http://www.telegraphindia.com/1120625/jsp/opinion/story_15638997.jsp#.T-hu3Bdo35s
THE HARD TIMES MUST GO- India needs drastic reforms, not cosmetic ones | ||
| Commentarao: S.L. Rao | ||
In 1990, A.M. Khusro was editor of The Financial Express.
The country’s economic situation was dire. A four-page article by an
anonymous writer (later speculated to be Montek Singh Ahluwalia) laid
out what must be done for economic revival and growth. The article
listed policy changes (that were also in reports by L.K. Jha and
recommendations made by the World Bank mostly by Indian economists).
Policy changes or new ones introduced by P.V. Narasimha Rao as prime
minister in 1991 with Manmohan Singh as his finance minister followed
this blueprint.
India’s
situation today is no less dire than it was in 1991. The prime minister
says that unlike then we now have ample foreign exchange reserves. But
they have come down by almost 10 per cent in the last two months. And
the reserves cost high interest. Being volatile funds they can flee at
short notice. As in 1991 we need drastic reforms, not cosmetic ones.
Growth is declining, inflation rampant, investment down, and payments
balance dangerously bad. Thankfully Pranab Mukherjee — the worst finance
minister that the Congress has had — will move soon and the United
Progressive Alliance can reverse his many mistaken polices. The best
reform would be to replace the two-headed “leadership” of the UPA with
one head with political power.
Contrary
to the statements of Congress and government spokesmen, there is no
magic wand. Opening foreign direct investment to retail, massive
infrastructure expenditures, superficial cuts in government
expenditures, are Mukherjee’s cosmetic sound bites, not reforms. The
needed reforms are structural and systemic, prioritizing decentralized
governance, and administrative reform.
Slashing
the fiscal deficit — and immediately — demands genuine and drastic
cutting of expenditures. Pious pleadings for reducing overseas travel by
government servants or not holding meetings in five-star hotels will
not do. Social service expenditures are the chief cause of Central and
state government spending since 2009. The figures between 2006-07 and
2010-11 (in rupees crores) are: 2006: 11,09,174; 2007: 13,16,246; 2008:
15,95,110; 2009: 19,09,380; 2010-11: 20, 71,147.
Schemes
and expenditures were rolled out with little prior testing, poorly
targeting beneficiaries. Much of the claimed expenditures have been
stolen. Obvious actions are to make an overall cut in each scheme, cut
allocations to states which have been shown to spend funds on non-target
beneficiaries, and in allocations to states that do not submit required
periodic returns.
The capacity of panchayats and
local authorities must be strengthened and then funds disbursed
directly to them for different social schemes. They might steal, but can
monitor closer to the beneficiaries. All schemes should first be
pilot-tested and a monitoring and evaluation mechanism established,
using lessons from the past as aids to minimize wastage and theft.
Foreign
investment has already increased to the United States of America and
Germany. Their strong currencies offer safety. The retrospective
taxation introduced in the last budget has unsettled investors. It
should be withdrawn immediately without waiting for judicial scrutiny.
For foreign companies, acquiring valuable Indian capital assets by
buying their holding companies abroad saved regulatory interference and
taxes. Some examples over the years: Lever buying Brooke Bond; Glaxo
buying SKF and Burroughs-Welcome; Kraft buying Cadbury, and many others.
The government must impose a prospective tax on capital gains on
overseas purchases of companies with sizeable Indian assets, and
withdraw the retrospective tax.
When
our composition of foreign exchange reserves improves, a calibrated
programme to reduce our dependence on volatile foreign funds must be
initiated. A tax must be imposed on foreign institutional investors who
move funds out of India without holding them for at least a year. As FDI
and exports increase, we must abolish the tax treaties with countries
like Mauritius, and the scheme of participatory notes, which have become
conduits for money laundering and illegal overseas accounts.
Foreign
direct investment policies must become open. Allow FDI in all sectors —
insurance, retail, pensions, aviation and anything else, with close
regulatory oversight, and with a small negative list on security
considerations. Rules and procedures must be simplified so that India
does not remain at the bottom of the list of countries where a new
business can be started speedily. The intention of the government and
its policies must be to make investment welcome, not to show suspicion.
The
government must abandon ‘disinvestment’ in State-owned enterprises where
it sells minor percentages of its equity; instead, it must privatize
them. The revenues that will be generated can be used for funding social
service schemes and for infrastructure. The bonus for the economy will
be that the fr eed public enterprises will function entrepreneurially,
efficiently and add substantially to the economy.
‘Disinvestment’
of part of the equity allows government to retain full control. It is a
revenue-raising exercise — not one to improve entrepreneurship and
management autonomy. Minority shareholder interests are ignored. The
freedom of the government as majority equity holder and policymaker to
overrule interests of minority shareholders under the present
disinvestment will no doubt be settled in court. Disinvestment does not
correct the biggest hurdle to the efficient management of public
enterprises — the interference of ministers and bureaucrats in all major
decisions and the absence of managerial autonomy in key decisions on
strategy, diversification, technology, collaboration, key appointments
and so on.
Attempts
to distance ministries from public enterprises — memoranda of
understanding between the controlling ministry and the enterprise on who
is to be responsible for what action — ended up as another budgeting
exercise and paperwork for the enterprise without achieving distancing
between the two. Another effort was to have holding companies like
Indian Tourism Development Corporation, and thoughtless mergers like
that of Indian Airlines and Air India. A recent fancy is that of
conferring ‘navaratna’ and ‘mahanavaratna’ status, but
that has not stopped bureaucratic control. Many times, even the top
operating management is given to bureaucrats. Public enterprises that
are not enterprising are still critical to the economy. But their
culture is administrative — of procedures. All serving and retired
bureaucrats in Central and state government-owned enterprises must be
removed. This is especially so for state electricity boards that have
accumulated losses of over Rs 1 trillion paid out of state budgets.
Decisions
on goods and services tax, the direct tax code, oversight of credit
rating agencies, introduction of the international financial reporting
system for all accounts, codification of standard rules for transfer
pricing, should be accelerated, not meander desultorily. Land
acquisition, environment and forest clearance are major hindrances to
industrial development. One suspects that the government prefers them to
be so discretionary. This must be corrected and a fast
approval/disapproval process introduced.
Natural
resources like coal, iron ore, oil and gas, telecommunications
spectrum, and others are national resources. A clear procedure for
allocation, fees for sale or lease and so on is not difficult to evolve
but obviously a discretionary procedure is more profitable to the
government functionary. Ministerial and bureaucratic discretion must go
in these matters, as on land and environment.
Independent
regulation of information, competition, electricity, telecom and so on
must also be treated as such. They must be made accountable to the
higher judiciary. Appointments must not be restricted, as now, to
retiring bureaucrats.
The
fundamental reforms must be decentralization of decision-making and the
individual accountability of the bureaucracy for decisions. Proposals
for administrative reforms exist and must be implemented immediately.
Administrative reforms must move the bureaucracy away from a
pre-independence system of revenue gathering, law and order maintenance
to a development and social service oriented one.
Financial
decentralization is another priority reform. Elected representatives,
especially in state legislatures, do not want to surrender their power
to distribute largesse. They have resisted financial devolution to panchayats. Panchayats must
have capacity-building and decision-making powers. Similarly in large
urban municipalities, corporators must be accountable for their
decisions. These are the urgent, doable and dramatic reforms. Will
vested interests in all political parties accept and implement them?
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