Eliminating Poverty in India

POVERTY CAN BE ELIMINATED

What is the cost of eliminating poverty and hunger in India? That of course depends on the extent of poverty, which has been mired in academic debates about the measurement of poverty. There is however universal agreement that in the years from 1993-94 to 1999-2000 the poverty rate (HCR) was between 25% and 35%. We can therefore skirt the esoteric debate about the precise change in poverty between 1993-4 and 1999-2000 and its level in either year by considering three numbers. For each of these years we order the households/person by consumption level and identify the ones which are 25%, 30% and 35% from the bottom. That is we identify in each year the consumption level of the person(s) who would be just at the poverty line if the poverty rate was 25%, 30% and 35% respectively. Then we calculate the income transfer needed for every body below that level to be brought up to the level. This data is summarised in the table below.
Table 1: Consumption Expenditures and Expenditure Gap


In 1993-94 the Central government expenditure in the budget category “subsidies” was Rs. 12,682 crore of which Rs. 10,099 crore were for food and fertiliser subsidies. The latter would have been enough to bring all the poor to the consumption level of the person/household at the 25% level. During the same year the Central and State governments together spent another Rs. 14,160 crore on the budget categories ‘Rural development,’ ‘Welfare of SC, ST & OBCs’ and ‘Social Security and Welfare.’ This expenditure would have been enough to bring all the poor to the consumption level of the person/household at the 30% level. These two sets of expenditures (Rs. 25850) would have been more than sufficient to eliminate poverty in 1993, if transferred directly to the poor and disadvantaged (SC, ST, handicapped, old, poor farmers).
In 1999-2000 the total subsidies provided by the Central government were Rs. 25,690 crore of which Rs. 22,680 crore were for food and fertiliser. During the same year the Central and State governments together spent another Rs. 28,080 crore on ‘Rural development (RD),’ ‘Welfare of SC, ST & OBCs and ‘Social Security and Welfare.’ Either of these was sufficient to bring all the poor to the consumption level of the person/household at the 30% level. Given that poverty was between 26.1% and 28.6% either of these if transferred directly to the poor and disadvantaged (SC, ST, handicapped, old, poor farmers) would have eliminated poverty. Together these subsidies and poverty alleviation expenditures (Rs. 53,770 crore) would have been sufficient to eliminate poverty in 1999-2000, even if administrative costs and leakages used up half the allocation (and the small fraction of RD expenditures on water supply were excluded).
It can be argued that the ideal (most efficient) social welfare policy is a direct transfer of income to the poor through a negative income tax. In a developed country this would be very easy. How can we transfer these amounts directly to the poor, the needy and the disadvantaged in a poor country? The answer, by setting up an Indian version using a modern smart card system that delivers cash and/or subsidies to the poor based on their entitlements as per specified parameters and norms. Such a smart card could be programmed with identity (photo & biometric fingerprint), and have information on social (SC/ST) and personal/household characteristics. Each person/ households’ entitlements could be in the form of specified subsidies (per unit subsidy of si for up to qi units for all i in C) for the purchase of a set of items C. The set of items C could include food/cereals, kerosene, midday meals, nutrition supplements, drinking water, toilet/ sanitation services, basic drugs, schooling (primary/secondary), internet access, electricity and a host of other items reflecting the dozens of subsidies and programs currently in existence. The entitlement could be varied with and dependent on various economic and social handicaps such as SC-ST, age (infant or aged), mental handicap, physical disability, female head of household, lactating mother, chronic illness. In this way all the current stakeholders, special interest groups and social policies could be accommodated within a single integrated system.
These subsidies would have to be collected by the provider of the specified service from the government through the smart card system just as is done currently in a credit card system. Alternatively all these entitlements could be calculated and consolidated into a single cash value to be delivered to the beneficiary every month at his residential address, through the smart card system. Though on theoretical economic grounds the latter may be the preferred option, the former would also yield substantial gains and perhaps be more feasible at this stage.
If poverty could be eliminated so easily why has this not been tried before? There are many reasons, but the most fundamental is illustrated by the following experience: In the formulation of the tenth Plan for food policy/ PDS system there was a proposal to gradually introduce a credit /debit /smart card system to replace the existing PDS system characterised by enormous leakages and high administrative costs (see Virmani and Rajeev (2001)). In this system the entitled person could obtain the specified subsidy from any participating supplier of food/cereals. The person would pay the supplier the difference between the market price and the unit subsidy, and the supplier would collect the subsidy from the government. The formal proposal was to carry out an experiment (as a first step) to determine its effectiveness and to learn about and iron out any problems that may arise. Consequently funds were allocated in the tenth plan for introducing it in a sample of urban areas along with the introduction of food stamp system in a sample of rural areas. Not a single State govt agreed to undertake this experiment, as it has the potential of dramatically reducing leakages and administrative costs.
Smart Card System
The smart card would also constitute a national identity card. For instance the card could contain information on citizenship and voting eligibility (constituency for voting) as provided and checked by the home ministry and the election commission respectively. Secrecy and confidentiality clauses would have to be built into the national smart card system by law. For instance, any person who does not want to avail of any subsidies / entitlements from the government need not provide the information needed for calculating & monitoring the subsidy/entitlement. They would for instance only provide the information necessary to obtain a passport and voter registration card. Many agencies of government (e.g. CBEC, CBDT, and Home) have proposed identification cards. There are significant economies of scale in having one smart card system for all citizens, with different agencies having their own special modules (password protected access to memory segments) within the card for their specialised needs.
The setting up of a smart card system is somewhat distinct from running it even though there may be economies of scope. The former is very similar to carrying out a (special) census in which the data gathered would be entered into a smart card. There is however an additional, technically challenging component, the simultaneous recording of a photo and a biometric fingerprint so as to minimise fraud. The experience with a similar system used in SEBI MAPIN project suggests that it would be best to sub-contract it to private parties in each State/region.
The running of smart card system is on the other hand very much like the running of a credit card system. All the credit card companies, as well as companies that provide back office services to credit card issuers or marketers, would be interested in competing to obtain the contract for the running of such a system. As a credit card company has to incur a fixed cost in setting up its own credit card system, these companies may be willing to charge below cost if they can share the fixed costs of the public system with their private card systems. This could make a significant difference in the cost of spreading the system to the rural areas. Cash delivery through smart card would be akin to a modern version of the Post & Telegraph department’s money order system, already operational with specialised companies that intermediate international/national remittances. The cost of setting up and running a nationwide cash delivery system for the poor would probably be significantly less than that of a commodity related system. The total steady state cost of running this system (including depreciation and return on capital) should be of the same order as the current credit card systems (< 10%).
The identity of the households below the poverty line is not fixed from year to year. The largest turnover occurs because of health shocks followed by natural disasters (droughts and floods) that knock people below the poverty line, while others who have recovered from the shock or have improved their position move above the line. As a matter of abundant caution we could target the bottom half of the population for issue of smart cards (with complete entitlement related information). Annual updating of entitlement related information could be done for those below the poverty line and those up to half this percentage above the line (i.e. if poverty rate, HCR, is 24%, cover poorest 36%).
An independent authority including government officials and non-government organisations could be set up to monitor the integrity of the Poverty Elimination System. This supervisory authority would ensure that private operators are running the smart card system in a manner needed to ensure that the subsidy reaches the poor.
Poverty, which rose during 1950-1 to 1979-80 (Indian socialism), has been on a clear down trend during the Market reform period (1980-1 to current). The level of poverty in 1999-2000 was estimated by poverty experts to be between 26.1% and 28.5% as per the Planning Commission methodology. This level of poverty is to be expected in a low income country like India. India’s poverty ratio is relatively high because we are a relatively poor/ low income i.e. with low average income. 90% of the countries in the world had in 1999-2000 a higher per capita (average) income than India. Our Global poverty ranking is in fact better than our ranking by per capita income. The absolute number of poor is very high because our population is very large, the second highest in the world. Contrary to popular wisdom, the large number of poor has little to do with income distribution. Our income distribution as measured by the Gini co-efficient is better than 3/4th the countries of the World. Further our rank with respect to income distribution is even better, with the poorest 10% of the population having a consumption share that is the 6th highest in the World.
Poverty can be eliminated within the next five years if we are willing to radically change the approach to “poverty alleviation” which was started in the early 1980s. Smart cards anyone?

