The Right To Growth

Introduction

      Economic growth represents opportunity. India’s Per capita GDP growth was 1.5% during the notorious License Permit Quota (LPQ) Raj from 1950 to 1980 (Nehru, Indira Gandhi 1).  The reversal of these failed policies instituted in the 1980s (Indira Gandhi 2 & Rajiv Gandhi) almost doubled the per capita growth to 3%. This was further raised to about 5% (1992 to 2012) by the reforms of the 1990s (Narsimha Rao, Atal Bihari Vajpayee). The decline of per capita growth to 2% in 2012-13 has come as a shock to youth who have grown up in the decade of 6% average growth. 

    The media exposure of high level corruption at the Center and pervasive governance failure across the country (States) has heightened the outrage against the government for depriving them of this new hope of a bright future. However, it should not be forgotten that corruption at the State level is a much earlier phenomenon and by now is so pervasive and entrenched that even the National media seem to take it for granted.  There is also a perception that the decline in growth is due partly to the indifference of the ruling party and its ministers, to the role of economic growth in creating opportunity for all, including generation of revenues so essential for enhancing opportunities for the poor through supply of Public Goods (public health, basic education & employable skills).  For instance despite decades of talk about supply bottlenecks in infrastructure, lack of productivity in agriculture, leakages in PDS-FCI, abysmal sewage systems there is little public evidence that ministers responsible for areas critical to growth and opportunity, are applying their mind and efforts to solving them.

  We need, “A Right to (8%) Growth Act” to ensure that government at every level from the Asha worker or primary worker in the village, to the humblest Babu in the Block office to the DC/DM at the district level to Chief Secretary of the State and all politicians holding office in State governments or autonomous bodies can be held accountable for economic growth.

China’s Party Led Growth

The Chinese experience suggests that this could be an effective way of achieving sustained development and faster poverty reductions.[i]  Since 1980, when the Chinese Communist Party (CCP) instituted market reforms, China has had an average per capital growth of 8.8 %, double the 4.3% average achieved by India.  One of the major factors has been its primary focus on economic growth for enhancing national welfare. The objective of maximizing economic growth has helped in achieving a very effective governance system that is highly decentralized in operation while maintaining the unchallenged authority of the General Secretary and the top organs of the party.  The basic objective of growth maximization filters down not only to every level of government and party but also to every State & provincial enterprise and party related enterprise. Within this overall objective, party cadres, government officials and enterprise managers are relatively free to experiment on the means to achieve faster growth.  More importantly they are effectively rewarded for achieving growth targets. The intensity with which local officials compete to attract investment and the red carpet they lay out for FDI is apparent to anyone who has visited an enterprise zone in China.  

The higher levels of the party continue to provide overall guidance on the broad directions of growth. For instance the growth objective was achieved by incentivizing overseas Chinese entrepreneurs in Hong Kong and China to shift their entire labor intensive export manufacturing facilities to special zones in China.  When this opportunity was exhausted they turned their attention to more sophisticated FDI from developed countries. When export opportunities in developed countries appeared to flag and the Asian crisis struck, the higher level direction changed to using Infrastructure investment and import substitution of the export supply chain to sustain high growth. Thus the use of growth achievement to measure the performance of party members and bureaucrats and to reward them appropriately through promotion and economic opportunities for their family members has allowed them to develop a unique blend of centralization and decentralization that has sustained growth for a historically unprecedented 30 years.

Growth Objective

    Though it is impossible to replicate the CCP controlled Chinese system in a democratic country, we can and should give much greater importance to the Growth objective and also use it to reward bureaucratic functionaries.  All public authorities responsible for licensing, permits, quotas and inspection would be judged by the growth of economic activity in their area. Electricity department could be linked to the growth of metered electricity sale and consequent increase in production. Similarly public health workers could be held accountable for the no of workers in their area falling sick due to waterborne or communicable disease and thus reducing production and growth.  Education departments would be judged by their supply of job creating skills.

