governance, political economy, institutional development and economic regulation

Posts tagged ‘urbanisation’

SmartCities: Making the rich smarter

The latest public “dog and pony show”, unveiled on Thursday in Delhi, is the selection of 20 cities across the richest 11 states of India for accessing the governments Smart Cities fund.

smartcitiesindia

Photo credit: smartcitiesindia.com

The near-complete exclusion of the poor “cow belt” states, except Rajasthan and Madhya Pradesh, can be explained by the need to first push public money to where elections are to be held in 2016 — Assam, Punjab, Tamil Nadu and Kerala — West Bengal being a surprising exclusion.

But what takes the cake is the inclusion of the New Delhi Municipal Council (NDMC), comprising just three per cent of Delhi’s area, which is directly administered by the Centre. The Central government owns nearly 90 per cent of the 44 sq km it comprises with marginal ownership in and around the prestigious Lutyens’ zone of power brokers, lobbyists, old-economy business people, big time realtors and other hangers-on of this rarified ecosystem — the Indian equivalent of the Washington DC Beltway.

lutyens

Lutyens Delhi a lush, green bubble in the heart of the capital. photo credit: indiatravelite.com

The NDMC is already a profitable municipality, as indeed it should be. It spends over Rs 3,000 crore ($450 million) every year on serving just 300,000 people — a per capita expense of Rs 1 lakh ($1500) per resident, per year. Compare this with the average spend in the other three municipalities of Delhi of just Rs 7,300 ($110) per capita per year — all currently managed by the Bharatiya Janata Party. More starkly, the average spend for all urban areas, across India, is a shockingly low Rs 1,000 ($15) per capita per year.

Why is the selection of NDMC for yet another barrel of “pork” so disappointing? Three reasons strike out:

First, that this should happen days before the “reformist” budget expected to be presented by the Union minister of finance for 2016-17 is unnerving. The budget is, or should be, about spending public money well and wringing out the maximum public value from it. Allocating subsidies to the rich cannot be part of a pro-poor paradigm. It symbolises all that is wrong with a bureaucracy which is all “spin” and no heart.

crown

Second, the bane of China style “big government” has been soft budget constraints and poor accountability. Big budgets lead to profligate spending. Bureaucrats are more interested in shovelling money out of the public door into private pockets and marking up their “performance” sheets, than in ensuring that the money is spent in areas where growth and poverty reduction can most be impacted. The casual allocation of Rs 500 crore to the richest local body in India, with the highest per capita income, just so that it can shine even better, speaks of a pernicious tendency in new public financial management to mimic private finance by allocating money where it can be quickly absorbed, rather than risk it where it would create the maximum social and economic value.

Third, it is no one’s case that redistribution of wealth can be done by pulling down those who are well off. But Reserve Bank of India governor Raghuram Rajan’s recent diatribe against the lack of public concern about the optics of vulgar displays of wealth strikes a chord.

Lutyens’ Delhi is the “Kohinoor” of Delhi. A small self-absorbed bubble of power, privilege and wealth. One acre of land here costs Rs 500 crore and sales happen rarely. Why can’t the power elite pay for the privileges they enjoy? Why is it so difficult to convince the 4,000-odd large private property owners — each with a minimum net wealth of at least Rs 100 crore — to pay for retrofitting their beautiful municipality? Isn’t that what participative governance means? Why must poor Trilokpuri in east Delhi comprising the marginalised, poor and the shabbiest of public services pay for keeping Lutyens’ Delhi shining?

 

Trilokpuri

Trilokpuri, East Delhi, a festering sore where only the marginalized exist. Photo credit: Indianexpress.com

Had Thomas Piketty been part of the Smart City selection committee he would have torn out his hair in a fit of Gaelic rage at the callousness with which public money has been wasted and inequality worsened. What indeed was the selection process which has generated such a warped result?

The allocation instrument is a “challenge fund” devised by the usual suspects: Fly in, fly out consultants. As expected, on paper, the process appears transparent and efficient. It is a beauty contest. Municipalities send in their proposals seeking Central government funds for up to Rs 500 crore ($75 million) over four years. But they must match the Central government allocation and also meet the criterion of performance efficiency which includes standard metrics like collection efficiency, proactivity, etc. Nothing wrong with that at all. The killer is that there is no criteria on what impact the project will have on reducing urban poverty or on reducing the depth of deprivation in access to basic public services in poor localities.

Is it any surprise then that the Smart City fund is merely ending up elevating the “boats” which are already afloat? And how is that so different from the infamous National Rural Employment Guarantee Act (NREGA) of the United Progressive Alliance, which similarly incentivised the ability to use funds quickly? Rich states like Tamil Nadu, with average informal wages way above the national average national, quickly pulled out most of the funds, whilst the poor, badly organised states faced an empty treasury by the time they got their act together. As before, the mightiest wins yet again.

