Tuesday, June 27, 2006

Where the economy is being chained

The redoubtable Economist (June 3rd - 9th, 2006), in a special report on Indian business, asks the provocative question: "Can India fly?".

The answer is that it has taken off; but its people could fly much higher without the fetters imposed by poor policies and incompetent government. Most objective observers share this cautious optimism.

The policy issues are mired in politics and populism. But Indian entrepreneurs and workers have a way of boosting production and productivity despite policy errors. The real problem areas are infrastructure, education and healthcare.

Power sector problems are very well-known, but half-hearted attempts by the Union, and populism, incompetence and corruption in states are severely undermining economic growth. When there is will, there are clearly ways of improving the situation.

Witness the much-maligned Gujarat. Three years ago, the losses in power sector were of the order of Rs.2,500 crore. In a bold initiative, the Gujarat government separated the agricultural feeder lines from domestic supply. Farm power is charged at Rs.850 per HP (at 1700 units consumption and 0.50 ps/unit). Today, all villages get 24-hour domestic supply, and the power board is making a tidy profit!

The Union itself is guilty of disjointed policy and incoherent execution in many sectors. Take energy sector. We have several players - ministries of oil and gas, power, coal, mines, non-conventional energy, and nuclear energy, and several public sector behemoths. Each functions as an isolated, vertical silo and there is no integration or convergence. This, at a time when dramatic changes are sweeping energy sector globally, and vital new initiatives need to be coordinated. Health sector provides another example. Nutrition, water supply and sanitation - three key determinants of health - are each managed in splendid isolation. Within health itself, the various disease control programmes, NACO, and AYUSH function as separate empires with very little convergence.

In states, the situation is at times even more alarming. Often key positions are filled routinely, with square pegs occupying round holes. The tenure of key public servants is usually under a year, and in many cases below 6 months! In this merry-go-round, there is neither authority to deliver, nor accountability. Everybody complains against everyone else. A classic system of realistic and plausible alibis is created, in which we have only victims and no villains. Not surprisingly, corruption is rampant.

In general, delivery of services, not withstanding a few notable successes, is poor. Education and healthcare are two important areas of failure. At the policy level, there is welcome recognition of past follies. More attention and money are now allocated to these sectors. In the absence of real reform in delivery, more funds would only lead to more leakages and dissatisfaction.

Do we have to live with this unhappy state of affairs, or can we improve performance? Will our economy be held back by poor governance? The answers lie in our approach to delivery over the next few years. A priceless opportunity beckons us. Indian economy can be truly unleashed and poverty ended if only public money is put to good use and services are delivered properly.

We certainly need comprehensive political reform to change incentives in public life and eliminate corruption. Equally, we need rational, growth-oriented, wealth and employment generating policies. Past orthodoxies need to be given up. But our economy need not be held back until these political and policy failures are addressed. Competent delivery can still be ensured within the political constraints, accelerating growth and reducing the burden of poverty.
There are four broad approaches which can yield significant results in delivery.

First, we need effective convergence of key sectors and services at all levels - Union, state and local. The fact that there are about 70 Groups of Ministers in the Union shows how disparate the functioning of departments and ministries is! Significant restructuring at every level is both necessary and feasible. This better coordination alone will improve both policy making and execution.

Second, a rational personnel policy needs to be evolved and implemented at all levels. Development of domain expertise, selection of the right person for the right job, a guaranteed tenure, clear mandate and adequate resources should be the key elements of personnel management. No elected government can completely ignore compulsions of politics, ideological affinity and personal chemistry. But it is possible to improve performance even within those constraints by sound management. Such management requires parallel recruitment for a tenure, competition, and honourable retirement for those whose strengths do not match the requirements of a growing economy. The barriers between public and private sectors should be lowered, and mobility should be encouraged.

Third, we need fusion of authority with accountability. The bane of our administration is complete divorce between the requirements of a job and the resources at the command of key functionaries. Mistrust, inadequate delegation, over-centralization, excessive procedural rigidities, and low risk-taking capacity are the characteristics of most public servants. As a result, most functionaries tend to take the line of least resistance. Routine files and meetings account for over 90% of the time, and neither innovation nor actual outcomes are pursued with vigour. We need to create a system of clear lines of accountability and clothe functionaries with commensurate authority and provide resources.

Finally, the focus must shift from expenditure and outputs to outcomes. Even physical targets are meaningless except in infrastructure sector, and outcomes need to be monitored in service delivery. For instance, educational attainments, health status, out of-pocket expenditure, economic burden of disease and skill levels can all be measured through random surveys with sufficient granularity to make assessments at district and block levels. We have impressive capabilities in organizations like NSSO, and they need to be strengthened to measure and assess outcomes in key sectors and programmes at grassroots level. Such feedback would be a tool for midcourse corrections as well as monitoring. The additional cost would be marginal, considering the vast outlays now proposed in key sectors of education, healthcare and social security.