Five Point Program For Pro-poor Growth

1 National Road Grid
Roads are both literally and figuratively the pathways to the growth of agriculture, services and industry. Connect every village (habitation), town and city with all-weather, paved/metaled roads of specified standard in five (10) years. Road connectivity is particularly important in the poorer States and regions, where growth has not picked up. The existence and quality of the roads should be monitorable by a web enabled information system.
Remove controls and restrictions on trade and transport at the State and local level. Plan for the provision of land on the sides of district roads and block road junctions so that economic activity, such as trade, hotels, restaurants and repair facilities can spring up. Plan National and State highways keeping in mind that underpasses and/or parallel local roads may have to be built in many places as economic activity spring up on the sides.

2 Let 1000s of Towns Bloom
For every existing town, plan and install a modern drainage, sewerage and water supply system with water works, sewage treatment plants and garbage disposal sites. The impact in terms of economic activity, health and nutrition can be enormous. Help develop consultancy firms that can Plan and organize such systems and organizations that can compete with each other to build these systems across the country. Once 100% coverage of towns is attained, extend the planning effort to semi-urban areas and villages in co-operation with Panchayti Raj institutions and NGOs.
Allow and encourage private entrepreneurs to build thousands of new towns/townships in semi-urban, semi-rural areas. Connect these to the nearest highway and water-supply mains. Scrap expropriatory sections of the Rent control act(s) and corresponding rules and procedures, so that the private sector can build and provide rental accommodation for the lower middle class and the poor.

3 Water Management
India is a relatively water-scarce country and Global environmental changes threaten to make this worse. Yet our limited water resources are either not fully utilized or are misused (depleting ground water).
There is an urgent need to improve the comprehensiveness and quality of water planning and management at every level (Center, State, district, town, panchayat, smallest farmer). Water harvesting, water shed development, recharge of water bodies and aquifers, must be planned and implemented in every nook and corner of the country. Education and demonstration of models with the active participation of NGOs can play an important role. Dams and canals have a place in cutting down the flow of water into the sea, recharging aquifers and supplying dry areas and parched towns. Tube wells in depleting aquifers must be discouraged through proper pricing of electricity and perhaps even water.
4 Universal Primary Education and Skill development
Universal Primary education is too readily identified with universal enrolment and low drop-out rates, rather than the ability to count, read, write and explain at the primary completion level. Before declaring victory and moving on to target universal secondary education we must ensure that every young person (25 or below say) meets the global standard of Primary education. Government must set up testing, standards and certification systems that can determine if these standards have been met.
The only way to ensure this is to empower every youth with a debit card, which allows him/her to purchase primary education from any school including any government school. The set of authorized uses of the debit card will be fully funded by the government. The funding of the government school and part of the administrators/teachers’ pay must be linked to the total debit card receipts (monthly fees paid through the debit card).
Every youth, rural or urban, after completing primary education must also have access to the six thousand or so globally identified skills. This requires a massive joint effort by government, NGOs and private skill providers. Government must provide funding for the poor while all possible private and foreign expertise and experience is attracted to India to provide training in all these skills in the next five years.

5 100% Telecom Connectivity
The USO fund must be used to ensure that the mobile footprint covers 99% of India in the next five years. Open access to physical infrastructure and land lines (including telegraph and electricity wires) and fibre optic networks must be ensured in rural areas for attaining universal access to internet in the next 10 years.

