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India's chance at reforms: now or never


Dinesh Narayanan & Udit Misra, Forbes India
Mar 24, 2010 at 06:11pm IST

On February 26, a rare confluence of events took place. As Finance Minister Pranab Mukherjee presented the Union Budget, the stock market started rising. The benchmark Sensex remained high even after he re-imposed taxes and duties he had withdrawn last year to help the economy out of a slowdown.

Sure, Mukherjee put more money in the hands of the people through income tax concessions, but then that money would be barely enough to buy goods that would become costlier with his excise duty hikes.

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Stock prices have a large element of the future hidden in them. It isn’t hard to pick up the palpable sense of imminence that now pervades the Indian economy. It is the only economy apart from China that is still growing at 7 per cent or more. It is also the only economy that has a domestic market of the size that can be a self-sustaining growth engine. A 2007 McKinsey Global institute survey says that by 2025, Indian incomes will triple and the country will become the fifth biggest consumer economy in the world.

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The country may well be on the verge of fulfilling a hope best articulated by Goldman Sachs seven years ago. Researchers at the world’s biggest investment bank had predicted that India would grow enough to be the third biggest economy behind China and the US by 2050.

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Were the markets cheering this vision of the future? Or were they merely relieved that the finance minister hadn’t done anything to reverse the reform process and instead chosen to commit to fiscal discipline? Perhaps it is a bit of both.

India will squander its opportunity to unleash long-term growth if it doesn’t get started on the next generation of reforms. Now, no one doubts Prime Minister Manmohan Singh’s intellectual ability to take economic decisions in the best interests of the country. But the moot point is: Will he and his team have the political courage to do it? Will sound economics finally go hand-in-hand with sensible politics?

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Budget 2010, of course, throws some hints that the government is willing to deal with some complex areas of reforms. But it will take more than just policy pronouncement for India to keep its tryst with destiny.

We’ve picked out four key challenges that the next ten years will throw up. One, the country needs a new, more remunerative approach to farming that replaces the current subsidy-ridden system. Sixty per cent of the population still survives on agriculture and figuring out a solution is now critical.

Two, India’s urban centres are bursting at the seams. So far, apart from a piecemeal approach, there’s been very little to suggest that the country is ready for the surge in urban population.

Three, the expanding society will fuel the demand for more energy. India is seriously short of stable sources of power. In the near future, the power produced will have to come from “clean” sources as the world seeks new ways to curb the damage to its environment. A sensible energy policy is, therefore, required urgently.

Finally, over the next few years, as incomes continue to climb, citizens will demand a more responsive government: New roads, better education and healthcare, to name just a few. Even though the budget has spelt out the government’s future role as an enabler rather than a provider, there is still a large swathe of services that require its supervision and execution. And for the most part, the government is invariably found wanting. How do we retool our bureaucratic machinery to be more responsive and capable so that the benefits of reform reach the people who need it the most?

A harvest of woes

The number of Indians depending on farming for the livelihood is 700 million, or two times the population of the US. The Green Revolution four decades ago largely benefited North India. Left out of it, and so many other waves of development, is the east of India where many of the country’s poorest people live.

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Mukherjee has proposed extending the Green Revolution--marked by transformation of agriculture with intense use of fertilizers, pesticides and irrigation--to the eastern region covering UP, Bihar, Chhattisgarh, Jharkhand, West Bengal and Orissa.

The ecological impact of Green Revolution is well known. The government plans to turn its attention in the areas earlier covered by it to conservation of water, soil and biodiversity. Mukherjee has also launched an ambitious plan to establish farming of pulses and oilseeds in 60,000 villages in rain-fed areas in the next year.

“For first time, we are seeing an overall integrated approach to agriculture. There are provisions for cultivation, post-harvest technology, commerce and conservation,” says M S Swaminathan, considered the Father of Green Revolution that helped the country become food-secure.

