governance, political economy, institutional development and economic regulation

Posts tagged ‘Vajpayee’

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.

1558 words

Saffron India

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The saffron deluge has taken everyone by surprise, like an early monsoon. The Modi storm carried away with it, anyone who rode with him and demolished all others, barring regional stalwarts like Amma, Naveen Patnaik and Didi.

Is this the end of caste as a political weapon? With Bhenji (Dalit supremo), Netaji (Ahir supremo-UP), Lallu (Ahir supremo-Bihar), Ajit Singh (Jat supremo-UP) all biting the dust and even Haryana going saffron, are voters taking caste out of national politics? Could this be stretched to say saffron can make the country less divisive- top downwards? Is there a hope that the next step could be to take caste out of state level politics? Well that clearly is Modi’s dream. But there are limits to Hindu integration and virtues in dissonance.

The democratic problem with an overwhelming mandate is that it reduces the opposition to a redundancy. In the extant case, saffron still has to contend with the Rajya Sabha where the NDA does not have a majority. More importantly, the recent Indian experience with huge majority governments has not been conducive for reforms. Of course coalitions are not a panacea for reforms either. The United Front coalitions of 1996 to 1998 were superbly ineffective. But the Janta Party wasted its massive 1977 win and Rajiv Gandhi frittered away the overwhelming sympathy vote in 1984. In comparison, significant economic reform happened only under the Narasimha Rao led coalition government in 1991; the Vajpayee led NDA government of 2000 and the Manmohan Singh led UPA I of 2004. There does seem to be a positive link between coalitions and economic reform. Possibly huge majorities induce comfort. The lack of competition douses the fire in the belly till ones time is up and it is too late.

Modi is not unused to huge mandates. After all he has led Gujarat for over ten years now. But it would be wise to pursue the idea of a “cabinet” of Chief Ministers and to engage proactively with the opposition. The last few years have seen rising inter-party acrimony making Parliament dysfunctional. To keep engaging, when not compelled to do so, is the best route to rebuild a national consensus on development priorities.

Modi is a man in a hurry, with an agenda to complete and too little time to do it in. It is consequently unlikely that he will let the baton slip. He would do well to use the UK-Tony Blair and Malaysia precedent and constitute small, vertically integrated, fully empowered, politico-technocratic teams with specific, measurable and time bound results expected from them. His secretariat is unlikely to be the laid back, free-wheeling entity it had become under Manmohan Singh, which reported to everyone but the PM. The expectation is that Modi will come to office with a pre-formulated agenda and a team to implement it doggedly.

Is the hoary city of Delhi likely to seduce him into somnolence? Again, very unlikely, given the cultural gulf tween the macho man from Mehsana and the pleasures on offer from the glitterati of Lutyens. His “quasi married” status is likely to generate many hours of speculation of who, if anyone, is likely to share 7 RCR with him.

The world will be waiting however, for any slip up on his management of the Muslim community. Whilst Modi seeks to treat all Indians the same and goes out of his way to say so, the fact is that to reverse the “selective appeasement” of the past will take time and fiscal space. Neither is available to him. This is where proxies and symbols can help to reassure minorities that he is their protector too. One important symbol will be his choice of the Home Minister, who whilst enjoying the full confidence of the PM, must be trusted by all segments of India.

Theorists will make much of the need for Modi to build or re-build institutions. This is very time consuming and effort intensive. Many of these (cabinet system; inner party democracy; the bureaucracy; federalism; the judiciary) were systematically destroyed during the long period of Indira Gandhi’s rule. Institutions do matter, particularly in a democracy, because they provide permanence in a politically unstable system. But in India we carry everything to extremes. No institution can atrophy and yet remain productive.

The central bureaucracy is one such institution. From the very beginning, it was merit oriented only at the point of entry. Even in that limited way, it did not respond to the socio-economic disabilities specific segments of India faced in getting in. This opaque, small, mostly male club can be transformed by introducing real competition at the top. This is from where the fish rots. All babu posts of Joint Secretary and above must be filled through open competition. It must be the PM (not the concerned Minister or the Department of Personnel) who must select the candidate, out of a short list of two, recommended by the UPSC. Each appointment must have a minimum tenure of three years with no job hopping allowed, even if more attractive lateral options become available.  

One new tradition, which must be reversed, is the “in your face” security apparatus. Modi was the highest security risk even before he became the PM. Now his security needs to significantly enhanced. But this challenge should be used as an opportunity to upgrade the security apparatus, rely on technology, intelligence and rapid response, rather than on a glut of gun totting men. It is only when the PM makes his security “invisible” that it will stop being the status symbol, it is today.

It will not be easy to rein in “privilege”, which is the life blood of an elitist, patrimonial State. But much of the rot we face today can be traced to this one, ubiquitous norm. Who better to try, than one who, like Bill Clinton, made it to the very top purely on merit?

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