Indian Economy: Shooting Star or Marathon Winner

India has yet to complete two years of 9% growth and already two extreme views have formed. The optimistic one is that we are already growing at 9% per annum and must aim for 10 to 12%. The pessimistic one, that this is an unsustainable cyclical bubble, as reflected in the rising inflation rate. Both miss the key issue, which is one of long run sustainability of fast catch-up growth. Neither macro-cycle analysis nor saving rate accounting provides an answer to this issue. Fortunately the history of post-war growth across the World does provide some clues.
Over a decade ago four economists published a paper that shocked development optimists. They found that a high average growth in one decade was no guarantee that a country would grow at a relatively high rate in the next decade. Inter decadal growth was almost uncorrelated (0.15)! The average country had episodes of high growth and then reverted back towards the mean. Another group of economists, looking at the remarkable performance of the ‘East Asian countries,’ found an exception to this result. Several countries in East and South East Asia had broken this jinx, so they dubbed these economies as the “East Asian Miracle’ economies.
A lot more data has accumulated since then, though only up to 2003, and it is useful to revisit this issue. Analysis of the new data for average per capita GDP growth of all countries for each decade since 1950 confirms, with modest variation, the basic mean reversion of the growth process across the world over five decades. The two decade correlation has declined from 0.26 for 50s & 60s to 0.15 for 70s & 80s and is 0.18 for 80s & 90s. The last two are about the same as found in the pioneering study and suggests that a small fraction of countries are able to sustain high growth for two decades. Most of the high growth economies of the fifties were shooting stars with growth reverting to mean in the next decade (50s -70s correlation of 0.07). Since the 60’s however, an increasing proportion of countries seem to be able to sustain growth for a third decade, as suggested by the growth correlation of 0.12 for 60’s & 80’s and 0.21 for 70’s & 90’s. The correlation between growth in the sixties and nineties is again almost zero (0.06) indicating that virtually all the high growth economies of the sixties had disappeared from the high growth firmament by the nineties, being unable to sustain this rate for more than three decades.
The best sustained performance of each country is found by calculating all possible 10, 20 and 30 year compound annual average per capita GDP growth rates and picking the maximum for each period. The mean cross country (median) value of this maximum was 4.8% (4.3%) for a single decade, 3.3% (3.0%) for two decades and 2.4% (2.4%) for three decades. More importantly, while 15% of the countries had a decade in which they achieved an average per capita growth of more than 7.5%, only 4.5% (2%) of countries had a twenty (thirty) year period during which they achieved this average.
How does India’s performance compare? India’s highest average per capita growth rate for one, two and three decades were 4.9%, 3.8% and 3.5% respectively, placing India above the mean for all categories. However, in the three categories 41%, 39% and 29% of countries respectively performed better than India. As we have shown in several papers since 1990, the situation has improved steadily since 1980. The same data set shows that for the 24 year period 1980-2003, India with an average per capita growth rate of 3.7% ranked in the top 14%. If we exclude small and tiny countries, it was in the top 11% at 10th position. These facts indicate that India is not a shooting star, but a long distance runner! But does it have the stamina to win a marathon that can take half a century (even for a high growth economy), to move from low income to high income?
This requires a re-examination of the growth performance of the Asian countries that have beaten the odds, i.e the ‘Asian miracle economies,’ which initiated reforms in the sixties and seventies. India’s growth acceleration in the 1980s resembled that of the Asian miracle economies both in terms of the change in policy regime and in the magnitude of growth acceleration. All these economies have, sustained higher rates of growth for longer periods than India has done. A detailed analysis of the Indian economy shows that the nineties reforms have put the economy on a rising growth trend that makes it possible for the Indian economy to close this growth gap.* It suggests that given our entrepreneurial capabilities, we can sustain an average per capita growth of around 6% + 0.5% (7.5% GDP) for 15 years till 2025, assuming that the average pace of policy reform seen during the past two decades is maintained. It also shows that a higher average growth rate of 7% to 7.5% (8.5-9% GDP) is possible for the next five years despite the termite eaten wooden frame (not rusted steel frame) of India. Such a performance would put us in the 10 top long run growth performers in history. One must caution, however, that reactionary steps and anti-reform measures, facilely labeled as reform, can undermine even the very realistic possibility of 6% per capita GDP growth during the next two decades.
Sustaining a rate of 7.5% (9% GDP) for the next 15 years, or equaling the long run performance of frontrunners Japan and China (8.6% and 7.8% per capita for 30 years), requires an improvement in the quality of governance, our greatest handicap. To become marathon champions we need deep and fundamental reform of government (e.g. making police and legislatures criminal free), a redefinition of Government’s role to take account of limited managerial capabilities, skills, expertise and resources, and a sharper focus on things that only government can and must do (e.g. operational town planning vs. building construction).# One is hopeful! The odds appear better than even!

------------------------------------------------------------------------------
* Policy Regimes, Growth and Poverty in India: Lessons of Government Failure and Entrepreneurial Success!, Working Paper No. 170, ICRIER, October 2005. See also, http://www.ncaer.org/downloads/lectures/NBER-NCAER.html.
# See, “A New Development Paradigm: Employment, Entitlement and Empowerment,” Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154 and “Lessons Of Government Failure: Public Goods Provision And Quality of Public Investment,” Working Paper No. 2/2006-PC, Planning Commission, February 2006.

Planning For Results: Public Accountability Information System (PAIS)

INTRODUCTION
Over the last five years there has been increasing recognition that the traditional focus on financial allocations and expenditure may have weakened the incentive for outcomes that actually benefit the poor and less well off, who are the presumed beneficiaries of these expenditures. Since the 1980s concerned citizens and leaders have speculated about how much of program expenditure actually reaches the intended beneficiaries, with guesstimates ranging from 15% to 25%. Whatever the precise number, there is a clear need to improve the quantity and quality of output produced by these expenditures and delivered to the intended beneficiaries. An ICRIER working paper by the author has presented suggestive calculations showing that in the year 1999-2000 the amount of money spent on a few major poverty alleviation programs would have been sufficient to eliminate poverty during that year. Improvement in the delivery mechanisms can therefore have a dramatic effect on the lives of the poor.
Central Schemes and Centrally sponsored schemes come directly under the purview of the Central government. As the Planning commission has the authority to allocate and approve funds for these schemes, it also has the authority to require the setting up of systems of operational planning and management that generate information needed to monitor these programs. A substantial part of the Central assistance for State plans lies outside ‘Normal Central Assistance’ and is channelled into programs such as AIBP, ARDP, BRGF and JNURM, whose fund release is approved by the concerned central department and the Ministry of Finance. This note outlines some practical steps that can be taken to improve the output/impact/outcome of central government expenditure over the next five years.
In the case of State Plans and the Normal Central assistance for State plans in which funds are allocated among States on the basis of the modified Gadgil formula, the Planning Commission and the central government does not have the constitutional authority to withhold funds from some States and transfer these to other States. Thus it has little authority to monitor any specific State government program. All it can do is to set up statistical systems that generate macro–economic information on the performance of the State governments over time and make this available to the public, non-government organisations and the media. The identification of appropriate outcomes for data collection and monitoring depend on construction of a hierarchy of goals (general/specific) that are critical to the overall objective of enhancing public welfare. The frequency with which the macro-aggregate information is generated will determine the periodicity with which the monitoring exercise can be carried out. Annual evaluation is impossible if the vital data (e.g. quinquinial NSS surveys) is generated every 4 years and is made available with a lag of 1 ½ to 2 ½ years. More frequently generated data such as State GDP (particularly agriculture) can be useful if and only if the link between State Plan expenditures on agriculture and the potential increase in GDP from agriculture is specified (through econometric estimates that account for rainfall variation).
The next two sections attempt to address two historical weakness in our planning system. Section 2 deals with the disconnect between the original theoretical reasons for planning (market failure, gap between social and private returns) and the way it has been implemented in practice (marginal changes in incremental allocation driven by political imperatives, starting of new programs by every new government without evaluating whether the old ones have worked). Section 3 tackles the gap between macro planning and detailed operational plans for actual ground level implementation. Section 4 outlines elements of a government management information system (PAIS) suitable for public accountability in a democratic country with a nascent civil society and budding media. Section 5 goes into a little more detail into the issue of monitoring outcome that are an essential part of planning for outcomes. Section 6 concludes the paper.

