governance, political economy, institutional development and economic regulation

Posts tagged ‘social protection’

The price of democracy

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Prof. Ashutosh Varshney of Brown University calls India an improbable democracy — poor, impossibly heterogeneous and multicultural, and ironically, only its colonial heritage keeps it going. So has our hubris cost us plenty?

Why we are not China

Forget comparing ourselves with China today. Are we at least on the same path? No, we are not. Assume a lag of a decade between China’s 1979 takeoff — Deng Xiaoping’s reforms — and India post-liberalisation in 1991. Second, assume that GDP growth is a decent proxy for national effort. Judging by the results, we have tried only one-third as hard as China to grow three decades into the reform process. Have we been tied down, like Gulliver, by democracy’s Lilliputian ropes?

Money or efficiency make the world go around

There are only two ways of increasing growth. Increase investment or increase the efficiency with which capital is used. The latter is tough but critical. Efficiency and stability invite foreign capital in, build supply chains and boost “federated” exports — many economies get a say and a share in the final product. Making the world your shareholder makes politicians more responsible — barring outliers like US President Donald Trump — and who knows, his unorthodoxy might well work for the United States.

Wasting scarce capital

Amravati

India is hugely capital starved. Sadly, it has not done well either in using capital efficiently. And it is not just the public sector alone which is wasteful. A generalised trend of wastefulness springs from poor monitoring systems available to the government, shareholders and citizens, none of which can easily check the data by triangulating information sources.

Over-designed public projects

Bengaluru airport has had charging points in its parking lot since 2008 for electric cars, which will not use them till 2030 – if then. You pay for casually over designed projects. The building of Amravati, the new capital of Andhra Pradesh, represents all that is wrong with our democracy with politicians free riding on tax payers.

Frank admissions of failure are as important as bragging about success

Finance secretary Hasmukh Adhia has admitted that the GST network has failed to provide end-to-end digitisation. We knew this. But speaking honestly and responsibly endeared him to the public. Unfortunately, no one is to be held accountable for this glitch.

Adhia

Cheap finance induces waste

Wasteful use of capital is hardwired into a system which prices capital cheaply. Most business folk will moan about the high cost of funds in India. But the fortunes, domestic and overseas troves of real estate barons and industrial tycoons were built on negative interest rates, with inflation boosting prices but diluting the real interest cost of a bank loan to zero over a 10-year period.

Four matras for democratic success 

Can we take remedial measures? The times are tough. But bad times never last. More important, are we primed to take advantage of the next uptick cycle in world economic growth? Possibly not. Here is a four-point mantra for getting there.

Efficient public services

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First, the new national government, later this year or in early 2019, must tackle the long-ignored task of public sector reform. It is shocking that economic duality has widened since 1947. The average citizen and business is streets ahead of the government in the effective use of 21st century technology to make employees accountable. Can you imagine how the government would change if the bottom five per cent of employees were sacked every year for poor performance or if the courts disposed of cases quickly? Just focusing on achieving these two and keeping everything else on hold could retrieve democracy in India.

Make data accessible on citizen aspirations & preferences, government performance and business governance 

Second, know your citizens. Make all residents and citizens identifiable, traceable and accessible. Aadhaar is the answer. Make registration for Aadhaar painless and self-declaratory — the ability to cancel out duplicates is supposed to be built into the system — enhance its accuracy in identification; mask the private information better and multiply improved digital recognition equipment. Populate data for citizenship, electoral rights and public benefits, using Aadhaar as the base platform. Transfer all public benefits through bank accounts. Roster all government officials, below 40 years of age, irrespective of grade or cadre, to serve as field-level facilitators wherever they are posted, with specific mentoring targets, to help citizens access their benefits.

The BJP and some regional parties (Trinamul Congress, AIADMK, the Left parties) who have a cadre are ramping up to do this. Down this route lies the threat of democratic abdication. A citizen must be served by the government of the day, not tied to the apron strings of a particular party for accessing benefits.

Link official accountability with efficiency in use of capital 

Third, change public incentives and processes. Switch from lazy budgeting of inputs to specific outputs, achievable over two years and outcomes over five years. Form teams of specifically identified officials to programmes and projects; ensure that there are no transfers and the team remains intact for the next five to 10 years. This will ensure more responsible budgeting; development of job commitment and expertise and improve outcomes. China does not shuffle its officials about needlessly. They stay tied to specific tasks for long periods — many forever. We encourage our officials to forum-shop from one cushy position to another.