Good intentions and the way to hell

It is said that the way to hell is paved with good intentions. Well- intentioned, but unwise policies can devastate local economics.

The plight of farmers and labourers in Kolleru area of Andhra Pradesh - the low land between Krishna and Godavari deltas - is a striking example of misplaced policies and institutional mistrust causing disproportionate damage to the economy. Three decades ago, there was hunger, malnutrition, disease and distress in Kolleru area. Though located between two great deltas enjoying irrigation over a century, Kolleru area suffered drought and flood alternately. Being at the tail end of both irrigation systems, the farms were dry when there was no rain; and being low lands, they were inundated when it rained. Severe flooding caused devastation in 1964, 1976, 1983, 1986 and 1989.

Since the 1970's the government actively encouraged the farmers take to fish farming: loans were granted, training was imparted, and technology was transferred.

In time, a thriving pisciculture led to rural prosperity. Adversity was converted into opportunity, and the wasted drain water became a source of wealth creation. Now, over 600,000 tons of fish are produced in that area valued at Rs. 2000 crore, supplying food to the rest of India. The sale of fish from Kolleru never exceeded 15,000 tons earlier. In this densely populated area, people's livelihoods, incomes, health, economy, and state revenues - all improved dramatically.

Such high growth led to some aberrations. At times, with the connivance of officials, farmers encroached upon drains, and obstructed flood flow, leading to inundation. Several big farmers and entrepreneurs saw an opportunity in pisciculture, and started taking large tracks on lease, paying annual rental of Rs. 20,000 per acre typically. There are vague complaints of possible ecological impact of pisciculture. All these have practical answers: encroachment should be evicted from drains, and the channels cleared of silt and weed; small farmers should be strengthened, and big farmers should be evicted from government lands traditionally cultivated by local farmers, and now leased out; industrial and municipal pollution in the upper reaches should be stopped; and pisciculture practices should be improved reducing dependence on fertilizers.

Instead of such rational policies, the government, which had earlier actively encouraged pisciculture, now decided to throw the baby with the bath water. Following years of uninformed media campaign, the state, without genuine consultation with the local people, declared an area of 300 sq. km as a wild life reserve, on the pretext that migratory birds including Siberian cranes needed untouched wetland. Fish and birds together actually form a mutually beneficial relationship: bird droppings make natural fish feed; and fish plankton and the resultant ecosystem feed birds. Both growth and nature could be sustained by wise policies. Instead the misplaced policy has the effect of snatching poverty from the jaws of prosperity!

About 35,000 acres of fertile land, including about 10,000 acres of land granted to the local dalits and backward classes is now part of the wildlife reserve. In this area alone, the annual fish production is about Rs. 500 crores. The livelihoods of over 100,000 people in the area are now jeopardized. All this, without any land acquisition or payment of compensation! A fair compensation would be of the order of Rs. 5000 - 7000 crores. All rights of farmers over their own lands are practically extinguished and they are directed to resort to 'traditional fishing', and agriculture without any chemicals. Fish tanks are destroyed in great haste. Drains are left unattended, increasing chances of inundation in upper reaches. Pollution from industry and municipalities is not stopped. But agriculture and pisciculture are blamed for ecological damage.

If agriculture is unacceptable on grounds of pollution, there is farming and pisciculture in 12,00,000 acres in the upper reaches, and the waste water drains into Kolleru. It is absurd to think of curtailing agriculture in this rich rice and fish bowl with over 3 million population! And if such 'pollution' is harmful, then the wild life reserve in the lower reaches has no meaning. State's folly is now compounded by institutional mistrust and logjam.

Under the law, the State government can declare an area as a wild life reserve. Once such notification is issued, all authority vests in the Union, and the State cannot correct its follies. Even the Union executive has no real power, as the wild life board and its standing committee take over. Even they cannot correct the mistakes, as the Supreme Court decided that all proposals for changes even if approved by the State, Union and the wild life board, should be cleared by it. The Court itself created sixteen empowered committees with extraordinary executive powers.

In the Kolleru case, a few well-meaning activists went to court, and obtained orders for demolition of fish tanks even before land is acquired. Neither compensation for lands, nor a comprehensive package of rehabilitation entered the picture. Agriculture is now criminalized, as par with smuggling or counterfeit currency. Now, even as politicians slowly recognize their folly, they are helpless to correct the mistakes. A system of alibis is created with everyone claiming helplessness. When the region is finally devasted economically without commensurate benefits to society, no one can be held accountable.