Rationale for Government Expenditure
As the government’s intervention expanded into every area of the economy, society and culture, the capacity of the government to directly produce and supply services, to manage financial transfers and subsidies and to enforce laws has become increasingly inadequate. Over the years the capacity and the ability of the government (in terms of quality of personnel and organisational capability) to achieve positive results has deteriorated relative to its ability to cause harm (as this is not affected by professional or organisational capability). As public resources are, by definition scarce and costly (in terms of opportunity cost and distortions) it is essential to use the government’s financial and administrative resources where they can make the biggest difference to social welfare.
According to the original theory of planning the emphasis of government expenditure should be on areas where the gap between social and private returns are highest and where market externalities need to be corrected. Future programs, projects and other expenditures should be separated into economically meaningful categories and sub-categories that bear some relationship to these economically sound principles. Integrated programs can then be built under these thematic categories in sectors where they are applicable.
We have to distinguish between Public goods and services (G&S) and those which deal with private goods and services. Private goods and services are those that are provided to individuals or specific households (e.g. PDS food, toilets). Public goods & services are provided to groups (e.g. connecting and village/urban roads) and individual usage is difficult or costly to measure. Quasi-public goods fall in between in that part of the benefits can be tracked to individuals, but part is more diffuse and may even accrue to future generations or to a wholly different group in another form. The items and examples are illustrative (not comprehensive).
Public Goods
General
(a) Knowledge generation and dissemination.
• Diffusion of agriculture & allied technology: HYV seeds, re-planting, fish stock, crop varieties, cultivation protocols/practices, Handicrafts & handlooms.
(b) Regulatory Systems, Standards and Certification: Establishment, maintenance, enforcement.
• Health and Safety Standards for products & services, Environmental standards for producers: Dissemination, diffusion and enforcement.
• Development of Standards & Curricula, Testing & certification systems for education & skill development
(c) National statistical system: Macro data collection and statistics. Sector and industry specific data.
(d) Pollution & Environment (Negative externality/Public Bads): Water, Air pollution
Sector Specific
• National security: including Borders, NE, J&K
• Law and order: Police, courts, judges
• Roads: Highways, Inter-connecting roads(habitations), urban roads
• Aquifer planning & management
• Urban and Rural civic planning; Land use planning (agriculture, non-ag; residential, commercial, industrial). Supply of “urban land”;
• Communicable, vector borne and epidemic diseases
• Forests, green belts; wild life preservation, bio-diversity

Quasi-public goods & services
Cross-Sectoral
• Education/Training of high quality educators/teachers/trainers and administrators/planners/managers.
• Preventive health: Public health education and incentives
• Drinking Water Supply system
• Sewerage, Drainage, Sanitation and Waste disposal systems
Rural
• Dams and Canals, Drainage systems.
• Rural electricity Distribution or decentralised production
• Community watershed, water harvesting.
• Marketing channel for agricultural & rural products e.g. B to B website.
Urban
• Urban Transport planning and public transport systems
Merit (private) goods & services
• Subsidised food: PDS/MDM/nutrition (for BPL)
• Primary education –universal (SSA) and literacy
• National scholarship program and subsidy/support system for socially deprived and economically vulnerable.
• Rural secondary education
• Training/skill development in agriculture (e.g. soil quality) & allied (fish farming)
• Basic health services (universal access) & rural health system
• House sites & toilets (for all/BPL)
Producer programs / subsidies for employment
(especially socially deprived/ handicapped, economically vulnerable)
• Safety net: NREG (employment for BPL)
• MSP, price risk insurance
• Monsoon risk insurance (subsidy) for small & medium farmers
• Fertiliser subsidy for small & medium farmers
• Tube wells-GW, minor irrigation
• Labour intensive small manufactures e.g. export oriented, handicrafts, handlooms
Other non-merit transfers and subsidies
Many of these need to be eliminated. Contrary to the basic philosophy of Planning they have seldom (if ever) been subject to rigorous Social cost-benefit analysis and continue because of bureaucratic inertia. Each subject division should identify these with a view to elimination. If necessary an independent evaluation can be carried out or commissioned.
PLANNING ELEMENTS
A perennial criticism of Indian Planning has been that Five Year Plans exist only on paper and bear little relation to what happens on the ground. Though this criticism is exaggerated and ignores the limits that the constitution places on various arms and levels of government, it has an element of truth in it. This is the failure to develop and approve detailed operational plans before the financial allocations are made/ released/ spent. Such plans are also essential for ensuring proper monitoring of outputs/ impact/ outcomes and for ensuring public accountability. A re-examination of plan processes and procedures and a filling in of missing elements is required. Planning for government expenditures involves the following steps:
Definition of Objectives
Expenditure planning requires that the objective be neither too broad nor to narrow. This is particularly true in a large, diverse country like India. To take an example from the health sector, health for all is too broad an objective to be meaningful for planning expenditures. At the other extreme, malaria control is too narrow an objective. One appropriate objective in this context may be the ‘Eradication of communicable diseases and the control/minimisation of epidemic diseases.’
Identification of Specific Goals
A menu of specific goals must be drawn up to achieve this objective. This menu will include for the objective illustrated above, sewerage and sanitation, clean drinking water, public health education as well as control of vectors, vaccination programs, and R&D.
Operational Plans
Detailed operational plans must be drawn up to achieve these goals. This has been the most neglected and deficient area of our planning process. A plan is not just a fine document of intent but a series of steps to implement it in a co-ordinated and effective manner. As health and diseases vary across climatic regions and States each will require a sub-menu with a different emphasis. For instance malaria may be very important in one state while Dengue or Chikangunya is more important in another. Similarly sanitation may be critically deficient in one State and drinking water problems acute in another. These sub-menus (given the relative importance of different diseases) must be translated into detailed measures to be taken at the district/ block/ panchayat / village level as appropriate. For instance if the sanitation plan includes supply of toilets to BPL families, identification of such families must be part of the operational plan.
To take another example, if the objective is transport connectivity the State governments must build roads that connect villages to each other and to market centres, railway stations and neighbouring towns. These towns must in turn be connected to each other and to ports and airports. These road links must be identified (source & destination) and defined (quality of road surface, culverts/ bridges needed etc.).
Management Information System
Effective governance requires a Government Management Information Systems or Government E-management system (GEMs) that will generate information on execution of operational plans and the attainment of specific goals. It is an essential element of the overall Public Accountability Information System (PAIS).
Sustained monitoring of programme inputs or outputs is possible only if information on these is generated by the implementation system. Thus a well defined and designed GEMs is an essential part of any effective expenditure system. The GEMs must generate data on the specific goals that are to be achieved, so that they can be monitored. For instance it is not possible to monitor the achievement of connectivity unless the roads needed have been precisely identified and the GEMS generates information on which have been constructed. Though the monitoring and auditing of financial flows will always be needed, the attainment of physical goals is vital to monitoring and evaluation of government expenditures, because of the wide and varying gaps between financial outlays and the achievement of specific goals.
Monitoring And Evaluation.
The final stage of the system is the assessment of impact and outcomes. A standard / normal GEMs may not generate sufficient information on the quality of output and the achievement of broader goals and objectives. Independent evaluation systems are therefore needed for this purpose. Often there are multiple programs designed to achieve similar or overlapping objective. Similarly the attainment of a specific objective may depend on many different factors including exogenous factors and different programs. A research program may be needed to sort out the various factors and impacts. A well designed evaluation can produce primary data that is useful for carrying out this research.
The frequency of monitoring is dependent on the frequency with which information is generated by the GEMs (annual, quarterly, monthly). In the presence of a GEMs, periodic independent evaluation can act as a cross-check on the accuracy of the GEMs (for instance through the use of satellite maps to determine road and canal completion) as well as provide a picture of the quality of output (e.g. direct sample check of road quality). Further a special evaluation is also useful to determine to what extent the broader objective is being fulfilled (prevalence of communicable diseases). This can help in reformulating specific goals, operational plans and implementation modalities.
Public Access to Information
The details generated by the GEMs must be put in the public domain in accordance with the Right to Information Act, so as to achieve the objectives of the PAIS system (next section). The objective must be real time supply of information on the internet, starting from the list prepared at the start of the program/project through intermediate monitoring to completion. Any evaluation report regarding the quality of implementation must also be put on the internet. Till such time as the general public has access to the internet at the Panchayat level, local level information may also have to be provided in locally accessible forms such as notice boards and through local radio & print media.
PUBLIC ACCOUNTABILITY Information System (PAIS)
The right to Information Act is a vital first step toward improvement of public accountability. The next step must be the generation and publicising of information on all programs / projects carried out in the name of the poor and other citizens. Every program / sub-sector should have an internet accessible Public Accountability Information System (PAIS). Such a system would have two objectives.
(a) To provide information to the targeted population about,
(i) the expenditure allocated and spent, and the receivers of the expenditure,
(ii) The major program inputs purchased (sources, amounts) the people hired and their actual attendance record (e.g. teachers),
(iii) The output of the program (e.g. no of patients treated, children who attended school) and when available its quality.
These would be put on the website accessible through the internet.