Stop fiddling with markets

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Fourth, walk the talk. Withdraw the government from being a market participant and it will work better. Markets are like forests. Naturalists like Pradeep Krishen say it is enough to fence barren land off from predators like goats to allow a forest to regenerate. Going with the grain of nature doubles results. Anything else is wasteful and inefficient.

Stop fiddling with markets and they will find their level. Focus on diluting, not alleviating, the pain of those who lose out from markets. Just that can consume all of the government. Do not dilute the bite of markets if you aim for efficiency. Equity initiatives must be front-loaded to enhance competitiveness, not installed at the end of pipe to shackle markets. Caste-based reservations for education, jobs or benefits are an end-of-the-pipe option. They gel perfectly with our real strategy of steady but inefficient, slow growth.

Democracy is not the reason for our woes. It is what we do with it that’s troubling. Democracy implies at least a 50 per cent chance of not getting re-elected. The great Mughals would not have approved of the risk profile. Neither, it seems, do our rulers today.

Adapted from the author’s opinion piece in The Asian Age, July 9, 2018 http://www.asianage.com/opinion/columnists/090718/price-of-democracy-a-4-point-growth-mantra.html

Fiscal courage needed on Feb 1, 2017

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In a welcome change of national focus, becoming rich is no longer enough unless the poor are taken along. Prime Minister Narendra Modi, who is very au fait with international headwinds, was prescient in his December 31 address. For the first time, it was not the youth, nor non-resident Indians, nor Hindus, that the PM was focusing on. His attention was primarily on the travails of the poor. He donned the mantle, first evoked by Prime Minister Indira Gandhi four and a half decades earlier in 1971, of a pro-poor proselytiser.

Recovering lost ground

Speaking in the shadow of the economic storm unleashed by the demonetisation of 86 per cent of the currency in November and December 2016, Mr Modi extolled the poor for their patience and resilience. They had shown, he said, “…even people trapped in poverty, are willing to… build a glorious India… through persistence, sweat and toil (they), have demonstrated to the world, an unparalleled example of citizen sacrifice.”

The finance minister would do well to gauge which way the wind is blowing when he rises to present the fiscal 2017-18 Budget on February 1. It is not as if the poor were ignored in the earlier three Budgets presented by him. But they only figured tangentially. Growth, macro-economic stability, infrastructure and jobs for the middle-class young, the usual Davos consensus, took pride of place.

A sombre 2017 ahead

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We face a sombre fiscal year ahead. The International Monetary Fund’s economic outlook — a source the finance minister has used previously to highlight India’s outlier growth performance since 2014 — has projected a growth of only 6.6 per cent in 2016 — one percentage point less than the 7.6 per cent estimated pre-demonetisation. Worse, even growth in 2017 at 7.2 per cent will suffer. Even this is dependent on the shock being temporary. The subtext is that if the ongoing jihad against corruption is extended indefinitely and indiscriminately, business sentiment will collapse. Corruption is a curse. But it must be tackled surgically by an army of savvy saints, who are hard to find.

Lower growth in 2017 would reduce tax revenues. Hopefully this can be compensated by taxing some of the Rs 4 trillion, suspected to be dodgy money, deposited in banks during demonetisation.

Sops only for revenue and economic return multipliers

This stash should also encourage the finance minister to take the risk of slashing income-tax rates to boost revenue through better tax compliance and boost demand. The maximum tax rate for an annual income between Rs 25 to Rs 50 lakhs should be 15 per cent (current rate 30 per cent), with suitably lower rates for lower income slabs. The tax on income between Rs 2.5 to Rs 10 lakhs should be broad-banded at five per cent (current rate 10 to 30 per cent). Tax studies show that the revenue dividend is more pronounced by reducing tax in the lower income slabs. This is probably because the proportionate cost of evasion reduces at higher income levels so it is tough to beat. High income wallahs tax arbitrage internationally via corporate earnings. So, they declare domestically only enough to justify their easily verifiable lifestyle and assets.

