governance, political economy, institutional development and economic regulation

Posts tagged ‘privatisation’

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First, in a post-ideology world, marked by rapid technological transformations, economic models become outdated even before they can be tested.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

 

Budget 2017 – say what you mean

professor

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

bhim

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

modi-troubled

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

trishul

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

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

Why no one loves Modi

In sarkari circles, an officer whom no one loves is an outlier — either cruelly termed “sanki” in colloquial Hindi (willful, unreliable) or brutally even-handed since she evenly annoys everyone.

But what does one say about a politician in this predicament? Frankly, whilst it is easy for a politician to be so faceless that s/he is quickly forgotten — think H.D. Deve Gowda, it is really quite difficult for a politician to incur the wrath of everyone. Prime Minister Narendra Modi has managed this miracle.

He has completely browned off 17 per cent of Indians, who are Muslims, by his inability to control the baying packs of Hindu fundamentalists. Ironically, the overwhelming majority of Hindu fundamentalists also suspect him of trying to soften and undermine, by attrition, their over-the-top version of Hindutva. Moderate Hindus are upset because they see the beginnings of unnecessary sectarian conflicts.

Big businesses and their eco sphere — lawyers, consultants, bankers and power-brokers — are unsettled because they are no longer implicitly part of the government machinery. The “Delhi watering holes” are empty. This is unnerving for business which hates changes in the rules of the game. It does not help that we have never had a consistent and predictable environment of governance. This is most visible in the tax regime. If “show me the man and I will show you the rule” principle operates, then those who have their foot in through the government’s door will stand to benefit.

Mr Modi has put off government servants by forcing them to be more effective in their jobs. The armed forces are smarting since they no longer feel cossetted despite the generous settlement of the “One Rank, One Pension” issue. The judiciary suspects him of trying to capture them. Parliamentarians feel neglected by the absence of direct engagement with him. For Mr Modi, inter-party relationships in Parliament are only a distraction, not an opportunity. The poor — 60 per cent of India with an income less than $2 per day— have yet to see and feel the difference that the new government has made.

The faithful

faithful

photo: the guardian.com

Mr Modi and the BJP’s traditional political base of middle class traders, small businessmen and upper-caste Hindus are the faithful who are part of the Rashtriya Swayamsevak Sangh/BJP family. These supporters remain wedded to Mr Modi. But even here, the support is primarily in the “cow belt” and western India. The other community which is deliriously supportive of the Prime Minister is that of expatriate Indians — around 20 million — but they matter only in the politics of their own homes, not in India.

Can the Prime Minister do better and, if so, how?

Play cricket not golf

First, Mr Modi must shed the self-acquired role of the sole, vote gatherer. He needed this image to overcome inner-party contestation and become the Prime Minister. Today, this image is a handicap. Ironically, he could usefully emulate the laidback, apolitical Congress vice-president Rahul Gandhi, who comes across as trying to do something significant — though no one quite knows what — rather than just win political battles. Mr Modi has enough going for him to let his administrative ability and his vision of a “New India” be the metric of his term in office. Others must now step in and become vote gatherers.

Even majority governments need to build consensus

Second, it is conventional wisdom that an India ruled by a brute political parliamentary majority is an outcome of a recent breakdown in true democracy, rather than an illustration of its success. There are two reasons: Coalition governments are inevitable at the Centre due to the firm hold that regional parties have over politics in the states. This trend is likely to strengthen.

In our first-past-the post system of election, members of Parliament get elected simply by getting more votes than the next candidate, never mind that these may not be even a simple majority of the total votes cast. This makes it politically sensible to develop narrow vote banks and to encourage splintering of other votes — a useful tactic, but with highly fractious outcome. The dalit vote bank of Mayawati (Behenji) or the Yadav vote bank of Mulayam Singh and Akhilesh Yadav in Uttar Pradesh are ready examples. Whilst any “ruling party” perforce has a numerical majority, it also needs to gather an “ideological majority” in Parliament — the sense of the House — to rule successfully. Coalition building will be key in the years ahead.

You have time, sir

Third, much like Anne Hathaway in the role of a young CEO of a start-up in the movie “The Intern”, now playing in the capital, Mr Modi has to slow down if he is not to burn out. He cannot be everything, everywhere. Nor should he try and do everything at once.

His energy and enthusiasm is infectious and sorely needed after the “Gulliverian” sloth of the previous United Progressive Alliance government. But it is a pity that Mr Modi is not a family man. Someone needs to prescribe “play time”, get him to chill in the hills he loves, get back in touch with his gut instincts, define narrowly what he wants to achieve by 2024 and work backwards from there.

lake

photo: katfin.com

This cannot be done whilst he remains the de facto chief of the BJP and the de jure chief of the government. Copying the Chinese, or the Congress way of doing things, is not a route to sustainable political heft in “New India”.