Political pork, lazy bureaucrats, the use of public funds for private gain by the elites is all old hat in India and across the developing world. Nothing new in that. The pity is that it needn’t be this way. The anguish is that old style cornering of public funds with no regard for ensuring equity, persists like a deep-seeded rot.

Prime Minister Narendra Modi of all people, should know the negative feeling generated from being excluded by the establishment. He must have experienced the chagrin of public money being wasted on “gilding the lily” whilst millions of poor children, like him, had to make do with a subsistence existence. Or is human memory so frail that one quickly forgets the bad times? Former Prime Minister Manmohan Singh was fond of establishing his humble roots by saying that as a child he studied under the village lamp post. But in the 10 years that he was in power, millions of children continued to study in exactly the same way.

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The preoccupations of the “Delhi Durbar” are pretty compelling. That is why they say you can wear a crown in Delhi. But don’t sleep easy — it isn’t permanent.

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The lonely statue of King George V after it moved from under its domed canopy  in India Gate – since awaiting another incumbent-and relegated to a museum.

Adapted from the authors article in Asian Age January 30, 2016http://www.asianage.com/columnists/exclusive-cities-715

Packaging Budget 2015

jaitley face

(photo credit: india.com)

The annual ritual of the government’s budget with allocations of money in billions is just gobbledygook for the average citizen. It is the “tone” of the budget which people tune into first and foremost. What must Finance Minister Jaitley do to get the tone right?

First, clothes make a man, as they do a woman. One hopes that the FM will avoid the intricately embroidered shawls he has shown a preference for through winter. He would do well to wear a tailored, dark “bandh gala” (Nehru jacket), now that he has the figure to flaunt one, perhaps with a low- key, accessorized collar. More importantly, the jacket would set the tone of the budget to follow- non-frivolous; cut to a reduced shape to fit the cloth available; modern with a link to the India’s rich past and prescient of India’s glorious future.

A budget theme

Second, he should depart from the tradition of the FM rambling on, in the early part of the speech, about the state of the economy. This is already adequately covered in the Economic Survey released a day or so earlier. Instead, he could usefully spend this time defining a “budget theme” which he must then follow through in the rest of the budget speech by linking specific allocation and taxes to the overall theme.

This writer suggests the theme of “open economy, markets and poverty reduction”. All three fit nicely with the “growth” expectations unleashed by PM Modi. Also these are the three legs for equitable growth.

Open Economy stance

An “Open Economy” policy stance has been consistently followed since 1991 in external trade. It is just that, India has not benefited as much as our neighbours in East Asia. The fault is clearly ours.

Our governments have not seized opportunities overseas which could be dovetailed with domestic comparative advantage, to make the economy part of global value chains. This becomes vital now if jobs are to be added in India.

The real issue is what must we do next to “open” the economy to competition- domestic and international? Four steps suggest themselves.

First, linking markets physically by a first rate “infrastructure grid”-ports, roads, rail and electricity is key to create a seamless national market.

Second, a digitized “tax grid” linking national, state and local level tax systems can enhance revenues; prune evasion and reduce the aggregate tax burden by avoiding “the pancaking of multiple autarchic taxes”. The ongoing Goods and Services Tax (GST) initiative barely scratches the surface.

Third, aggressively privatizing state owned enterprises, including in arms and ammunition, can provide the required business momentum for competitiveness; assist in reaching fiscal deficit targets and benefit consumers.

Fourth, why not open, hitherto closed, domestic markets in land, legal and media services to foreign investment except where considerations of national security exist.

The FM could signal the second wave of liberalization and reform to follow up on the 1991 wave- external trade reform and industrial delicensing, by (A) tweaking competition thwarting domestic regulations and (B) supporting Indian business to reap the benefits of an open economy internationally.

Living by market logic

The BJP has always enjoyed the trust of business. But their commitment to expand markets and competition is not deeply etched enough. There is a lingering fondness for using and growing, the already vast powers of the State to bypass markets and “fast-track” development in a top- down “Developmental State” mode.

Examples include the loss of focus on privatization of state owned enterprises- partially attempted by the Vajpayee government (2000-04); a growing tendency to use the already iffy balance sheets of public sector companies and banks as leverage for funding “impossible public dreams”. Examples are a larger than feasible or necessary target for horrendously expensive and as yet commercially unviable, renewable energy systems and the development of a hundred SMART cities with even the concept remaining undefined nine months down the road.

