governance, political economy, institutional development and economic regulation

Posts tagged ‘UPA’

Bimal Jalan reflects

Jalan book

 

exercises the writer’s privilege to box his reflections between three inflection points. The first is 1980, ostensibly because 1977-79 was the first time the Congress lost power at the Centre. The second is 2000, being the start of a new millennium. And 2014 is the bookend when the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) formed a majority government.
Obscure inflection points
Of these, the choice of the first two years as turning points is not immediately obvious. Conventional wisdom regards 1991 to 2014 as a near continuous development period, barring the fractious interregnum of 1997-99. In the 1980s, it is 1984 that dominates, as the end of an era with the assassination of Indira Gandhi and the beginnings of Rajiv Gandhi’s brief “Camelot” phase. The year 1980 is significant only because Sanjay Gandhi died in an air crash in June and Mrs Gandhi aged visibly. The choice of 2000 is similarly obscure, except for broadly coinciding with the start of Atal Bihari Vajpayee’s NDA government.
Dr Jalan – man for all seasons
But this is mere quibbling. The book is unconstrained by structural rigidities. It provides reflections, spanning Dr Jalan’s seven earlier publications since 1992.  It can’t get better. Dr Jalan was in the Rajya Sabha (2003-2009); the longest serving governor of the Reserve Bank of India (1997-2003) since 1992; finance secretary; secretary banking, chief economic advisor and India’s executive director to the IMF and the World Bank.
Seven key reflections
Readers would choose their own favourite reflections. But this reviewer was intrigued by the following seven.
Low public savings retard investment 
First, Dr Jalan favours the conventional view that the persistent gap between India and the fast-growing economies of Asia during the last four decades of the 20th century is explained by our low levels of investment. For this he squarely blames our ideological decision to invest in public sector industries, which failed to generate savings for future investment and instead bled scarce tax revenue to fund financial losses — a familiar story even today.
Colonial style administration ill equipped for challenges
Second, he red flags the fact that from the 1970s, we did very little to enhance the competence and efficiency of public administration. We still lack the required composition of skills and experience in the public space to provide 21st century results.
High expectation, poor execution
Third, he bemoans the fact that we unfailingly adopt best practice priorities — take the national priority for agricultural growth. But we fail miserably in making supportive policies and rules. We have throttled agriculture by ignoring the interest of the farmer to serve the interest of the consumer. Similarly, we prioritise a progressive fiscal policy. But the revenue from direct taxes stagnates while regressive indirect taxes are buoyant.
Sustained, high growth misaligned with political incentives 
Fourth, Dr Jalan’s term in the Rajya Sabha convinced him that deep political reform is the key to change India. And who could disagree? But some caveats apply. Decentralisation, as flagged by Jalan, is certainly desirable for enhanced effectiveness and public participation. But, it will not, by itself, serve to reduce the size of government. In fact, employee numbers and expenses are likely to increase as scale effects disappear.
Union government muscularity erodes state government autonomy 
In a similar vein, it is true that the Union government tends to erode the federal structure by misusing governors for narrow political ends. But constitutionally, we are a “Union of States with a centrist bias”, per political pundits, and not a federal state. Parliamentary norms and conventions are routinely subverted — a self-goal, since this reduces Parliament’s credibility.
Dysfunctional parliament erodes its own credibility
Dr Jalan cites 2006, when the budget was passed without discussion, illustrating political expediency of the worst kind. But it is open to question whether the existing process for annual Budget presentation and examination remains a productive exercise or has become mere form without substance. The cabinet system of decision-making, underpinned by the principle of collective responsibility, was undeniably subverted during the United Progressive Alliance government, since political power was dispersed beyond the government. But this was poor practice rather than a structural flaw. And it appears to have healed itself after 2014.
Judiciary – safeguarding the constitution 
Fifth, the judiciary, rightly, comes in for high praise, for progressive jurisprudence, safeguarding the principle of separation of powers, and the primacy of the Constitution. But entrenched territoriality in the judicial appointments process remains contentious.
Public sector banks – out of control
Sixth, Dr Jalan recounts, financial reforms after the Narasimham Committee report of 1998 enhanced the resilience of Indian banks. But he leaves the reader begging for more on what went wrong over the last decade to inflate stressed loans to crippling levels. Are not politicised leadership and boards the problem in public banks? And given the stakes, can UPSC selection – as Dr Jalan suggests – really be an effective bulwark? Would not ramping up private shareholding, with the government holding only a “golden share” be a more effective solution? More generally, how effective are the existing prudential norms, for limiting exposure to sector, corporate or currency risk?
Tax reform – only half done?
Seventh, Dr Jalan’s view that it is unnecessary to reopen the constitutional scheme for inter-governmental division of taxes is curious. Tax pundits advocate that GST be extended to alcohol and petroleum.
jalan 2
It is a broad canvas on which reflects, as befits one who has helmed public policy since the 1980s. Readers will look forward to his take on the more recent developments — that is, since 2014.