There’s clearly a lot at stake. Farmers are the biggest vote bank in India and that makes policymaking for this segment extremely tricky. Governments must tread carefully while restructuring this sector, vital for the long-term economic and food security of the country.

But the first sign that the UPA government is willing to take the risk came a week before the budget when it dropped a decades-old fertilizer subsidy regime.

The old subsidy scheme had been counter-productive. Fertilizer makers had few incentives to increase investment as prices were fixed, while the government’s subsidy bill kept on rising due to higher input costs. It did not help the farmer either, as his soil was degraded and productivity declined.

About 17 per cent of India’s GDP comes from farming. Agricultural productivity has been over a plateau for the past 10 years. The message is clear: The benefits of Green Revolution are wearing out due to repeated use of chemical fertilizers and pesticides. Urea is one of the chief culprits.

Yet for long, no government has been willing to deal with this anomaly. Then, just before the budget, the government took a politically sensitive decision. It said it will subsidise the nutrient content of fertilizers and not specific products. This means farmers will be free to buy what is best for the soil rather than what gets the maximum subsidy.

Indian appalling service

Another animal the politician is wary of is the powerful Indian bureaucracy. The weakness of the government’s institutions in providing key citizen services is notorious. “Indeed, in the coming years, if there is one factor that can hold us back in realising our potential as a modern nation, it is the bottleneck of our public delivery mechanisms,” Mukherjee said in his budget speech.

The country’s bureaucracy is steeped in the legacy of the British Raj with its own paraphernalia of rules, regulations and procedures. The administrative set-up in India attracts the best talent because the selection process itself is highly competitive. Yet, it often remains unresponsive and insensitive, especially in areas removed from power centres.

“The problem lies elsewhere, in our conception of the state, to wit that it has to directly deliver on every front and not be content with an enabling role,” says the just-released Economic Survey.

The Administrative Reforms Commission says that most agencies of the government are functioning sub-optimally, and government programmes have not yielded the desired results. At most levels, authority is divorced from accountability leading to a system of plausible alibis for non-performance.

That means sometimes it works, but often it fails. For instance, the number of reported cases of polio declined from 28,757 during 1987 to a mere 186 in 2000 restricted to just two states as health workers diligently went door-to-door immunizing children.

At the same time school education, for which the government plans to spend about Rs. 31,000 crore this year, the story is dramatically different.

The gross enrollment ratio, despite rising rapidly in the 1990s, was just 61 percent in 2007 compared to 87.2 percent in Brazil, 81.9 per cent in Russia and 68.7 percent in China. And the quality of teaching leaves much to be desired. Voluntary group Pratham’s latest Annual Status of Education Report says over half the students in standard V could not read standard II texts.

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Much of the inefficiency is a result of centralised planning without proper understanding of local demands and issues.

Former Panchayati Raj minister Mani Shankar Aiyar says that there is no political will, even among his Congress Party colleagues or anyone in the government, for true devolution on the basis of finance and functions. “The Panchayati Raj ministry should get as much importance as the finance ministry,” Aiyar says.

A beginning was made to change the top-down approach in 1993 when India gave constitutional status to local self-government. However, the results are at best patchy. A reason is that the decentralisation was pursued in a way that distributed power. Other countries have done it based on the services to be provided. “Most of the important social services in developed countries are provided by the local government, but in India it is about exercising power,” Krishna Vatsa, an Indian bureaucrat who is now regional director (Asia) at UN Development Programme.

For instance, while the district level organ of local self-government has been given the power to effect transfers of teachers, it is not responsible for the academic performance of the region. As a result, the power to carry out transfers is often used purely for selfish interests.

The need to station the government’s best officials to run social welfare programmes was never stronger, Mukul Asher, professor at the National University of Singapore, says. But typically, working in social welfare departments is not the preferred career option for many bureaucrats. There are not many incentives for working in the sectors that aim at inclusion and it can only improve with better human resource planning, argues Vatsa.

