Modi government this trend has reversed. Capital expenditure has increased from a share of 12 per cent till 2014-15 to 14 per cent. Simultaneously, the Central revenue deficit has decreased from 3.1 per cent of GDP in fiscal 2014 to 1.9 per cent in fiscal 2018.

But private investment has dried up from fiscal 2016. Plagued by 14 per cent of stressed loans, banks focused on damage control adversely hitting new lending. The “twin balance sheet problem” of banks and their defaulting borrowers needs faster summary resolution for results.

Solutions must be found for alleviating poverty — one-fifth of our citizens remain poor and another one-fifth are vulnerable to poverty from shocks. Inequality is increasing. This reduces aggregate demand in the economy. Demonetisation and the attack on corruption has subdued consumption and investment, till businesses adjust to the new operational constraints.

80% of the poor live in rural areas – income support can increase demand

There is a general expectation of sops from Budget 2018-19 in view of the impending elections. Finance minister Arun Jaitley is sure to resist this temptation. However, he might be tempted to withdraw subsidy benefits from urban areas, where incomes are higher and employment more easily available. The subsidy burden on food, cooking gas and fertiliser is an unsustainable two per cent of GDP — principally because it is badly targeted and inefficiently spent.

Rural distress and poverty far exceeds that in urban areas. Indeed, entrepreneurial rural folk access urban areas for employment, medical help and higher education. In rural areas, a phased switchover to direct cash transfers for BPL families is required. This will stimulate rural markets, provide flexibility to the beneficiaries and reduce the deadweight loss of high transaction costs.

whale spout

The finance minister is fiscally bound this year, not least because the GST is performing below expectations. He should frankly admit that the economy needs breathing time, before the numerous reform steps deliver results. In the meantime, keep breathing, if you can.

 

 

Adapted from the author’s opinion piece in The Asian Age January 22, 2018 http://www.asianage.com/opinion/columnists/220118/reading-the-tea-leaves-as-fiscal-2019-looms.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

 

Taming Terror

terror

(photo credit: guns.com)

An inequitable sharing of power and the “glass ceilings” of “closed order” societies, devised to keep the status quo intact, are ripe pickings for terrorism.

Apologists of terror focus on this underlying social explanation for the breeding of terror. But this is cold comfort for the victims of terror who, generally, are as ordinary and as excluded, as those perpetuating terror.

In fact hurting the average citizen is the intended consequence of terror.  The intention of the terrorist is to shatter the credibility of the government’s ability to preserve the rule of law.

The UN Declaration of Human Rights 1948 is a verbose document assuring all manner of Human Rights through its 30 Articles. Of these, the most critical are Articles 3 to 5 which relate to the Right to Life; Freedom from Slavery and The Right against Torture. It is these three which are the primary targets of terror.

Democracy disappoints

Through the second half of the Twentieth Century the anticipated social leveling through the spread of Democracy and since 1990 the economic benefits from Globalization were expected to take away the breeding ground for terror. Sadly this has not happened.

Democracy perversely marginalizes and excludes many, even as it empowers others. In India lower castes have gained through a policy of positive affirmation but religious minorities have lost out. It is all a numbers game with a huge political incentive to encourage identity (religion; ethnicity; caste; culture) politics. In this polarizing game those who have the majority win and the rest lose or are forced to become subaltern partners in governance.

Economic growth an incomplete answer

The notion that growing economic well-being can bridge the divisiveness of culture and identity has been shattered repeatedly. Germany was a rich nation just prior to the World War II but demonized the Jews. British and French kids today join the Islamic State even as the ethnicity obsessed, Right in Europe is resurgent by making immigrants the “fall guys” on whom to pin the woes emanating from the fiscal excesses of the go-go years of the first decade of this century.

Monitored executive discretion can help

Centralized, authoritarian regimes like China seem best placed to manage terror for the simple reason that they have plenty of monitored, executive discretion, which is the key ingredient whilst fighting those who live in “shadows”.

Terror is spread by highly trained and motivated cadres who are rigorously monitored and mentored.  They can only be stopped by a similar cadre. The Israelis know this and that is why they are so successful at surviving in the toughest neighborhood in the World.

But Democracy by definition undercuts executive discretion. Transparency, Open Data and Citizen Voice- all off-springs of the Good Governance framework popularized since the late 1990s, similarly constrain executive discretion.