(b) To empower the target beneficiaries (users) to put up their own evaluation of the program alongside the government provided data & information.
Thus for instance in the case of primary education, parents of enrolled children should be able to post their comments on the attendance record of their primary school teacher, the number of children graduated and the quality of the education provided. They could also agree/disagree with the govt. posted data (as per (a) above). This would be a review system patterned on existing systems like Amazon Books in which readers can post book reviews.

A PAIS system must have at its core a financial control and output/ achievement monitoring and evaluation system for each program.
The PAIS system would be a geographically multilevel, multi-layered system in which higher levels would present data after aggregation/integration from lower levels/layers (panchayat, block, district, State).
Most citizens, particularly the poor, for whom many of the projects/programs are intended do not have easy access to the internet. It is therefore essential that the Central and State e-governance projects be fully aware of and facilitate access to this information. For instance, many State governments are installing internet kiosks in Panchayat Ghars and these should allow free access to the PAIS system by local residents, non-profit organisations and local community radio stations.
Community radio can also play an important role in monitoring and increased accountability of local level functionaries (political and administrative). In 2005-6, TRAI had recommended a liberal policy on community radio stations so as to make it relatively easy and inexpensive for non-profit organisations to set up such local radio stations. Unfortunately, the policy did not make allowance for a small group of village youth/women etc to set up a low cost local station without forming/ registering a society. This needs another look, particularly in villages/ panchayats where no society exists or has come forward to set up such a station. The very strict policy relating to news radio also needs re-examination. The community radio policy and rules should explicitly mention that such radio stations have a right to disseminate any and all news (information) relating to execution of government projects and programs in the block/district. This is necessary to ensure that the general estrictions on dissemination of news by private radio and TV stations is not used to stifle the dissemination of such information by community radio stations.
Integrated Smart Card
For programs and subsidies meant for individuals and households, the PAIS would have a third leg, an integrated smart card (ISC) system. The ISC system can convert the poor from supplicants who are sometimes treated worse than beggars to empowered citizens who can demand the approved/sanctioned/budgeted entitlements as a right. On the other side those who are genuinely concerned about the poor will be able to identify exactly who is getting (or not getting), which of the slew of benefits that are currently given out by numerous departments at the Central and State government level.
The system will be built on the identification and issue of unique ID number to all residents. This requires a data base of identifiers (permanent) and the issue of a UIN to each resident. Based on this Unique ID number and associated information all residents will be entitled to a smart card containing their unique identifiers and specified un-changeable data. All residents with consumption/income below the median will be entitled to obtain this card below cost (BPL free), conditional on declaration of their income/ consumption (subject to verification by govt agencies). All those above the median income/consumption would have to pay the cost of this card but need not declare their income/consumption so as to make it easier to preserve confidentiality. Declaration of income/consumption would be required by any individual/ family/ household who want to claim an entitlement. That is, only those who have declared their income/consumption and had it entered on their card can claim any subsidy that is intended for the poor and less well off (subject to normal verification procedures).
The entitlements would be divided into three categories. Those only for BPL (conventional poverty line). Those above poverty line but having income below the median (APL50) and the rest of the residents. Though primary identification of BPL will be as difficult/ easy as it is today, the creation of a unique ID referenced data base accessible to different departments and agencies will allow progressive improvement in the quality of the relevant information, as the data base containing this information will be available to all departments and the public. If any other criteria are to be used for giving subsidies, for instance if the fertiliser subsidy is to be given only to small and marginal farmers, appropriate land related information (ownership/leasing in/leasing out) would have to be entered in the data base and the smart card.
The smart card would have memory partitioned into distinct modules representing different entitlement groups for which free services or implicit/explicit subsidies are given. These include Food & Nutrition, Energy (kerosene, LPG, electricity), education services, health services, civic amenities & services (drinking water, latrines/sanitation), employment (NREG), economic/farming (fertiliser, irrigation water, MSP). These separate modules could in principle be managed by the ministry/department under which the group falls. They would be responsible for setting up and maintaining the back-end financial and data base system that is vital to eliminating errors of omission and commission and improving delivery efficiency. These departments/ministries would control the entry of data into their own module of the smart card.
Any subsidy received by any individual would be entered on his/her smart card when the good or service is delivered/charged for by the authorised supplier (e.g. the FPS, kerosene/LPG dealer, fertiliser outlet). The rules and regulations for delivery of subsidy and its re-imbursement to the goods/service supplier would be defined by the concerned department. The data entered on the smart card should however, be accessible by all monitoring/ evaluation agencies so that they can put together a picture of what subsidies are being received by whom as well as those who are not receiving a subsidy for which they are eligible.
The integrated smart card system (consisting of front-middle-back end) is completely consistent with different models of delivery of subsidies and transfers. Thus the food subsidy could,
(a) Continue to be delivered through the existing Fair Price System in which food is delivered to them by FCI through State food departments,
(b) Be delivered through FPS plus other authorised food shops, or
(c) Delivered through any shop in the country that signs up and registers with the concerned department (with no FCI supply), or
(d) Be converted into a pure cash subsidy.
It will also allow other innovations/experiments such as the division of the PDS food entitlement between the Head of household and his/her (non-earning) spouse or transfer of entire household entitlement to the housewife/mother. Similarly different models can be used for Kerosene supply and fertiliser supply to farmers. In other words the precise model for deliver of the subsidy or income transfer to individuals/ households can be decided separately and/or modified over time.
Classification of Beneficiaries
The NSS surveys are currently used to estimate State and National poverty rates. By their nature and design these surveys do not identify specific individuals/families/households below the poverty line. Central departments and/or States have their own guidelines for identifying BPL households. The actual data collection and identification is done by States, which have their own rules and procedures, and these can vary across States and their sector departments (eg. State food departments and State rural development departments). For instance the Rural Development department of the Central government has a set of guidelines for identifying the poor for the purpose of eligibility under the programs funded by it. These guidelines specify an exclusion criterion (all those above the consumption poverty line for the State) and 13 different indicators for identification of BPL households. The rural development departments of States carry out the actual rural census for collecting data on these variables, specifying the rules for creating a single index and specifying cut-off values for the overall index or indices. The degree of consistency and comparability of such data across States is indeterminate as the definition of parameters and the wording of questionnaires were done independently by each State. Further the relationship of these parameters to the consumption criteria used in the NSS consumption surveys is un-known.