Conclusion

In country whose politicians have always acted as if growth is something to be ashamed of it will not be easy to orient the system towards growth of the economy, jobs and  income and all the inputs that go into their creation. If the Right To Food Act can eliminate leakages, corruption & inefficiency in the PDS/FCI, as evidenced by the government’s calculation of fiscal costs, a “Right to (8%) Growth Act” can achieve wonders in eliminating corruption, improving governance and raising the rate of growth of the economy to its full potential of 8%.

PS: Twitter your support to  #RightToGrowth   @dravirmani .

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[i] China’s Socialist Market Economy: Lessons for Developing Democratic Countries,” Working Paper No. 5/2006-PC, Planning Commission, June, 2006. http://planningcommission.nic.in/reports/wrkpapers/rpwpf.htm

Growth, Exchange Rate & Expectations

 Q&A with Outlook (L Nayar)

Q1: Why there is such a marked change in perception about India's growth prospects and improvement in Indian currency since RBI governor Raghuram Rajan took over?

A1: these are two different questions with opposite answers.

 Q1a: Why there is a change in perception about India's growth prospects.

 A1a: Growth prospects have worsened as shown by the GDP data for the first quarter of 2013-14 (April-June). Consequently all forecasters, including the government related bodies, have reduced their forecast for 2013-14 by 1% point or more.

 Q1b: Why there is such a marked change in perception about India's currency and improvement in Indian currency since RBI governor Raghuram Rajan took over?

A1b: There are two reasons. The movement of the dollar above Rs65 was clearly due to pessimistic expectations, a problem that economist call overshooting. Raghuram Rajan the new RBI governor has, through his maiden speech on the first day of taking over at RBI, effectively used his global reputation to remove irrational fears and re-establish RBI credibility. This brought the dolrar below Rs65.  The further movements below this level are due to small positive developments on the external front, like a narrowing of the trade deficit and stabilisation of expectations about future fed actions.

Q2: Have the fundamentals changed in anyway or is it only a change in perception? If so will the change in perception including among private investors bring cheer to Indian economy?

A2: It is due to a change in perceptions of short term financial investors alone. There is little or no change in the perception of long term investors, and the decline in GDP growth coupled with marginal improvements in balance of trade have a negative effect on balance.

Q3: Can a single person - the RBI governor be the change agent or is it unwarranted expectation?

A3: The RBI Governor can only change perceptions regarding aspects that are covered by RBIs mandate and act within its own mandate, which is monetary stability. The governor can also play a more activist role in financial market reform, which will have a medium term effect on efficiency & growth. Raghu's speech gives an indication that he intends to play such a role to promote faster financial development. Beyond this the expectations are unwarranted.

Modi (anti-) intellectual Icon?

Socialist Ideology

     Since the ascendance of Shri Jawharlal Nehru, our intellectual discourse has been dominated by various versions and adaptations of Socialist ideology. The high priests ('Brahmins') of this ideology are the "left intellectuals" who dominate the public debate.  Many of us thought that the 1990s reforms, their success in accelerating growth and the consequent reduction of poverty would gradually change the discourse.  This optimism was premature, as the "left intellectuals" successfully fought back and re-established their primacy during the UPA regime (I & II).  The "socialist ideology" is so pernicious because it crowns the "left ideologues" as the arbiters of public morality (the prosecutor, judge & jury).  Their narrative is so widely believed, that if you oppose the left you risk being typed as uncaring of the poor, the weak and the humble!  Thus even 'conservative' or so called 'right wing' political parties have internalised the "left intellectual" narrative.  This uniformity of intellectual and political narrative is not good for the country. The Monopoly needs to be broken.

Competition

      A recent book on the role of institutions in economic welfare and growth concluded that "Competitive Politics" are as important as "Competitive markets" for sustained economic development and growth. This is particularly so in an Open Democratic country like India. India needs an alternative narrative of economic growth and welfare, that politically challenges the monopoly of the "left intellectuals." Though it is dangerous for a poor country to simple copy what advanced countries have done, the interplay of competitive markets and social policy in Scandinavian countries is instructive, provided we clearly understand the difference in institutional conditions and circumstances.