The most dramatic illustration is the public rebuke given by the Republican controlled Senate to President Obama’s initiative to “socialize” radical Iran by negotiating a nuclear agreement with it. This is a departure from the “norm”, which gave significant leeway to the US President to negotiate Foreign Policy initiatives. We are fortunate that the Indian Prime Minister is not constrained in this manner since Agreements with Foreign Nations are not subject to Parliamentary approval and the Executive has considerable discretion in managing Foreign Affairs.

With both Economic Development and Democracy proving to be unlikely bulwarks against terror what then remains as a cogent strategy to manage this scourge?

Four initiatives present themselves.

First, reduce inequality. This is important because much of it, particularly in developing countries, is the result of massive corruption. This is visible in the workplace; in life styles and in the resource endowments that some people inherit. What can be done about it is less certain. The best, but somewhat dissatisfactory strategy is to constrain the government’s budget to the very minimum, whilst striving to get the biggest bang for the buck. Big governments are bad news. Small, nimble governments are in.

Second, adopt open access structures: The challenge is not to “pull down” the rich by taxing them (France tried but failed) or by banning the consumption of luxury goods (luckily the French view fine wine and cheese as a necessity). The challenge is to open access to good education, health, social protection and formal, private sector jobs based on merit.

Third, Role Models matter. “Open access” systems are not created overnight.  Open access is more than a physical process. As Tagore said it is the mind which has to be opened. Role models are key in building such societies.

One such role model today is Arvind Kejriwal who emulates the entrepreneurial, mass-movement based political principles of Bapu (Mahatma Gandhi).

PM Modi presents the other, more “muscular” model of the dedicated, organizational man who claws his way to the top by pure grit and guile- very similar to what happens in an American Corporate and the Communist Party of China.

Both role models represent an open access system in operation. For Chief Minister Kejriwal the “entry point” was the Constitutional provisions for pluralism in political parties. In Prime Minister Modi’s case, it is the meritocratic structure of the RSS and the BJP.

That “open access meritocracies” are the best bridge to socialize Radicals, Fundamentalists and Discontents is best illustrated by the recent teaming up of the “Islamist” leaning, People’s Democratic Party (PDP) of Mufti Mohammad Sayeed with the Hindu Right-BJP to form a government in Kashmir. Neither party wears “secularism” on their sleeve but both represent the middle class and that is their biggest glue. In comparison, the National Conference of Kashmir and the Congress are both dynasties run by political aristocrats.

Fourth, grow the middle class. The key to kill terror is to grow the middle class by investing in formal, private sector jobs and state funded, but privately provided, education, health and social protection facilities.

Keeping people productively busy and cruising the “basically comfortable” income frontier is important. Time to restructure the government workplace by opening it up to external skills (they exist in India believe it or not!); balancing worker rights with worker responsibilities and decentralizing authority widely, including to non-state actors thereby co-opting them into governance, so that the “pie” is widely shared.

Capitalism centralizes income and wealth. The government must use its fiscal resources to re-distribute it wisely.

Mega-cities are inhuman

Unlike monkeys, it is not in the nature of humans to huddle though we take to cuddling quite easily. The instinct to explore new frontiers and the excessive demands which we impose on natural resources; both push us to put space between each other. The ancestors of today’s Indians trekked all the way from Africa to the sub-continent around 500,000 years ago, possibly to put space between themselves and their African cousins. It is not for nothing that the self- sufficient, “Marlboro Man” was an icon for three decades starting from the 1960s albeit now discredited in a tobacco-less World.

monkeys huddling

There already are too many humans at 7 billion. Of these, 1.2 billion souls are concentrated in India, making us the most densely populated, large country in the World. Worse Indians are huddled in habitations in just 9% of the land available. The rest is forests (an implausible 23% in government data), private groves, pastures and agricultural land.

Humans huddle in cities more out of necessity than choice. Group living does not come naturally to humans, unlike lions, elephants, antelopes and penguins. The Swedish alternative lifestyle experiments in the 1960s, demonstrated that whilst cuddling was definitely in, huddling was out. Commune members tended to pair off, even if temporarily. More evidence on human choice is available from the preferences of the rich, who sprawl in gardens, whilst the poor are crammed into tiny, multiple stories precariously piled on houses.

