It’s time we refocused on growth, economic empowerment and governance

As the year 2011 begins, India needs to refocus on improving fundamental sources of sustained high growth; on economic empowerment of its people and businesses; and on better governance which meets aspirations and expectations of the people. Without such refocusing, it will be increasingly difficult to effectively address India’s geo-economic and geo-strategic challenges.

Such refocusing requires that the country, particularly those in political and bureaucratic leadership positions, move away from political symbolism; over-politicisation of even routine decisions; and from family and personality-centered socio-political culture. These characteristics are highly unsuitable and indeed counter-productive for a country which aims to be a major power in the next two decades.

It may be useful to briefly reiterate the substantive content of each of the area requiring refocusing.

Fundamental sources of growth
There is robust national and international evidence that sustained high growth requires an appropriate combination of the following:

1. Human resources and skills for a modern technologically progressive society, which are also internationally competitive: Mismatch between educational programmes supplying manpower on the one hand and demand by business, government, and other sectors  for employable skills is an important constraint on India’s growth. But essential institutional, organisational and regulatory reforms in this area are lagging, while a counter-productive tendency to micro-manage skills acquisition by political and bureaucratic class persists. Scarcity of quality educational institutions has led to rent-seeking in this sector; and tax and regulatory gaps have led to distortions in this sector, while eroding the tax base.

2. High level and quality of capital investments, particularly in infrastructure in both urban and rural-agricultural sectors: Within the next two decades or so, near majority of India’s population will be urban. The agricultural sector accounts for around 17% of GDP but nearly two-fifths of total employment. Such a mismatch needs to be addressed by improving productivity, and increasing non-farm livelihood opportunities. Amenities for improving quality of life, including physical and digital connectivity, in improving degraded land, irrigation facilities, constructing more efficient agriculture supply logistics chain, and for health, education, and housing require a qualitative and quantitative transformation.

3. Acquiring proficiency in applying knowledge economy concepts, and in knowledge management: Such proficiency is needed not just in manufacturing, but particularly in agriculture, and services, particularly those involving social sector services. Knowledge has high average, but low marginal cost. So, diffusion of knowledge is crucial and feasible, given appropriate organisational incentives, technology and result-orientation.
This requires robust data bases, and information and management systems. A mindset and institutional arrangements conducive for empirical-evidence based design and implementation of public policies and schemes, with a feedback loop for corrective actions, are essential.

There is, however, little evidence of organisational learning and of leadership, which are conducive to acquisition of such proficiency in many crucial areas of government, such as railways, other transport, agriculture, urban management, health, and social security.

Sound macroeconomic management, particularly achieving fiscal consolidation, fiscal flexibility and financial stability.

Fiscal consolidation involves keeping fiscal deficits, appropriately defined to include accrued and contingent net liabilities, and not including one-off revenue from spectrum and other asset sales as ordinary current receipts, which are consistent with moderate inflation and high growth.

Fiscal flexibility requires that fiscal planning should leave enough space for growth and social cohesion enhancing expenditure. The combined government expenditure in India exceeds 30% of GDP. Even with such high share, quality and quantity of government services are grossly unsatisfactory.

The casualness with which Fiscal Responsibility and Budge Management (FRBM) Act targets have been set aside at the Centre and in many states; the lack of urgency in improving current cash budgeting and financial control systems, even in commercial enterprises such as the Railways; and the lack of financial discipline, recently demonstrated in expenditure on Commonwealth Games, and in large supplementary expenditure approval by Parliament, do not augur well for fiscal consolidation and flexibility.

India’s high internal debt ratio (over 65% of GDP even by conservative estimates) and high trade and current account deficits, which are being financed through volatile net inflows of portfolio capita, remittances and others, could leave India vulnerable. The 2011 Budget of the Centre and of the states should include sound macroeconomic management, including fiscal management, as primary criteria in assessing them.

Economic empowerment of people and businesses
Economic empowerment requires ability and capacity to exercise choice in occupation, location, product lines, methods of doing business and conducive policy and regulatory environment, including law and order. An important feature of India’s growth strategy has been the entrepreneurial capabilities of its people. But if children do not receive sound education, or basic level of health care, and do not have connectivity, trying to expand in time and scope special privileges to certain segments of the population has made them a rentier class, dependent on the political-bureaucratic classes.

Outmoded regulatory hurdles in education, health, housing and other sectors need urgent review.
The response of the government to high food inflation, including high onion prices, was symptomatic of the lack of understanding of the need for empowerment. The policy instruments were export ban, and rise in minimum wage, which will make farming activities of small and medium farmers even less attractive, and speed up substitution of labour for capital equipment. This suggests that even for the critical farm sector, economic empowerment is not high on the agenda.

Such instances can be repeated for other sectors. For mandatory provident and health schemes, where quality and quantity of delivery of services is very poor, no choice has been given to members to select alternatives. Contestability, essential for efficiency, is instead thwarted, with workers not receiving full benefits for which they have paid.

Governance
There is insufficient action on instituting governance reform. The Administrative Reform Commission at the Centre and in the states has minimal impact. The Supreme Court has declared that no public employee has the right to indulge in corruption as part of his or her job. This needs to be implemented, along with accountability of the employees. Corruption is indeed a complex issue, but this should not act as an excuse for requiring minimum norms of behaviour from public employees. The Right to Service law in Bihar is a step in the right direction.

India should not take its growth or rise internationally for granted. Refocusing along the directions suggested above will substantially increase the probability of the country emerging as a major power; while improving electoral prospects of those perceived to be a part of such refocusing. A government leadership must be judged by acts of omission as well as commission.

The writer is a professor of public policy at the National University of Singapore and can be reached at mukul.asher@gmail.com. Views are personal