Urban Inertia

India’s burgeoning cities will become overcrowded in the next 10-15 years and fixing them will be a key priority. Mukherjee, in his latest budget, has hardly touched the urban areas, which are likely to be home to more than half the population in about 30 years.

About a third of India’s population lives in cities and towns. In a couple of decades, more than half of the country will reside in urban areas. By next year, two-thirds of the GDP will be generated there. Yet, the only integrated programme for development of urban areas, the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) is woefully slow-moving.

A 2007 McKinsey Global Institute survey estimated that by 2025, urban India will account for two-thirds of the consumption growth. But even the richest Indian cities are victims of bad planning and overstressed infrastructure.

Take the country’s commercial capital Mumbai. More than half of its population lives in about 1,950 slums. Running water is available only for two to six hours a day. About 35 per cent of the households lack basic sanitation. The city’s storm water drains cannot take a rain intensity of more than 25 mm per hour and the average travel speed is six to eight kilometers per hour, according to a city development plan for Mumbai of 2006. The plan admits that the quality of life in the city has drastically fallen over the years. In spite of the diagnosis, nothing much has moved in Mumbai. Even the long-standing rent control regulations and land ceiling laws have not been amended.

“It is very clear that as we urbanise and motorise, our cities will have the twin challenges of pollution and congestion,” Sunita Narain, director of Centre for Science and Environment, says. “And it is important for us to be able to move quickly to buses today rather than tomorrow.”

The McKinsey survey predicts that by 2025, Indians will be spending a quarter of their income on food and beverages, down from 42 per cent in 2007. However, they will be spending a fifth of their incomes on transport, it says. Yet procurement of buses by state transport utilities is nowhere close to the demand.

M. Ramachandran, urban development secretary, remarked at a JNNURM review meeting on buses in October 2009 that even though orders had been placed for 11,000 vehicles, only 350 had been supplied until mid-September.

The clean energy imperative

The world is keeping a close watch on India’s response to the energy challenge. A growing economy will demand new sources of energy. Given the sensitivities around climate change, it will also mean reducing dependence on fossil fuels. For that, the government needs a new set of incentives that encourage entrepreneurs to set up capacity in renewable energy.

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The budget says that India will set a clean energy fund that will help research and development of new technologies. “Ten-15 years from now, the competitiveness of the economy will depend on our technological capability,” says Pratap Bhanu Mehta, president, Centre for Policy Research. “You would want to be on the technology frontier.”

To encourage investment in technology, however, the government needs to present a long term policy vision. Take the solar mission, for instance. India hopes to be the global leader in solar energy by 2022 with an installed capacity of 20,000 MW. That will require huge investments, especially by the private sector. But investors are uncertain.

Jayant Kawale, who heads Pune-based Bharat Forge’s renewable energy division, says there is clarity about incentives only until 2013. “As an investor, I need to know if the programme is going to continue.”

On the face of it, the mission has launched successfully. The government had targeted setting up 1,000 MW by 2012. However, the incentive structure was such that there was a virtual stampede to set up solar power stations. The mission has offered four units of thermal power at about Rs. 2 for every unit of solar power produced. That is to bring down the cost of solar power which is fixed at Rs. 18 per unit. The producers are free to sell that electricity even on power exchanges where sometimes it trades at Rs. 8 a unit.

The finance minister has increased the budgetary allocation for the ministry of renewable energy by 61 per cent to Rs. 1,000 crore. But more than money it would need to iron out the creases in policy to meet its ambitions.

Clearly, the road ahead is filled with new opportunities — and equally, tricky policy potholes. In his budget, Mukherjee said, “I have placed my faith in the collective conscience of the nation that can be touched to scale undreamt of heights in the coming years.”

Now, as the country awaits its moment under the sun, this is the time to convert that rhetoric into substantive policies. Nothing less will do.

(Additional reporting by N S Ramnath and K P Narayana Kumar)

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