Lastly, the Prime Minister needs to agree with big business that competition from foreign and domestic rivals is inevitable and desirable. Trying to pick champions, South Korea style, is incompatible with our fractious democracy. Infrastructure and defence are two areas where foreign investment is conspicuously lacking. And it shows.

Neglected next steps

There are three imperatives Mr Modi must push through:

Sell the public sector. Privatise selectively where there is the least likelihood of noise, as in power, oil and gas. Use efficient instruments like the public-private partnership, as in the privatisation of electricity in Delhi.

old babu

photo: ibnlive.com

Modernise our archaic bureaucracy. Rid it of the stranglehold of the somnambulant but elite All-India Services. Downsize the Union government to its core sovereign areas. Give leadership roles to professionals selected for specific positions.

eagles

photo: amazing chaos.com

Be like Arjun and aim for the eye of the eagle — identified by Mahatma Gandhi as the service of the poor. But choose an eagle which is in the far horizon, not the one preening itself in your garden.

Being loved by all is of no consequence to an effective ruler. Being loved by the “right” people is more important.

Adapted from an article by the author in Asian Age November 6, 2015 http://archivev.asianage.com/columnists/why-no-one-loves-modi-797

Kejriwal – God’s own messenger

Kejriwal Ramlila

(photo credit: indiatoday.com)

Speaking today in Ramlila Grounds, the “maidan” of the people’s movement which birthed the Aam Admi Party, just over a year ago, Kejriwal, in his acceptance speech as Chief Minister of Delhi state government, confided that it was God who had ordained the Tsunami like landslide win of the AAP (96% of the available seats).

None of the 100,000 supporters gathered there doubted for a minute that this was indeed so. For them Kejriwal is indeed a God sent savior from the ugly corruption of state agencies; the morbid face of the traditional parties in Delhi and the lop sided “development” which leaves 60% of Delhi’s citizens living in muck and filth without water or sewage systems, though electricity supply has improved significantly, post privatization by the previous Congress government of Shiela Dikshit (http://www.cuts-international.org/ review of customer satisfaction 2015).

Kejriwal still concludes his speeches with a rousing “Inquilab zindabad” (long live the revolution) preceded by Bharat Mata Ki Jai (Praise be to Mother India) and followed by Vande Matram (the title of India’s National Song) but it is clear political experience has mellowed him.

Today’s signs of maturity included a firm rejection of the recently voiced ambitions of several AAP members to ignite AAP “fires” all over the country and spread the party – a mistake they committed last year; a commitment that Kejriwal will personally serve the people of Delhi for the full five years – he unsuccessfully contested the Varanasi polls against PM Modi; a reality check on the speed at which citizens should expect change; reaching out to non-supporters with the assurance that he would be everyone’s CM not just the AAPs and emphasizing agendas which are within his constitutional mandate.

But most of all what impresses is the choice of candidate which carefully reflects caste, regional and religious representation with poorly performing Ministers, fashionistas and charlatans from his previous government, excluded.

AAP is clearly a new age substitute for the erstwhile Congress minus its dynasty, corruption, clunkiness and with a dash of the Communist zeal for equity.

Today, for the first time in four decades, the Gandhi cap- a boat shaped headgear of white coarse cotton, was once again the headgear of choice in Ramlila Grounds. A sea of 100,000 white Gandhi caps, emblazoned with the iconic jhadoo (broom) symbol of the AAP bobbed and milled about, as this simple instrument of defiance and political empowerment, dating back to India’s independence struggle, was proudly donned by all present.

How long can the romance and dedication of a few drive a government to deliver? This is what remains in doubt. The cabinet line-up is unremarkable and four of the six Ministers, faceless new-comers to both politics and administration. Kejriwal pledged that he and his team would work 24X7 for the people without rest. But this is meaningless hyperbole. Every worker knows that efficient governments are run not by tireless people but by systems and institutions, both of which remain in short supply.

Kejriwal mentioned that the government would seek the advice of Bhen (Sister) Kiran Bedi (the BJPs nominated candidate for CM who was humiliatingly defeated by the AAP) and Ajay Makken of the Congress. One hopes he will also seek more professional help to flesh out his 70 point manifesto.

Service delivery is of course priority number one. Water, sewage and transport are directly within the Delhi government’s ambit and should be his focus if he wants to show performance. In electricity the private utilities have consistently improved their performance. Embedding consumer friendly practices in regulation and a consumer representative in the Delhi Electricity Regulatory Commission can deal effectively with the lack of trust between the utility; the regulator and the government.