Babus, in India, are willing to serve the government, even without pay, for the privilege of living in Lutyen’s green, heritage, garden city. The nouveau rich meanwhile are busy buying up unauthorized, “farm houses” in Delhi suburbia. Part of the fascination of “going West”, particularly to the US, is the affordability of sprawling houses as compared to the tight, modular, frightfully expensive “paper” abodes of the Japanese.

Neither time not technology, augur well for huddling or cuddling. Thanks to digitization of information; the internet and social media, human relationships are now virtual and often best conducted remotely. Many a face to face encounter has spelled disaster. Business is also increasingly digital and even government is going that way. All of this reduces the need for huddling in cities. The modern “Morlboro Man” is a woman with her Iphone.

Gandhiji’s vision of “self-sufficient” villages and Julius Nyrere’s vision of “Ujama villages”, on which the Washington Consensus smart set poured scorn, now increasingly seems not only a reality but a potential option for preserving the best of humanism. Consider that with the revolution in printing technology, it is already possible to print out a plastic tumbler or bowl in one’s home. Consumer durables are most likely to follow suit. This will completely change the “scale economy” for manufactured goods. The most scalable part of the new technology would be the software, which in all probability may have been conceived in a garage! Of course we would still need some “old industry” type factories to make the chips, the computer accessories and most importantly the printer, which makes all this possible.

Old age technology and industrial habits have fueled the international trend in urbanization towards mega cities (population of 10 million and above) whose number increased from 2 (Tokyo and Rome) in 1970 to 28 in 2013 and will likely go to 37 by 2025. India today has 3 mega cities and Mumbai is the second most densely populated megacity after Dhaka. The demise of the mega huddle of a mega city is not immediately imminent because the available “industrial age” technology still makes them scale efficient. But in India recent data indicates that growth in the mega cities is slower than in second rung cities which shows that they have reached the economic limits of their efficiency.

Mega cities are bad news for the following four reasons.

First, humans are bad huddlers because with the existing technology, cities with a density in excess of 4000 persons per sq km, end up severely polluting the air, land and water. Our mega cities have a density of around 12,000 persons per sq km and are unsustainable, as are China’s.

Second, as population density increases, the pressure on land drives up the price of realty, making “land intensive” business like “international scale multi-brand retail” uneconomic. Contrary to popular criticism, the AAP knows that no international multi brander would want to locate in Delhi because land is too expensive and hence had no downside in siding with the populist naysayers.

Third, increasing population density requires a higher spend on environmental mitigation of local pollution further driving up the cost of doing business.

Fourth urban led growth is inherently iniquitous. It creates pockets of luxury amidst vast swathes of wretchedness. The IMF (the bastion of the erstwhile Washington Consensus) estimates that in the US, 90% of the incremental wealth from growth benefits just 1% of the population.  Inequality is a growing concern and a key driver of political and social instability and crime and a major threat for poorly governed countries.

The term SMART city is the current buzzword to make cities efficient. This is a misnomer since cities by definition are not SMART. SMART is to digitize; connect electronically; disperse population; integrate rural and urban areas seamlessly and not to huddle.

Our cities should be self-financing and not draw on central or state funds. Public spending on infrastructure should focus on making rural areas more productive. It should improve the quality of life for rural residents since dispersed habitations make market based solutions for basic services unviable. At the best of times, making sensible public investment is tough. It becomes unconscionable when public funds are used to artificially drive up the demand for realty through public expenditure on creating cities. This growth pattern has also been a key source of corruption with elite capture of the land just prior to its development into an urban area using State finance.

The US is the best example of publicly funded investment in highways since the 1950s. However, even they found it difficult to do so efficiently. They also have bridges to nowhere. The recent publicly financed programs of demand creation since 2008 have been downright wasteful. California, for example, is persistently broke because it is wedded to “big government”. Publicly funded research and infrastructure can only be attempted by very efficient governments and India is not one of them.

We should go back to our roots in communities. Public finance should be used primarily to subsidize connectivity (ports, airports, rail, roads, airwaves and electricity)in segments where market solutions are not available and private investment unviable. Building and maintaining stuff is best left to the private sector.

The urban-rural divide is an artificial cleavage. Gandhi’s village need not be devoid of modern facilities. Migration should be a choice enabling people to vote with their feet but it is demeaning as a necessity. Spending public money on urban areas is like giving a hungry woman a fish to eat. But investing seamlessly across the country is like teaching people how to fish. Only the latter is sustainable.

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