This is a classic case of chopping off the head for a simple headache. Can we disentangle the mess we created and promote rational policies and sustainable growth? It will take years of dedicated efforts, wisdom and restraint from all players before some sanity is restored to our polity. Meanwhile, will somebody, anybody the State, Union, the Courts - understand the pain, anguish and needless suffering inflicted on the helpless population of Kolleru and protect their rights and livelihoods? Or will we add to the growing rural alienation, unrest, and resort to violence, which have bedeviled our skewed growth?

The risks and rewards of corruption

The recent CBI raids and allegations of disproportionate assets of a prominent Haryana politician to a tune of Rs. 1500 crore have barely evoked any interest among political pundits and media. There is such cynicism prevailing about politicians, that most people tend to believe the worst about 'them'.

But we have to acknowledge that corruption is all-pervasive in our society. The much-talked about corruption perception index of Transparency International places India pretty low in terms of integrity in public office. A CMS-TI study in 2005 estimated that the monetary value of petty corruption in 10 sectors alone is of the order of Rs. 21,000 crores per annum. When you consider the collusive or 'grand' corruption and all the sectors of the economy, easily ten times this amount is collected in bribes annually. The 3 million trucks in road transport industry provide an illustration.

Typically, each truck pays about Rs. 200 per day as bribes at check posts, octroi centres, and other places. Thus, petty corruption in truck transport alone accounts for over Rs 20,000 crores per annum! Clearly, corruption amount of Rs 200,000 crore every year is a realistic estimate by any standard.

The disclosure of assets of candidates which came into effect in 2002 with Supreme Court intervention has created some unusual situations. Many politicians known to be wealthy, but corrupt disclose very little income or assets, whereas honest politicians with legitimate income disclose much more. The net result is, disclosure of assets has become somewhat ludicrous, and often distorted. There are still many honest politicians and public servants. It would be extremely debilitating to our democracy to paint all public servants - elected or appointed - by the same brush.

Huge, unaccounted and illegitimate election expenditure, mostly incurred by the candidates as an investment in politics as business, demands multiple returns to sustain it. Even a casual analysis shows the multiplier effect of illegitimate election expenditure on corruption: risk premium is high in politics; provisioning for the next election has to be substantially higher than the previous one; a high return on risky investment is the natural expectation; the many party 'cadres', who in mass-based parties are actually mercenaries, need to be rewarded with access to public money and opportunities to make a 'living' at cost of state or society; and the many intermediaries in the vast cycle of corruption demand their own pound of flesh, thus multiplying the corruption proceeds several fold. Direct theft of public money through treasury malpractices is both rare and easy to detect and punish. In a robust and open democracy, complex systems need to be evolved to sustain such a web of corruption. Transfers and postings of officials and even junior employees often has a price. At times some form of auctioning actually take place, and the positions go to the highest bidders. The bids can be one-time payment for a tenure, or monthly payment of a guaranteed amount.

The expensive private political advertisements in language papers and bill boards extolling the virtues of this municipal chairman or that MLA, not to speak of state party basses and chief ministers is an indication of the huge expenditure which goes into politics as investment in anticipation of multiple returns. Such large expenditure by political wannabes for self-aggrandizement or pleasing political godfathers significantly adds to the corruption load on the system.

This tragic vicious cycle of corruption is undermining competition, jeopardizing vital services, diminishing quality of lives, distorting public life, and impeding economic growth. Bhanoji Rao and Srinivas Kolluru estimate that our growth rate will increase by about 1.65% at current investment levels if our integrity reaches Singapore levels. Competition and choice in the economy have successfully curbed corruption; telephones is a good example. Transparency and technology have been effective in reducing supply. But technology succeeds only when processes are reengineered. Land records computerization in AP did not reduce corruption in land registration; but in Maharashtra there was greater success. Recently issuing driving license and renewal has become largely corruption-free, thanks to sensible process reengineering coupled with application of IT.

But there are core areas which cannot be taken out of state control. Already justice system is 'privatized' by armed gangs taking law into their hands, and providing rough and ready 'justice' for a price through brutal means. In fact, this state failure has vastly complicated our politics and inducted murderers into legislatures. Therefore, the standard libertarian mantra of 'privatization' does not address the problem adequately. It only tends to shift corruption from the economic areas of decision making to the core areas of state functioning. Therefore, while efforts should continue to curb the supply of bribes, we need to look hard at the demand side.

One simple solution is to make it much harder for corrupt public servants to enjoy the fruits of their perfidy. For instance, the Law Commission, in its 166th report (1999) recommended confiscation of properties of corrupt public servants. Jammu and Kashmir recently enacted such a legislation. Such a law effectively enforced along with strict curbs on benami transactions (as advocated by Law Commission in its 57th report in 1973) will reduce the rewards of corruption drastically, and increase the risks hugely. This is a relatively simple and easy measure which should find broad acceptance across the political spectrum.