Iconic Challenger

    From my perspective, the most interesting thing about the rise of Shri Narendra Modi on the National Stage, is the challenge that he poses to the "Socialist ideologues."  The seriousness of the challenge that he poses, can be gauged by the minute dissection of his every statement and action and the virulence of the "left intellectuals" attack on everything that he has said and done.  Being from a poor family, a backward caste, an uneducated child who educated himself as an adult, a self made man, free of the corrupting influence of family rapacity, who has never used his humble background or caste to win votes (though he has used his religion). More than any other potential candidate for PM a man of the people. A Chief minister of one of the richest and faster growing States in India, who has been re-elected three times. A non-intellectual, virtually an anti-hero in intellectual context. 
    In sum, Narendra Modi is almost an iconic challenger to the "left intellectuals" and their ideological dominance of the political discourse. The question is whether this non-intellectual will be the leader who overthrow the monopoly of the "left intellectuals" and create a new "governance and growth," "right of center" national narrative to compete with the "socialist ideology"?

Conclusion

  From the very limited information available till now (opinion polls, media stories of writers' interaction with public) I conclude that Shri Modi has a better than even chance of becoming the next Prime Minister of India and of changing the political narrative of National welfare, governance and growth.[1]  What else he may do (good or bad) needs much more detailed analysis.

[1] For the possible direction in which the narrative may be changed see, Virmani, Arvind, "A New Development Paradigm: Employment, Entitlement and Empowerment, Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. [  NewParadigm4nf ]

Monetary Policy And Financial Reform: RBI under Raghuram Rajan

Background

     Despite predictions of a bottoming out of economic growth, the rate of growth of the Indian economy fell to 4.4% in Q1 of 2013-14 from 4.7-4.8% in the previous two quarters.  With the government and the Congress party (UPA II) focused almost exclusively on welfare laws and expenditures,  any remaining hope of decisive action on investment-growth enhancing reforms was rung out of the markets.  This led me to say a week ago that the Government-RBI had boxed themselves into a corner with little room for policy maneuver, and only an unorthodox fiscal-monetary policy, the “Macro-twist” accompanied by bold reform could now get the economy out of this situation.  In this context the appointment of Prof Raghuram Rajan as Governor of RBI was the only silver lining on the dark clouds hanging over the economy.  Raghu, on the day of taking over as Governor of RBI on 5^th August, 2013 used his international credibility among the Global Brahmins of Money and Finance and the World’s Central Bank Governors to expand the box, the range of options available to the RBI.

RBI under Raghuram Rajan

    Raghu’s first speech as governor(4^th Sept 2013), coming as it did on the day that he took charge,  surprised with the  speed with which he spelt out his vision for the RBI. In hindsight, it actually reflects the fact that he is probably the first RBI governor (in my memory), who in a manner of speaking was groomed for the job. Six years ago he was appointed chairmen of a committee on financial sector reforms and developed his ideas on banking, financial and institutional (RBI) reforms needed in India.   Since then he has been an external advisor to the PM, allowing him to keep in touch with the problems facing India.  Last year he was appointed as Chief Economic Advisor, to gain experience of the inner workings of the Ministry of Finance and the Government in General.  He was thus in a position to ‘hit the ground running,’ and he did so!

Given this background, including his international standing as a star economist and the indications he gave in his first speech, I predict that Governor Rajan will follow a two pronged approach to Monetary and Financial policy

(1) He will adopt a modern, neo-conventional monetary policy, and The epitome of ‘conventional monetary policy’ was “inflation targeting” based on the assumption that in the long run this is also the best policy for full employment/maximum Output (growth).  The “Neo” refers to the lessons learned by the Global financial-monetary czars about systemic risks and macro-prudential regulation, after the Global financial crisis (which he was the first to warn about).  Having, warned him about the problems of “inflation targeting” in India and heard his response, I would expect him to adapt it to Indian conditions and move cautiously in implementing this policy.  The new committee under DG Urjit Patel will likely draw up a road map for implementing this and supporting institutional reforms (like the ‘Monetary Policy Committee’).  As he said, he will spell out his monetary policy stance to current and expected  developments, like the unwinding of QE3, in his monetary policy statement on September 20^th , 2013