The more generic reforms can follow. Policing, housing and land management is not in the mandate of the Delhi government so these cannot be his government’s priorities. At best he can and should be a spokesperson for the citizens and press the Union government to perform on these issues.

Setting specific targets for water supply, sewage disposal and treatment and travel time in Delhi should be right up the street of the IIT alumni who crowd the AAP. Time to descend from the realm of high rhetoric and morality into the mucky business of unclogging the pipes of Delhi’s governance.

Show us that you can deliver clean water at a reasonable price to all; that every dwelling and mohalla in Delhi gets a sewage collection system; that Delhi’s sewage is treated before it is discharged into the Jumna river and that public transport is available within a ten minute walk of every dwelling in Delhi at a frequency of not more than 15 minutes during peak hours, 30 minutes during off-peak hours and 60 minutes all through the night.

If you can do this, sir, in 2020 you are sure to get 99% of the seats, possibly with the BJP choosing not to contest.

The budget of small things

jaitley 2015

(photo credit: dailymail.uk.co)

February is when the Indian Finance Minister (FM) gets flooded with unsolicited help from well-wishers on how to get his job done of presenting the Union government’s annual budget on the 28th.

This time, the flood is a Tsunami as a consequence of the Delhi state assembly electoral debacle for the BJP on the 10th February. Some fears are imagined. Others are real.

BJP only for the rich?

The BJP has traditionally been a party which works well with the private sector. If viewed through a “zero-sum” filter, this strategy could be perceived as working against the immediate interests of the poor. The classic example is whether electricity supply should be subsidized and if so to what extent and in what manner and whether the private sector’s bottom line concern for profitability can be consistent with an electricity subsidy for customers?

The “Davos mafia”- banks, big business and “growth” fundamentalists are keeping a hawks eye on everything the FM now says to detect signs of his wavering from the hard path of economic reforms announced by him last year. Their expectation is that he will resort to “populism” to placate the poor, with an eye on the nearing state elections in Bihar.

Will Bihar drive the budget?

The BJP cannot afford to lose Bihar. Doing so will surely crack the political invincibility of PM Modi. Some believe it is already dented by an ill-advised, last minute tactic in Delhi of pitting the PM versus Kejriwal, even though it was known as early as January 15th when the elections were announced, that the BJP was unlikely to win.  None of this environment is of the FMs making. But it hampers him greatly in being bold, outspoken and visionary on economic reforms- as he has shown an inclination to be.

Statistical flights of fantasy

It does not help that the Indian Statistics establishment has further queered the pitch by an ill-timed release of a new formula for calculating GDP which shows that the UPA government was doing fairly well on growth (6.9%) even in its last year (2013-14) accompanied by reduction in the trend rate of inflation (consumer price index) to 9.5% from 10.2% the previous year.

This raises the bar for the FM in FY 2015-16 to unrealistic levels in growth (>8.5 %?) and possibly also inflation expectations (<5% ?).

The dilemma of the FM is that if he follows a tough approach to economic efficiency he gets branded as heartless and gutless if he doesn’t.

Privatization can soften the subsidy cuts

Privatization of our clunky 277 publicly owned industrial companies; poorly governed 7 public insurance companies and 27 banks is a no-brainer to calm both the heart and the gut of the FM.

The share of publicly owned companies in the Indian stock market capitalization is 48%. If more of them were publicly listed this proportion would increase further.

The capital gains from privatizing- selling at least a 50% plus 1 share in publicly held equity to private investors is sufficient to meet the existing annual aggregate subsidy outlay of around Rs 4 lakh crores (USD 66 billion) for the next five years till 2020 with linked fiscal benefits from tax revenue on higher growth and profitability of these entities. Associated economic benefits like more jobs and employment would be additional.

The FM has the choice of either being fiscally profligate or remaining cautiously courageous whilst perturbing the entrenched interests which feed-off the public sector; a small proportion of unfit employees who would lose their secure jobs; petty contractors who have developed a nexus with public sector contracting authorities and Trade Union leaders. None of these are part of the 300 million poor people of India. Nor are they part of 90% of the workforce, which operates in the unorganized sector as contract labour.

The FM would be well advised to err firmly on the side of “financeable equity”. This objective points him to generate additional revenues to finance selected tax breaks and subsidies.

Here are three suggestions that could set the tone of the FY 2015-16 budget.