Lower growth also red flags the fiscal deficit as a percentage of GDP, which acts as a cap on public borrowing to spend. High fiscal deficits can lead to inflation and public indebtedness. But courtesy demonetisation money is cheap. Banks deposits have swelled by Rs 6 trillion since October 28, 2016. This is low-interest money waiting to be used by the government and its assorted entities. Inflation is well below the target five per cent. This presents the option for temporarily breaching the fiscal deficit target of three per cent for 2017-18 to infuse income into the poorest households.

Rich farmers, poor workers

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Sops for agriculture are falsely conflated with poverty-reduction objectives. Admittedly, investing in agricultural growth is an efficient strategy for reducing poverty. Eighty per cent of the poor live in rural areas. But this is too blunt an approach.

Fifty-four out of 180 million rural households (30 per cent) own no land and survive on manual labour. Benefits from agricultural growth are indirect for the poor. Scheduled Castes, Tribes and Muslims are overrepresented in this group. They need instant relief. Consumption loans of Rs 20,000 for each household, deposited into bank accounts, repayable by labour in village improvement schemes, can combine the advantages of a direct benefits strategy, coupled with the self-selecting benefits of the National Rural Employment Guarantee Act programme. This requires an allocation of Rs 1 trillion — three times the NREGA allocation. This would be a fit use for the demonetisation windfall.

Neo-middle class vulnerable to sliding back into poverty

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But income support is a short-term mechanism to reduce poverty. The World Bank assesses that the Indian growth strategy, whilst effective in pulling people out of poverty, is less effective in keeping them out of poverty. By 2012 poverty levels were down to 22 per cent, from 45 per cent in 1994. But an astonishingly high 41 per cent in the neo-middle class were vulnerable to sliding back into poverty. Even in the go-go years (2005 to 2012) around seven per cent of the neo-middle class slid back into poverty. Sudden economic stress, like the loss of jobs, can significantly increase this proportion.

Reduce multidimensional poverty through better services 

Vulnerability to sliding back into poverty can be fixed if the poor get steady jobs, which are more likely if they are educated. Shocks to household budgets can be mitigated by access to healthcare. Nutrition can be improved through clean water supply and sanitation. Lower tax on low-income earners reduces the effective cost of labour versus capital, making labour competitive in the formal sector. Public services, which reduce the multidimensional index of poverty, can be ramped up by the private sector, if the government provides viability gap funding.

Junk low economic return schemes & protect the poor from shocks

India can be on track, to meet the interim sustainable development goal of reducing the level of extreme poverty to nine per cent by 2020, if we safeguard growth and cocoon the poor from shocks by providing access to better public services. The finance minister must identify the allocations specifically for the core objectives and discard the chaff generated by the testosterone of high growth.

Adapted from the authors article in Asian Age January 20, 2015 http://www.asianage.com/opinion/columnists/200117/safeguard-poor-bring-india-back-on-track.html

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Union Budget 2015: Well-meaning but lacking spirit

(photo credit: dnaindia.com)

Clothes truly make a man. FM Jaitley’s budget, presented to Parliament today, turned out to be constructed the manner in which he was dressed- a Modi jacket over a shirt, trousers and chappals (flip flops) for shoes. Nothing objectionable of course and yet unexceptional.

Tarun Das, the veteran Industry budget watcher, known for drawing up lists of good and bad points, complained that he could not find one thing to quibble about.

The Congress foot soldiers predictably fingered the paucity of direct measures to boost agriculture and made vague and unsubstantiated noises of the poor being let down.

“Thinkers” were left wondering what the log frame was for going from the budget allocations to the near term objective of generating jobs. Particularly relevant if Indian grew at over 7% per the new GDP calculations even as pink slips were the order of the day in FY 2015 and investment nose-dived. Clearly just doing more of the same is unlikely to generate jobs and the problem is not the lack of skills it is the lack of demand for skills.

The middle class stood around puzzled about how and why they had not been given tax relief. The poor…well they are just too busy working to bother too much about the national political economy.

Expectedly, this was a timid budget and not calculated to set the Yamuna on fire. The FM has a very “young team” who are still learning how to get a gas connection in Delhi, so they could hardly add little, expect technical tweaks.

One such is changing the way in which the GDP is calculated so that, almost overnight, economic growth estimates for 2014-15 went from a shameful 5% earlier to 7%.