Neither of these “public dreams” can be funded by market based finance. Both require huge subsidies, either direct budgetary allocations or indirect like “directed” loans from public sector banks. Bad loans which are artificially rolled over in government banks are, as a proportion of total assets, more than double the proportion in Indian private banks. Government owned businesses and banks need to be made autonomous if they are to survive. RBI should censure banks, which make irresponsible “dream” commitments and SEBI should do the same for listed government companies to protect minority shareholders.

The FM must set the record straight on both fronts. The fiscal constraints on public finance are unlikely to permit massive direct allocations for renewable energy or urbanization. He must further clarify that whilst both goals are laudable they should be achieved through projects, which are technically sound and financeable through market instruments.

Commercial finance for renewable energy and urban development

The FM must point out that renewable energy development, whilst a flag ship project, is hampered by the disincentive of subsidized conventional energy supply. Allowing market prices to prevail for retail energy supply is the first step to making renewable energy financeable.

The World Bank initiated a new program of Green Bonds which tap “specific institutional and retail investors with a yen for green development” internationally. Of the US$37 billion Green Bonds issued in 2014 nearly one half were corporate Bonds. Such debt instruments could also be developed for the US$ 1 Trillion Indian domestic Bond market, 25% of which is corporate debt.

Similarly, realism on urbanization agendas is urgently needed. For orderly urbanization the funds must be found within urban areas by rationalizing property and land tax and raising revenue by leasing government land banks for development to private developers. China successfully unleashed Municipal entrepreneurial energy to finance local development. Using national tax resources for urbanization is a poor use of scarce resources. Cities, which on average are 50% richer than rural India, must finance themselves through user charges, local taxes and monetization of local government resources. There can be no free lunch for a city.

Ending poverty by creating jobs

For starters, the FM could usefully adopt the international metric for defining the very poor as those who earn less than $1.25 per day and the poor as those who earn up to $2 per day. But what is much more important is to share a time bound vision for ending poverty.

The World Bank has set 2030 as the year by when world poverty (per capita income >$1.25 per day) is expected to be reduced to a residual economic and social challenge. India could simply align with this challenging target.

Today, 25% of the 1.2 billion poor people are Indian. Setting 2030 as the target for graduating them out of extreme poverty is aggressive. Even with an 8% annual growth, India could only be where China is today. China took 30 years to end extreme poverty (1985 to 2014). India would do well to achieve the same in 50 years (1980 to 2030)

The international consensus on poverty reduction is that strategies which allocate more resources for human development, livelihoods and private sector employment work best. India has lagged in enhancing budgetary allocations to education and health (including water and sanitation), as compared to any other growth oriented economy. One hopes the FM shall redress the skewed allocation since it affects the poor the most.

Small is still beautiful

If this logic is followed, the small and medium scale manufacturing sector, rather than mega projects, should be the focus for jobs and poverty reduction. This is where manufacturing is the least capital intensive; can use existing infrastructure with some rejigging; is most easily related to agriculture and could more easily grow incrementally as business expands.

We must avoid the trap of subverting the “growth” agenda into glitzy but lazy action points. To grow jobs for the poor it is the small things that count, like removing municipal and police harassment of street vendors; simplifying tax assessment processes and “problem solving” by getting local and state governments in growth mission mode.

The FM must pledge to blur the dualism in “well-being”, between 10% of the workforce in the “large, formal” sector and the 90% in the informal sector. The lot of employees in the informal sector can only be improved by “facilitating” employers to grow their businesses. This will happen only if labour regulations are light handed; permit flexible and fair employment practices and adopt a sequenced, incremental strategy for improvement in labour welfare supported by adequate public fiscal support for social protection.

Poverty and jobs filter for budget allocations

Applying a “poverty and jobs filter” to the budget allocations could be an innovative way to present the inter-se allocations across sectors and relate them to the budget theme. This would also discipline government departments to relate their work to the objective of private sector jobs and poverty reduction.

There are many ways of packaging a budget speech which very few actually read though more may hear it through. It should therefore be written for this audience and not the specialist, who will anyway delve between the lines. Best to outline the inflection points in Indian public finance history the budget seeks to create and leave the rest to the TV channels.

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India’s Urban Adolescence

jama masjid

(photo credit: http://www.virtualtourist.com)

First time visitors to India are usually taken aback by our degraded cities and the seeming public apathy to sewage and garbage competing for space with Bentleys and Porches-much like puberty when it is as important to hide the pimples as it is to dress smart.

Ed Glasser of Harvard University, speaking at the LSE-NIUA Urban Age Conference” in New Delhi today illustrates the dire situation by using the metric of vertical plus horizontal living space available per person.  India’s low rise cities squeeze people much closer together-often to suffocatingly high levels- as compared to high rise cities with a similar spatial (horizontal) density.