Metric of administrative efficiency

First, the FM should announce that this government intends to demonstrate its credentials of being an efficient administration by collecting more revenues from the existing taxes despite offering selective tax relief. This fits well with the already publicized drive against “black money” and the return of undeclared foreign assets of Indian national, residents.  This also reassures tax payers that the government intends to retain stability and predictability in the tax regime.

There is nothing like burning ones bridges to bring out the best in oneself. The FM did this last year by taking up the challenge of meeting a 4.1% Fiscal Deficit target for this year and 3.6% of GDP for the next. He should carry through this resolve now without opting for the “lazy” alternative of using the new, inflated GDP data to project a rosy revenue estimate.

Surplus income with small tax payers boosts demand

Second, the FM should demonstrate the government stated preference for “small government”; private finance lead investment and the market.

One equitable way of doing this is to leave more income in the hands of the small tax payer by increasing the income tax-free level from Rs 2 Lakhs per year (USD 3300) to Rs 5 Lakhs (USD 8200). This simple measure takes 90% of the existing assesses (around 29 million in numbers) out of the tax net but impacts only 10% of the revenue.

Pancaked, indirect taxes on consumption (customs/excise; sales tax; municipal taxes) drain 50% of the disposable income of such tax payers in any case, so there is an equity view point also along with the argument for the greater efficiency of a more focused and selective tax effort.

Increase tax revenue equitably and efficiently

India’s tax revenues need to be increased by at least 1% point of GDP but not by continually “milking” the narrow tax base available historically. This approach is neither efficient nor does it build political credibility amongst the tax victims –the salaried middle class. Imposing a new, low tax with a huge tax base as on stock or commodity market transactions and siphoning off a part of the windfall due to the crash in oil prices could be two such option.

Extending income tax to the creamy layer with huge agricultural assets on a presumptive basis is a must. Tax free agricultural income is the easiest refuge for rebranding “black money” as “white”. This loop hole needs to be stamped out.

Agricultural income tax is a tax resource reserved for the State governments. But the Union Government could incentivize States by offering a higher share of GST to states willing to introduce agricultural income tax. This would be in the spirit of efficient, equitable, cooperative federalism.

Third, the Jan Dhan Yojna for financial inclusion has opened 125 million new bank accounts during the last few months. The bulk of these accounts remain dormant. But despite such caveats, this is a good scheme. Recent work, including by Thomas Piketty illustrates that personal wealth is the biggest asset in incremental wealth creation. Why not extend then, albeit in a small measure, the key to wealth creation to the poor also?

Endow the poor for wealth creation

Dhan” (wealth) is an asset-something you own. It is a pre-condition for wealth creation. Why not open bank or Post Office accounts for the poor also? Of course the poor have no surplus to put into a bank. But the government can fill this gap by depositing Rs 10,000 (USD 164) into each of the bank accounts of all “poor” account holders as a 10 year fixed deposit from which only the interest income would be available to the account holder till maturity. To narrow the ambit and the financial implication of the scheme initially, only poor women and poor senior citizens (the most marginalized of the poor) could be eligible.

Fiscal fundamentalists will deride this measure as irresponsible in an environment when subsidies have to be contained, if not reduced. There are two reasons why their apprehensions are unfounded.

First, the small value of the deposit and its unavailability for withdrawal for 15 long years reduces the attractiveness of the scheme for would be scammers. The annual interest earned of Rs 800 (@8%) per account is not enough to attract fraud but sufficient to keep a genuinely poor person interested in the account as a source of additional income. For the Bank this provides a pool of valuable long term resources for their Treasury operations.

Second, the fiscal outlay, whilst significant, is not unmanageable. The likely pool of “poor” women and senior citizens would be around 200 million. If full coverage is targeted over a three year period, an annual budgetary allocation of around Rs 70,000 crores (only 18% of the existing aggregate allocation for subsidies) would be required. The spread effect, both political and economic, is hugely significant.

In comparison, the Union government alone spends an estimated Rs 4 lakh crores (USD 66 billion or 4 % of GDP) on subsidies. Much of this outlay is either lost in transit to the beneficiary (as in food subsidy- refer to Ashok Gulati, India’s brilliant agricultural economist) or the targeting of the subsidy is so vague (fertilizer and energy subsidies) as to benefit the poor only marginally. A “wealth and income transfer” scheme aided by the Unique Identification mechanism, where available, is likely to be more efficient and effective.

The recent developments in Southern Europe and now in Delhi should convince Mr. Jaitley that “demonstrated equity and inclusion” as a “brand” is in. Citizens do appreciate a tough “reforms” stance. But it must be balanced by effective instruments for income transfers to the poorest of the poor.

Babu-traps 101

Image

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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