Clever statistics also enabled the FM to “achieve” the challenge he had taken on in July 2014 of running with his predecessor’s very stiff Fiscal Deficit target of 4.1% of GDP.

FM Jaitley is at heart a lawyer and lawyers are by nature aggressive, garrulous and argumentative. Predictably his rhetoric was expansive. He berated incremental change as the hall mark of the previous Congress regime and defined his vision as “a quantum jump” which would “make India fly”.

Wisely however, he did not seriously seek to implement the rhetoric. He maintained broad continuity in inter se allocations across functions. Even the tax proposals had very limited surprises barring a possible promise of a tax bonanza for the corporate sector.

State Owned Enterprises are not being privatized and are slated to grow and provide a significant amount of the Rs 1.25 lakh crores ($20.5 billion) the FM expects to invest in FY 16.

Pushing the right buttons

The FM pushed a number of “buttons” to rally the relevant stakeholders.

Greening city transport

For the “Green” brigade, he proposed a misguided but mercifully paltry, subsidy Rs 75 crores ($ 12 million) for the development of electric vehicles. One hopes this money will be used to develop electric public carriers like buses or trams and not cars. Urban congestion is so extreme that even if commuters don’t choke to death on exhaust fumes, courtesy electric cars, they could starve to death as commuting time increases and urban traffic, grid locks become a regular event.

Relief for NGOs

Yoga teachers and schools can expect to benefit from their new status as charities. The NGO community will certainly appreciate the enhanced tax free limit of 20% of their income from commercial operations.

Broadening digitized cash support

The enhanced compulsory use of digitized transactions through banks, including the Post Office which becomes a payments Bank for state subsidies and the disallowance of large cash payments is very welcome. Digitised audit trails are sorely needed to start the clean-up of the black economy.

Soak the rich

Soaking the rich always gets favourable reviews and the FM did this with finesse. Tellingly however he got no cheers from colleagues in Parliament, who seemed to look more worried than gleeful, particularly when he requested them to voluntarily not accept gas subsidy which will now go directly into the bank accounts of consumers.

He garners an additional, estimated Rs 8000 crores ($1.3 billion) by abolishing the clunky, expensive to administer and iniquitous Wealth Tax and substituting it with a 2% surcharge on individual income above Rs 1 crore ($164,000). There are only around 100,000 such “super-rich” tax payers who are unlikely to complain. Of course the rather small number of the income tax paying “super-rich” illustrates how pervasive is unaccounted income and wealth and how far we have to go to unearth “Black Money”

Social protection for the poor

The spate of pension and insurance support measures are directionally correct but the poor will await implementation before they cheer.

Giving hope to corporate India

Corporate India also gets a break with a promise to reduce the basic Corporate Tax rate from the prevailing 30% to 25% over the next four years. The catch is that exemptions which today reduce the effective collection to just 20% of Corporate India’s income is also scheduled to be reduced. So the net gain is unclear. In the meantime they had better read the FM’s lips- to quote Ronald Reagon.

Election politics

West Bengal and Bihar, both states which go to the polls soon, will receive special central assistance in addition to the increased allocation they have already got per the recommendations of the Finance Commission. This explains the renewed bonhomie between the BJP and Nitish Kumar and Didi (Mamta Banerjee) respectively, Chief Ministers of Bihar and West Bengal.

Fiscal devolution kick starts Cooperative Federalism

The biggest plus from the budget is implementation of the spirit of “cooperative federalism” by transferring 42% of Union tax proceeds to states from around 32% earlier, per the recommendations of the Finance Commission. Transfer of an additional 20% as central grants will further boost total transfers to states to 62% of Union tax revenues. This “big bang reform” in fiscal devolution sets the stage for State governments to take direct responsibility of the functions allocated to them under the constitution. They can no longer plead a lack of resources.

FM Jaitley is right that reform is a year around activity and does not begin and end with budget promises. Let us hope he walks the talk. The biggest public service he could render is to make the budget presentation process devoid of “news value” by following a year around dialogue with stakeholders and continuous results on basic reform steps.

This was a budget without many surprises. Maybe we have evolved to being an economy, in which the budget is a mundane, technical exercise, of interest to economists and accountants, but of little immediate consequence for those who live in the real world.

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