(2) He will forcefully pursue liberalization of financial markets, including foreign exchange markets and banking, institutional reform of the RBI & other financial institutions, and universalization of modern payment systems, banking & financial instruments (inclusion). He has already announced a number of specific liberalization on banking and foreign exchange.  Liberalization and promotion of competition are risky at a time of low growth and high uncertainty.  Thus timing and sequencing of liberalization measures needs to carefully weigh the gains against the risks: The latter can only be minimized through skillful but ruthless prudential regulation, e.g. on “Non-Performing Assets” (NPAs) and “ever-greening”.  Therefore he has already warned that he may have to take unpopular actions.  Some of the measures, such as new Banking licenses to industrial houses can also be politically contentious.  He has therefore wisely set up a committee under former RBI Governor & Member of Parliament (MP) Dr. Bimal Jalan, to act as the last word on new Banking licenses.

The RBI has been excessively cautious on the use of new technology to spread modern payment and banking systems.  Since the introduction of mobile pension payments in rural South Africa  and MPESA mobile cash in East Africa, I have been pushing the RBI to adopt these systems. As Raghu’s committee strongly advocated inclusion, I expect these to be speedily introduced in India.  This, and his committee’s innovative proposal to introduce ‘tradable priority sector lending commitments’ and other new ideas for inclusion will be chalked out under the ‘Nachiket More’ committee.

Conclusion

    In my view, these reform measures are Raghu’s answer to those of us who have argued for giving greater priority to economic growth.  With the reforms log jam persisting in Delhi, he is implicitly saying that he will follow a relatively conventional monetary policy and it is up to the government to do its part on the fiscal and structural policy side to promote growth.  At the same time he will try to help market expectations and confidence through a new more aggressive financial reforms policy, which will promote efficiency, investment and growth in the medium term.  Having expanded the range of Macro options, through his personal credibility and decisive start, it is now up to the government to act. 

[Note: This article was written on September 5th 2013, a day after Raghu's maiden speech, but has been pending with a newspaper since then.]

Faces of Corruption In India

Overview

   To understand corruption in India today it is useful to analyze it along two dimensions.  Economic and Institutional.

The main Economic categories (from a corruption perspective) are, (i) Government purchase of Goods and Services (including government employment). (ii) Production and sale of Goods and Services by Departmental Public Undertaking and Public Sector Units.  (iii) Natural Resource Rents: Natural resources include all minerals (including  coal, oil & gas), Land and Electromagnetic Spectrum. (iv) Natural and Artificial (policy created) Monopolies & PPP contracts related to these.  Networks such as electricity T&D & rail lines, airports, major ports and dams are natural monopolies. State Electricity production, Railway services (INR), Coal India, Dual use items of Defense production are monopolies created by policy & can be made competitive by policy change. PPP contracts for these as well as for Social services exclusively produced & supplied by government take on the character of artificial monopoly when good auction procedures are not used.   

The main Institutional dimensions are, (a) The “Lower Bureaucracy:” The ‘State government’ machinery dealing with repeated routine economic & social activities. This is the machinery we deal with as citizens, as workers, as employees, as self-employed, as small businesses, as NGOs and large corporations as tenants or house owners, as land owners or rentiers.  This is the government whose functionaries, often referred to as “babus,” we all interact with, in one way or another, in every sphere of activity. Also includes the entire local government (Nagarpalikas & Panchayats) & a part of the Central bureaucracy (non-IAS, IPS) that operates at State-City level (e.g. Customs, Income tax, Central excise). (b) The “Higher Bureaucracy”(Officers of the central services like IAS, & equivalent parts of State services)  The decision making process for deciding on policy and implementing one off or unique procedures that have to decided anew every time. This is more high level decision making. (c) The criminal justice system. This is the notorious “politician-criminal-police” nexus that actively thwarts the “rule of law,” and believes it is above the law and behaves as if the constitution of India does not apply to it. Judges who take bribes to give knowingly wrong decisions should perhaps be seen as part of this.