A lot more needs to be done to transform the political culture and to change the electoral system in order to make it possible for honest men and women assume public office without illegitimate expenditure. But the first sensible step is to make the corrupt pay.

Crossing the Rubicon...Tamil Nadu style

In a democracy, elections are not merely about choosing representatives and deciding which party should be entrusted with the responsibility for governance. Elections are also about political education and determining priorities for the future. But over the decades, most parties in India have failed to utilize elections as a means of mobilizing public opinion to obtain a mandate for meaningful change. Instead, elections have become a way of determining who will rule.

Over the years, cynical and shameless manipulation of the poor and powerless voters through competitive populism has become the dominant feature of our elections. The current Tamil Nadu Assembly election has shown that this process of manipulating the vote has reached the nadir. The DMK-combine promised colour televisions to each family!

This is by no means the first time when a party offered freebies to the unsuspecting and hapless poor. Most candidates habitually offer money and liquor for vote. And since the early 1970's politicians perfected the art of using public money as inducement for vote. Ostensibly, all these promises are intended to eliminate poverty. But the gullible poor remain as vote-banks, and no significant dent is made in poverty.

The Garibi Hatao politics of 1970's and the populist policies of NTR and MGR are good illustrations of the poor becoming an assured vote bank, even as their condition remains largely unaltered. The absurd campaign of Devilal in Haryana in 1987 marked a new low, when he promised to give irrigation water without 'depleting the power in it' as opposed to Congress which generated hydro-electricity before allowing it to flow into irrigation canals! Devilal again hit headlines in 1989 by promising to write off farm loans. The loan waiver was eventually implemented by VP Singh government in 1990. The credit system suffered irreparable damage, and farmers continued to be in distress after the loan waiver.

Politics of free electricity has dominated our electoral landscape for long. Several states resorted to this, including the present Congress government in Andhra Pradesh. Farmers continue to pay huge bribes for new connections or services, power supply is erratic, and utilities suffer serious losses at great cost to the tax payer. And yet, the cynical governments resorting to such short-term ploys reap rich political dividends.

But all these pale into insignificance in the face of the brazen promise of DMK in Tamil Nadu to give colour televisions. By this reckless promise, the sovereign voters are converted into mendicants. The tragic death of several poor women while distributing free sarees in Lucknow in 2004 forever reminds us how the voter has been reduced to a beggar. But Mr Karunanidhi now seeks to institutionalize such mendicancy. In such political calculations, people are not human beings with dreams and aspirations, and dignity and pride. They are reduced to being voters whose compliance is necessary for the power of a few manipulators.

When poll promises are always made with an eye on the votes, what is wrong with Mr Karunanidhi's promise? Because, this time by offering colour TV sets, the politicians have crossed the rubicon. Most of the subsidies and freebies offered by parties so far can be justified on the ground that they were meant to help fulfil potential, or prevent suffering, or support the weak and vulnerable. But colour television sets cannot be justified on such grounds by any stretch of imagination. That is why Mr Karunanidhi's election promise has implications beyond Tamil Nadu and this election.

If such a reckless electoral tactic goes unpunished or unchallenged, who knows what tomorrow will bring? In a future election, a party may offer free motorcycles, another will promise refrigerators to all, and a third will give motor cars! And why not guarantee a hundred bottles of free liquor annually to every family? And all this, with public money. This will certainly bankrupt the treasury. Election will go to the highest bidder. Once such promises are honoured, nothing much more can be done. Education may be in perilous state denying poor children an opportunity to enlarge their horizon and acquire skills; we may have more televisions than toilets, and people may suffer indignity, humiliation, inconvenience and ill health on account of public defecation; and public health may be in shamble forcing millions into sickness and debt trap. But once people get televisions and scooters, the state does not have resources to do the things which it ought to do.

Therein lies the real tragedy. The state is ready and willing to do what it need not, or ought not to do, at the cost of its essential functions. Poverty is perpetuated, and millions remain as vote banks, seeking alms and freebies which will never improve their condition. The netas and their families of course continue to thrive in the 'service' of the people. The servant becomes the master, lording over people, and the sovereign citizens become mendicants propping up the political fortunes of a few individuals and their kith and kin.

This must stop. If the parties have any sense of shame and spirit of public service left in them, they must come together to put an end to this culture of mendicancy. The media, which are busy peddling the week's sensation, must rise above the mundaneness of daily occurrences, and mobilize public opinion to reshape politics. The time is now, before all parties subvert our democracy fully and public office becomes the preserve of the highest bidder.