The issue of a unique ID number to each resident will not magically solve these problems of consistency and comparability across different data sets. Nor will it do away with the basic need for verifying the information provided by each resident and for updating it regularly. The use of a Unique ID number for each individual surveyed and/or enumerated will, however, make it much easier to cross check and improve the quality of the data over time, once it is digitised.
OPERATIONAL PLANNING
Outcomes & Management
Capital Expenditure
Over the decades Plan projects and programs have come to be focussed excessively on spending of allocated expenditures rather than on their impact or outcomes. During the tenth plan an effort has been made to re-focus planned projects and programs on physical outputs and final outcomes. These outputs and outcomes have to be defined before finances are budgeted and detailed operational plan drawn up for physical implementation. These then provide the basis for continuous monitoring, periodic evaluation and achievement/ accountability. The approach has to be somewhat different for projects and programs.
Large projects: Each large project must have a detailed Program Evaluation Review Technique (PERT) and /or Critical Path Method (CPM) chart or programmed work program. Land acquisition, which is often a critical bottleneck must be dealt with in the CPM based operational planning.
Small projects: Though detailed computer (program) based planning is not required for each and every small program, a complete enumeration/ listing is essential. This allows broad three stage monitoring (not started, in process and completed). These small projects can however be geographically aggregated (for instance by district) and their financial outlays and physical targets monitored (PERT/CPM).
Public & Quasi-Public G&S: In this case we should do a complete enumeration of financial and physical targets (e.g. Roads, canals, drinking water systems). Concurrent evaluation by independent monitors at State and Central/national levels should also be done.
Private goods for individuals (e.g. toilets, house sites). Detailed lists of individual beneficiaries and their location and program relevant characteristics must be produced before funds are transferred to the implementing agency. This allows regular monitoring of the physical achievements.
Service Delivery: Subsidy Accounting
The treatment of subsidies must be made clear and transparent to every one, particularly the beneficiaries. This requires,
(a) Explicit calculation of cost of production and supply.
(b) A billing system that shows not just the price charged but the full price and implicit subsidy provided (separately).
The Inputs transferred from one government organisation to another, must also show clearly the cost price, the subsidy and the actual charge, to facilitate calculation of the cross tax-subsidy between government organisations.
Muster role and electronic record must be maintained of names and ID of each user of the service (receiver of subsidy). This must be aggregated at the level of the service provide (teacher/health service doctor) and above to provide a quantitative performance record of government servants/service providers. The operational provider (class teacher, PHC nurse/doctor) could be issued a time card that records his/her attendance at school/hospital or a smart card that could record the provision of service to a user (entered on her smart card).
As soon as the smart card system becomes effective, smart cards would have modules for each government provided/subsidised service so that citizen is empowered to demand this service. The relevant module would be credited with the subsidy. The subsidy would be electronically transferred (credit) from the users smart card to the service provider’s smart card if and when the service is actually provided (e.g. if the teacher and the student both come to class).
Time Horizon & Management Transfer
The time horizon of Plans is formally limited to the five year Plan Period unless there is a recognised spill over, such as a project or program that starts in the middle of one Plan and is expected to be completed in the next Plan. Thereafter the projects and programs are transferred to the Central govt department or State govt and/or the operating units under their charge whose planning horizon is often limited to one year as per the normal annual budget cycle. The transfer of Plan projects and programs from one management unit to another at the end of the Plan raises issue that need to be addressed to improve outcomes through more effective ‘operational planning’ and management. The different management units may be within the same administrative ministry/department (Department, departmental unit, PSU or Govt controlled non-profit society) or at different levels of government (Centre, State, Local Govt/PRI). In both cases there is also a budgetary transfer from the ‘Plan’ to the ‘Non-Plan’ head with a corresponding change in funding priorities, rules and procedures. Taken together this can result in serious mismatches in operational planning and management that undermine and occasionally nullify, the original goals that motivated the initiation of the project or program.
One example of this is the construction of a new speciality wing in an existing hospital, which is completed as per plan and becomes the responsibility of the hospital. There have been cases in which whole or part of the wing has remained unutilised because no new professional/ technical/ managerial staff can be appointed with in the budgetary rules applicable to the hospital. There have also been cases in which the staff operating the old wing have been transferred to the new wing and the old one is no longer operated, while the new one is functional (but perhaps without the more skilled staff needed to effectively use the more sophisticated equipment). There have also been cases where new staff can and has been appointed, but not enough budgetary provision is available to purchase the inputs and raw materials to use the facilities at their peak effectiveness in supplying hospital services. And finally and almost universally there is inadequate funds budgeted for maintenance so the total stock of equipment declines rapidly despite the new addition, so that the quantity and quality of services supplied is barely maintained at old levels instead of increasing/improving significantly.
Maintenance of Assets
It is well known to anyone who has worked in government or analysed its budgeting that the easiest and first item to be cut in times of budget stringency is budgetary allocations for maintenance of machinery, equipment and other assets. The result is that in every non-commercial government organisation, machinery and equipment tends to deteriorate over time with consequential deterioration in the quality and the volume of service provided using this equipment. At the same time demands are routinely made to the Planning commission for plan funds for purchase of equipment, machinery and new construction. This compartmentalization negates the very concept of rational investment planning, which relates to the stream of services generated by investment, rather than about new investment per se. The objective of planning has to be to maximise the stream of services that flow from assets.