The perplexingly happy co-existence of some of the finest hotels and monuments in the World, with the largest slum populations has multiple explanations. Some trace institutionalized urban neglect to the Mahatma’s vision of a happy India as comprising only self-sufficient villages with cities as necessary evils.

Others point to the stratified, Hindu, caste system as the reason, why spotlessly clean households and well-scrubbed people have no qualms about chucking their filth into the streets. The central concept of “ritual pollution” is a purely personal one. Public filth is a public issue and it is enough to be personally clean.

Urban government “groupies” identify the extended atrophy of municipal government in independent India, as the key reason for listless municipal governance today.

Possibly there is a little bit of truth in all these explanations and some more. But none of them are helpful in solving the problem.

The Mahatma and his thoughts have long been relegated to the realm of our “glorious past” with little salience in a rapidly growing, open economy. Spinning one’s own yarn and milking one’s own goat, even if one is a rocket scientist, negates the central concept of “comparative advantage” on which international trade is based.

The caste system has not stopped us from sending a low-cost space mission to Mars; from becoming the Information Technology back office for the West; from producing more films in Bollywood than another country in the World and becoming the most successful, largest and most diversified democracy. Blaming urban decay on caste is just plain lazy thinking.

As outdated, are those who mourn the relatively light touch of municipal government in India and the over whelming influence of higher levels of government at the Provincial and National levels.

T.S. Panwar, Deputy Mayor of Shimla at the same conference illustrated the helplessness of municipal government by calling himself the “garbage man” since that is the only unique function his municipality could legitimately claim. Of course, one may well ask why small, municipal governments need autonomy beyond the functions best performed at the local levels, like garbage management, street lighting and the maintenance of demographic records.

In this vein Harvard University Professor, Neil Brenner posits that municipal autonomy, as an explanatory variable for citizen satisfaction, in an increasingly networked world is pretty meaningless. When even nations face the prospect of losing sovereignty in monetary policy; resource use and trade policy, it is too late to target greater devolution of powers to municipalities, as a driver of high urban growth.

India’s ambition for urban led growth has to be based on the consensual transfer of resources which fuel growth, from their existing owners, to cities. Far from devolving powers downwards this means looking upwards to supra-municipal jurisdictions where meaningful negotiations can be done between rural constituencies, like sugar cane and rice farmers, who use water wastefully today and cities who should be willing to pay for incremental water. Similarly cities need to negotiate with the owners of agricultural land to buy land for growth at market rates. Meanwhile, city dwellers have to boost city revenues by paying higher taxes and “user charges” for the privilege of staying in a high growth area where jobs are plentiful and the quality of life indicators higher.

Gerald Frug of Harvard University has a similar vision in which metropolitan conclaves, comprising representatives of all municipalities, decide how people should live in cities and are empowered by their collective size and reach to negotiate with National and Provincial governments. Richard Sennet of the LSE and NYU advises the just starting 100 Smart City program, to be careful to avoid creating “stranded assets” financed by public funds, as in China. The down side of fast, lumpy investments is that what once looked like a good idea very quickly gets sidelined by technological change; shifts in business cycles and evolving trade regimes.

How can India grow beyond its urban adolescence? Some lessons are relevant.

First, for all large projects ensure that public money only leverages private investment rather than being the sole source of funding. Public resource allocation methodologies are famously inefficient. The willingness of private entrepreneurs to risk their capital by co-funding public projects becomes a plausible proxy for sound investment decisions.

Second, whilst Public Private Partnerships are consequently the chosen instrumentality for lumpy investments, both the benefits and the risks must be equitably shared between the public and the entrepreneur. Arun Nanda of Mahindra Lifespace hits the nail on the head, by stipulating that successful Public Private Partnerships never forget to ensure quantum benefits for the Community they dispossess of resources.

Third, whilst it is true that there can be no governance without an effective government, it is unwise to equate decisive governments with good governance. Good governance implies embedded systems for “direct participation” by all stakeholders to hold government accountable.

Within the good governance eco-system, the role of political parties is the least discussed and is the most deficient. China’s rapid urban development is as much due to single party rule as it is to inner party discipline. Democratic plurality is meaningless without well administered political parties which reflect democratic ideals and public accountability in their internal processes.

The helplessness of even well-meaning politicians, lower down the food chain, in the face of low traction with party bosses to solve their local problems, often reflects the top-down, stratified architecture of political parties, where “lateral entry” at the top level is the norm and meritocratic selection from within party cadres an oddity. We need more efficient, vertically integrated and transparent party structures as part of good urban governance.

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