 

Adapted from the authors Book Review in Business Standard, September 18, 2017 http://www.business-standard.com/article/beyond-business/bimal-jalan-reflects-117091801405_1.html

 

Soothe gussa fauji pensioners

OROP

photo credit: ex-servicemenwelfare.blogspot.com

Ex-servicemen are angry that their attractively titled demand — one rank, one pension — is not being implemented by the government. OROP as a “brand” is a huge communication success, hitting all the right buttons — simplicity, easy comprehension and being evocative of equity.

It is not surprising therefore that Prime Minister Narendra Modi adopted it in his election campaign. The United Progressive Alliance, caught napping, made a notional budgetary provision in February 2014, but did not survive the general election to be held accountable for its implementation. This pledge was repeated by Prime Minister Modi from the ramparts of the Red Fort on August 15. But fauji pensioners were not impressed.

Top babus, secretaries to the government and generals retire at a fixed apex pay since the Fifth Pay Commission (1996). Their pension increases to reflect all future revisions in apex pay. Those retiring below the apex pay have to make do with pension revisions at 50 per cent of the minimum of the revised pay scale, even if they retired at the maximum of the pay scale. Hence the inequity. Babu and fauji apex level officers thereby invite the charge of being self-serving.

A bit of history here. The armed forces have traditionally enjoyed an “edge” in the compensation they get versus civilians. The logic for the premium is accepted and remains rock solid even today.

Till 1973, fauji pay was reviewed separately. The 1970s were bad times for all government servants. Faux socialism required that government salaries be stagnated in the name of removing poverty. But the axe fell most heavily on Army pensioners via the Third Pay Commission, 1973. The result was that the payout ratio (the proportion of last pay to pension) for fauji and civil pensioners was made the same — 50 per cent — by reducing the fauji payout and increasing the civilian payout.

Real basic pay under the Fourth Pay Commission (1986) doubled, but inflation adjustment was only partial. The Fifth Pay Commission (1996) doubled the basic pay and provided for 100 per cent inflation indexing including for pensions. This fixed the earlier problem of pension not keeping pace with inflation. The Sixth Pay Commission (2006) tripled real pay. Whilst this was necessary, it stoked the angst of pensioners, other than the creamy layer, because pension adjustments lag behind salary revisions. With every pay commission, pensioners fall further behind. Only faujis have led the agitation for OROP, possibly because of the high regard the public has for them versus a less than rosy public perception of other government employees.

Kohima

The principle that fauji salaries must have an edge over civilian salaries has been consistently accepted. Suitable salary scales exist to illustrate this “edge” of around 10 to 15 per cent of basic pay. But in a classic case of maintaining the form whilst subverting the spirit, the benefits of the designed “edge” are only notional and not real. Here is why.

First, the sharply pyramidal structure of the armed forces limits the potential for promotion. In comparison, the civilian cadres are much less sharply tapered. Since pay is still effectively linked to position or rank, this means that civilians’ pay outgrows the notional salary “edge” over the first 16 years of their service. Thereafter, they lead not lag the fauji pay.

Second, stringent health requirements also ensure that faujis retire much earlier than civilians. Estimates suggests that 60 per cent of fauji officers retire by the age of 54. A soldier retires at the age of 35, while other ranks retire by the age of 45. In comparison, all civilians carry on earning promotions and pay enhancements till the age of 60.

Shorter service spans and fewer promotion avenues ensure that at retirement faujis have a basic salary which is around 40 per cent lower than a civilian who started service at the same time at an equivalent grade. To provide an equated pension to a fauji, the pension payout ratio has to be at least 75 per cent, as it was till the Third Pay Commission slashed it to 50 per cent.

The other options to safeguard the “edge” are to increase the salary scales of faujis significantly above civilian pay or to proliferate the number of senior positions — as it happens for civilians — to safeguard promotion prospects and income. Neither is an optimal solution to deliver more bang for the buck. Both require complex negotiations between losers and gainers within the armed forces.