Effective operational Planning requires that requests for plan funds for construction and purchase of new machinery and equipment be embedded in a broader operational plan that fully accounts for future maintenance expenditures on existing and new equipment. The Planning Commission can make a start by insisting that such medium term operational plans, showing future budgetary transfers and/or user charges, be drawn up and presented to it, before new Plan investment (for purchase of machinery and equipment) is formally approved. Any funds required for maintenance of assets being constructed as part of the plan are part of the plan allocation. The 11th Plan could also provide funds for maintenance of existing machinery and equipment as an incentive for preparing long term operational plans (by the receiving nodal department/ operational unit) that include adequate provision for maintenance expenditures.
Plan to Non-Plan
In most Central sector projects and programs the nodal department and/or the operational unit remains unchanged when the Plan scheme is completed. The only change is in the funding source; the fund requirements for running the project or program is transferred from the Plan budget to the non-Plan budget. Very often this is associated with a shortening of the time horizon from the five year Plan perspective to the annual 12 month budget perspective. Given the 12 month time horizon, there is no operational plan in existence with concerned departments, which projects overall financial outlays/requirements with future plan and non-plan fund availability and integrates them on a medium-long term basis. As the services generated by the project or program are commonly non-commercial, there is no increase or at best a less than commensurate increase, in the revenues from the new service. The result is often a sharp (un-planned) increase in non-plan fund requirement. This can result in un-planned cut-backs in existing programs (thus curtailing volume and quality of services delivered from them) and/or underutilisation of newly created facilities because of lack of staff or material inputs.
One potential solution is identical to that for the maintenance problem. The formal approval for Plan programs and projects must be preceded by the presentation of a wider medium term operational plan for the relevant department / agency /unit in which the Plan schemes are embedded to achieve the overall aim of that dept/agency/unit. The operational plan must include medium term projections for staff requirements, material and maintenance requirements including those arising from planned investment. Similarly plan and non-planning funding sources must be integrated into this budget on a medium term basis. This will help reduce the extreme cases of wastage that arise from the distortion of incentive to keep starting new Plan programs and projects because these are funded by a separate Plan budget, not constrained by existing (non-Plan) budget allocations.
Paper exercises, in which each department and its subordinate units make operational plans along these lines, will not be enough. There will have to be a procedure for aggregating these new operational plans to ensure that projected aggregate, total (plan + non-plan) expenditures are consistent with projected revenues. Sustained and comprehensive improvement can only take place if,
(a) There is a single Ministry of Planning and Budget that integrates annual (non-plan) budget allocations and medium term plans and corresponding allocations (centralised solution), or
(b) The incentive structure is overhauled (decentralised solution). This is considered in greater detail below.
Centre to State
In the case of CSS schemes there is an additional complication, particularly in sectors/ sub-sectors that are in the States list or in the Joint list but as a matter of practice have historically been exclusively carried out by the States. As the motivation for these schemes is an identified National deficiency in economic or social development, they are framed by the Centre and implemented through the States. Each State has its own perspective on the sector/sub-sector for which the scheme is framed based on its history, institutions and administrative machinery and political experience. It is inevitable that National guidelines cannot take account of every variation in every State of the Union. As long as the scheme is CSS scheme it can be kept relatively isolated from the existing rules regulations and procedures relating to the that sub-sector in each State. However at the end of the Plan when the scheme is transferred to the State it must be integrated into the existing institutional arrangements for all activities in the sector/sub-sector. This can mean a significant adjustment if not dislocation.
This has several implications. (1) It magnifies the problem of transferring the scheme from the Central and State Plan budgets to the State non-plan budget. (2) To the extent the CSS funds represent additional funds for the State it distorts their incentive structure. There is a strong incentive (particularly in better performing States) to adapt or disguise existing State programs and show them as a new programs eligible for funding under the Centrally Sponsored Scheme(CSS) and to use as much of the funds provided under it, for existing State schemes.
To address these problems the CSS scheme guidelines must be framed keeping in view the need for their transition and integration into the existing programs of the State set up at the end of the Plan.
Incentive Compatibility
What has been termed ‘Operational Planning” in a Government Planning context is a routine and un-noticed function of commercial organisations – no commercial organisation of the size of any government non-profit service organisations would survive without it. The key difference is that a commercial organisation cannot survive without revenue and the consumer/buyer will not pay unless a service is provided at a satisfactory level. Thus service delivery is the primary focus of the commercial organisation. The second focus is of course the minimisation of delivery cost. The challenge for the government is to create an incentive structure that mimics that of the commercial organisation without giving up the non-profit character of the service providing organisation, such as a school or primary health centre.
The solution lies in linking budget transfers with service delivery. The first and most fundamental requirement is to measure and records every service delivered by the government organisation. The second is to devise a transparent formula that translates the amount and quality (to the extent feasible) of service provided, into a budgetry allocation that is available to the organisation as a matter of right. The third element is to give complete autonomy to the head of the organisation to spend this budget allocation for anything that in the organisation’s will increase the volume quantity of services provided and/or minimise the unit cost of this provision or raise its quality at least additional cost.
If recording transactions is the sole responsibility of the service provider it is not very difficult to fill in the register at the end of each day to show that a lot of users have been provided a non-existent service. Thus a cross-check must be built into the system. The best cross-check is to empower the citizen user for who the service is intended. This can be done by issuing each of these entitled users with a smart card or debit/credit card. The user would then present the card to the service provider when she wants to obtain the service and the provider would use it in an appropriate machine to record the service provided. These records would be periodically (e.g. monthly/weekly) sent to the supervisory authority through which the budget funds are provided. The authority would have software systems for cross-checking users, aggregating them and calculating the resultant budgetary transfer. These transfers could then be made with the same periodicity.
CONCLUSION
Better and more effective Planning of government expenditures has many elements. Some of the elements of planning that need improvement have been discussed in this note. These include clearer definition of program outputs and outcomes and detailed operational plans for achieving these goals. With the availability of new technology, government management information systems and public accountability can be vastly improved. The paper proposes a Public accountability information system (PAIS), including a smart card based system for delivery of entitlements to individuals or families. If implemented sincerely, with inevitable modifications and adaptations arising out of implementation experience, this can help improve the efficiency and effectiveness of government expenditure over the next five years.