With some danger of over-simplification, much of the first two economic categories of corruption is institutionally carried out by the lower bureaucracy, with systemic payments (bribe shares) moving up the system, while much of the third and fourth economic categories of corruption is done at the Higher bureaucracy level (with Lower Bureaucracy involvement only when needed) either with knowledge of or under the direction of the political bosses.

Economic Dimensions

There are four major categories or sources of government related corruption in India.

Govt. Expenditures/G&S Purchases

Goods and Services Purchases that constitute the expenditure side of the budget of government at every level.  This includes wages & salaries and therefore hiring and recruitment and contracts for construction and maintenance of roads etc.  My informal inquires & reading suggests that the cut that government as a whole takes (shared between the functionaries & the bosses) has gone up progressively from about 15% in the 1960-70s to a range of 30% to 50% in the 2000s (% depends on nature of the G&S).

Public Production & Sale of items that can be produced by private producers and sold in market.  These include all the Cetral government and State government owned.

       There is a massive system of corruption in government expenditures and purchases in which all levels of workers are involved,  from the lowliest sweeper  & chaprasis, through petty clerks,  dealing hands inspectors & superintendents through officers and politicians.  In this well oiled machinery the unchanging faceless bureaucracy collects the bribes and shares it up to the officer and political level.  It is my understanding that a new politicians or concerned State minister does not have to ask for anything, it would be delivered to him whether he wants it or not. This is the part which is so pervasive and systemic  that only a major institutional reform can  reverse the process.

Natural Resource Rents

Natural Resources such as Urban Land, minerals/oil, Spectrum, Aquifers. Theoretically these resources are the common property of the citizens. With few exceptions government at different levels [Local (Nagarpalika, Panchayat) State, Central] control all natural resources through multiple means and can manipulate policies, rules, procedures & enforcement to extract resource rents for themselves and those who help them cheat the people out of these resources.

    These are generally large case by case decisions and are therefore likely to be controlled at relatively higher levels of State, Central Governments.  An economically sound way to reduce natural resource related corruption is to make it compulsory for government to sell or lease all natural resources through an auction procedure that is designed to facilitate a large number of bidders.  These auction procedures have to be simple, well designed and understood, otherwise the corrupt will manipulate these auctions too.  There are a host of complication related to Urban land that have to addressed separately in detail. One of the most critical is the way “Land use” is determined and changed. Manipulation of this aspect can be source of massive corruption.

PPP for Natural (or Created) Monopolies

  PPP Contracts related to "Natural Monopolies" or artificially created "monopolies".  Manipulation of terms and conditions and the contracting process can be used to give contracts to favored parties. In some cases, an honest person knows that the strict terms of the contract cannot be fulfilled without making losses. The dishonest know that they can later bribe and get terms changed and therefore apply.

Institutional Dimensions

  Lower and Upper Bureaucracy: To deal effectively with corruption, it is necessary to distinguish between the lower bureaucracy and the institutionalized-routineised, entrenched corruption that has become a way of life for the ‘Babus’ and the case by case corruption at the higher levels in which manipulation decisions have to be made case by case or for groups of cases.  The latter involves the active participation of the government ministers.

 Violations of Law: (a) Major violations include violations of criminal law that come under the rubric of "Politician-Criminal-Police" nexus.  Also include violations of govt. rules & regulations that could cost human lives or cause serious damage to health.  (b) Other violations are related to violation of government rules, regulations and procedures on day to day economic and personal activities.

Conclusions

    Corruption is Hydra headed monster that has to be addressed at different levels.  It requires political, judicial, legal, police and bureaucratic reforms