The fact remains that OROP, as a principle, is flawed. It is not consistent with the principle of efficiency and it violates the principle of contracts. Pension is a stream of future payment for past services. Pay is a dynamic concept which changes as markets and job requirements change. Pay must reflect current market conditions. Pension is like a fixed annuity, albeit indexed to inflation to protect pensioners. Increasing the base pension amount as pay increases, as envisaged in OROP, is indefensible.

What then is the way out of the Jantar Mantar logjam, where the agitating faujis vent their gussa?

Good practice suggests that huge changes in pay be avoided since they lead to intergenerational inequity — future employees get paid much more, even in inflation indexed terms, for doing the same job. But such pay changes are sometimes necessary to correct a long neglected problem. Interim solutions can be one way to smoothen the transition. This is the way to go.

The government can restore the pre-1973 pension payout of 75 per cent but only for those faujis who retired between 1973 and 1995 when pension was not 100 per cent inflation indexed. This will significantly soothe the gussa of faujis whilst creating no untoward precedents for civilians.

The cost is around Rs 10,000 crore per year (back of the envelope estimates) or 7 per cent of the annual defence revenue budget for a period of four years.

Righting a wrong is costly but best done whilst the cost is bearable. Giving fauji pensioners short-shrift, whilst feting them publicly is inconsistent. Let January 26, 2016 be when the President of India soothes the gussa of 1.6 million fauji veterans.

Adapted from the authors article in Asian Age August 23, 2015: http://www.asianage.com/columnists/soothe-gussa-fauji-pensioners-476

Aside

Politics and theater

Parliament disgraced it self yet again. The statement of the PM on the economic situation was a welcome window into the minds of the policracy. Perhaps it is the Shatrughan or Babbar effect, but may of the honorable members believe that they magnify their own self image by copying a fiery, rightious Bachan, a braggart Sanjay Dutt or a stylishly, thughish Pran, If we wantd to see imitation actors we would watch movies instead. Pity none of them can dance though. It would have been good to see Manmohan deliver his economic sermon break dancing to a Hritesh number. The nearest any member comes to this is the redoubtable Rajiv Shukla who vitrually goes into an attarctive “wave” dance the minute the opposition shouts at the PM.

It was not clear what the government wanted to achieve yesterday. Statements made in the house are assurances of delivery (promises) which are monitored. No new promises were announced by the PM. He merely repeated what Chidambaram had already assured the house. Worse the manner in which he read the speech out had less credibility than the assured delivery style of the practised lawyer, Chidamram. The opposition oddly thought it necessary to shout down a “maun” PM. Possibly they have become so used to not hearing him at all, that that the merest squeak out of him is tantamount to an aggressive barrage.

Yes unbridled corruption is a mjor failing of the present government but that is the election plank of the Aam Admi party which is invisible in Parliament. Only those in power can be corrupt. The UPA is in. The BJP is out, so we can’t compare apples and oranges. Corrupt sons and sons in law are not a chink of the Congress alone.

I wish the opposition had cornered the PM on the three key constraints to unlocking growth and good governance. One is the recent sense of “entitlement” of the “policracy” to massive corruption. The potential and many would say the impunity, to be corrupt, erodes the possibility of shrinking Delhi in economic decision making and the transfer functions and finance to the States. On corruption it is only the record of the left parties which is relatively clean but unfortunately, unlike their brethern in China, they join the populist bandwagon here and shed crocodile tears for the poor, with little regard for the disastrous economic outcomes of populism. In fact the left is very much like our PM….honest but ineffective and the new India does not endorse that.

 Second, we need to correct  the extravagant spending on defence of around 20% of the budget. This is a major drag which comparative developing countries in East Asia (excluding China), Latin America and Africa do not face. Since the defence sector is notoriously non transparent, little is know of how much public finance leaks…..but the growing political clout of arms dealers makes it apparent that it is they, who are king makers and not the other way around.
 Third, the dynamic economic record of some state level leaders (Modi, Nitish, Patnaik etc) has a major medium term constraint. ALL of them follow the centralised Delhi model of not devolving functions and finance downwards,  to where the real action is, at the local level. That is the third quiet revolution still to happen in India but is completely ignored by all parties.
India does not lack economic or technical expertise in the public sector, skilled labour or private entrpreneurship. What we lack is a honest, formally endorsed leader at the national level. The best cooperatives, like Amul, grow because of honest, pragmatic and enigmatic leaders, like Kurien. If INFOSYS today needs to recall Murhty, to rescue it, shouldn’t India also reach back in time and get an oldie (albeit preferably, one without a child-in-waiting), who has the experience, the rectitude and the fire in the belly to lead? India is a young country but sometimes, it is only the exprienced who can deliver what the young want.

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