Future Economic Contours of Asia and its Impact on Global Strategic Architecture

Introduction

It is a pleasure to be here at the USI. I was eagerly looking forward to it. The focus of the talk today is on the role of Asia in the world economy. To see where we are going, we first look backwards a little into history and speak about things which are not normally talked about and then move forward into a projection of the future. With the help of tables and figures we will deliniate Asia’s role in the world economy in the past century and in the recent decades.
We will then digress briefly to cover some definitions. Though one would like to avoid any economic jargon at such a gathering, these are necessary for distinguishing between a lot of contradictory numbers that are put out by different writers and the media. For instance, some of you may have heard the following type of statements; India’s share of world GDP at Purchasing Power Parity (PPP) was 5.9 per cent in 2003; India is ranked as the eighth economic power and fourth in relative size and so on.
Then I will very briefly describe indicators and indices of power. Finally, I will go into the likely projections for the future of Asia and the world. We will look at India and China, ASEAN and very briefly at the European countries and Russia. We still have to take note of the relative developments in Europe and Asia and then briefly their implications. Other issues of interest can be covered during the question and answer session. The basic approach underlying this presentation is to link economics with security issues.
Regional Shares of World GDP (PPP)
Table 1 shows regional shares of world GDP over the long period of history from the beginning at year 0 to 1998. Table 2 depicts regional shares of world population and Table 3 shows per capita GDP ratio to the world average. You will be surprised that all this data exists all the way back to the beginning of the millennium. The degree of accuracy that far back will obviously will not be as much as in recent data. You would notice from the tables that the second World War provides, very roughly an appropriate divide from the perspective of directional trends. During the pre-war period Asia’s economy has been more or less in continuous decline with its share of World GDP on a downtrend. Conversely Europe’s share of World GDP has been rising. In the millennial perspective, America was a late comer till its settlement by Europeans, and then in 1820 it took off. So basically before WW II there was a decline of Asia in the world economy. The tables reflect relative importance of regions in the world. Notice here that up to 1820 Asia had 60 per cent of the world economy with Europe around 25 to 30 per cent.
A small part of the relative decline of Asia and the rise of Europe and USA was due to differences in population growth, which resulted in a decline in the population share of Asia and a rise in that of Europe and USA (table 2). Most of the change in relative economic position was however due to the dramatic rise in the per capita GDP (or income) of Europe and USA as a consequence of the industrial revolution and the diffusion of technologies spawned by it (table 3).
In the post-war period, we see a reversal of the pre-war trends for Asia and the USA with the share of the former beginning to rise and that of the latter starting to fall (table 1). This was actually preceded by a turn around of Europe with its share of GDP starting to rise at the beginning of the First World War. This reversal was driven initially by a reversal in the population shares of each of these continents. As we will see below it is now increasingly driven by the closing of the per capita income (or GDP) gap that had opened up and widened over the previous centuries.
Though the overall story is going to hinge on three continents, Asia, Europe and the USA, it is useful to look briefly at Latin America and Africa as well. Table 1 contains data pertaining to ‘Share of World GDP at PPP’, the “Share of World Population’ and ‘Per Capita GDP Ratio’. Note that the share of Latin America in world GDP is 8.7 per cent and in world population is 8.6 per cent. There is very little imbalance between these two. Consequently their per capita GDP is also about equal to the World average. We don’t except big changes in future in Latin America because there is no imbalance. On the other hand, Africa’s per capita GDP is very low relative to the world average. We don’t however, except large changes in Africa over the next 50 years. So this presentation will not be saying much more about Latin America or Africa.
Comparing Economic Size
It is important to understand why we see in public discourse, different estimates of relative income or GDP of various countries. What has been used in this presentation and which will continue to be used, because it is the right and proper way to measure relative size of economy of different countries or regions, is GDP measured at purchasing power parity (PPP). As already mentioned, GDP can be divided into population and per capita income or the average income of persons living in the country. The latter is correctly measured only if use PPP.
In simple terms purchasing power parity can be explained by assuming that somebody having $100 in the US buys a certain basket of goods and services. To have parity there is a need to ascertain as to what is the amount of rupees that will buy the same basket of goods and services. Let us say just for the sake of an example that its equivalent is rupees 1200. Then that is the purchasing power parity 100 dollars to 1200 rupees. It means the exchange rate in terms of purchasing power is 12 rupees per dollar and not 45 rupees as we see in the market. The purchasing power parity is really a measure of the size of what people (in India in this case) can buy which is what the GDP is supposed to be.
In contrast the GDP measured in dollars is merely the Indian GDP in rupees converted to dollars by multiplying with the current exchange rate (Rs45/US$ in our example). In certain cases this grossly under-estimates the true purchasing power of the economy or its residents. This can be seen from Table 4.
Very briefly, what has been done here is to arrange all the countries of the world in the year 2005 along the X-axes. To avoid cluttering I have not written names of the countries. Then their GDP at PPP and at the 2005 exchange rate is plotted. Red dots denote the GDP at purchasing power parity and the blue dots denote the GDP measured in terms of the current exchange rate. A trend line has then been put through each set of dots – red line for the GDP at PPP and a blue line for GDP at the market exchange rate. The important thing here is that when you go from almost zero income to about middle income or 24 per cent of the US income, the gap between these two widens. That means the current exchange rate measurement is getting further and further away from the real measure of the economy, the GDP at PPP. Once a country has 25% of US GDP the gap starts to narrow.
Now most people have heard about the first BRICS (Brazil, Russia, India and China) report. This report assumed that we are on the side of the curve where the gap is going to narrow. It is just not true of India and China. Russia, however, is now at the turning point and hereafter the gap is going to start narrowing as Russia grows. Brazil is somewhere in the middle between China and Russia. So there is the fundamental error in the way many reports have projected GDP at market exchange rates and then used conversion factors to obtain the GDP at PPP.
Country Trends: Asia and Europe
Now we come back to the PPP measures which we use right through out the rest of the presentation. Table 5 depicts the large Asian countries’ share of world GDP. This shows that the GDP shares of India (blue), China (red), Japan (orange) and rest of Asia (purple) all declined in line with the overall downtrend shown in Table 1 from year 0 to 1998. There are three additional points emerging here. One is that during the period 0 to 1500, India’s GDP was larger than China’s. Since then it has generally been smaller. The second is that Japan had a relatively small GDP share till the end of the War, but thereafter it rose rapidly and overtook both India and China. Finally, the up tick in the overall share of Asia was led by Japan, followed by the rest of Asia, then China and finally India. In other words all countries of Asia are participating in the come-back of Asia.
Details of Asian countries’ share of world is shown in Table 2. This suggests that the decline and rise of the population share of Rest of Asia has played a role in the decline and recovery of its GDP share. Japan’s modest rise and fall in the prewar period was also related to population shares, but the post war rise has been driven by increase in per capita income (catch-up growth). During the pre-war period, India’s population share was on a declining trend while China’s was highly erratic. In both cases, however, the predominant driver of the decline in GDP share was the rising gap between their per capita income (or GDP) and that of USA, Europe and some Latin American countries(table 2).



















Let us briefly look at the European countries’ share in world GDP (Table 6). Till the first war, the share of all European powers was rising. There was a fairly short period in history when the UK was the largest economy. Earlier it was Italy, France and so on. We need not go into details but what the table shows is that by and large all the major countries rose till about the war period and then started declining. Data pertaining to the European Countries’ share of the World is contained in Table 3.


















We turn next to the contemporary period and shift from historical data to the standard World Bank data. Table 7 depicts the changing pattern of global economy in terms of share of country’s share of World GDP at PPP. North America (the US and Canada), as a region has a share of world GDP which has been more or less constant except for a small decline from the 1970s onwards. The share of Asia-Pacific has been rising rapidly for the last 25 years or so. Europe and Central Asia as a region have been declining. So the picture here currently depicts the US share at par and the relative rise of Asia and relative decline of Europe.
Table 4, compares the position in 2003 with that in 1979 for GDP shares, population shares and relative per capita income. The relative per capita GDP of Asia has risen over this period because of the because of the rise in China and India; India’s per capita GDP relative to the world has doubled from 0.2 per cent of the world average to 0.4 per cent . China’s per capita income was much smaller in 1979, about half that of India. It has jumped six times to 0.6 of World average and is now 50% more than India’s.
























World Today: Economy and Power
There has been a lot of discussion that the world is uni-polar, multi-polar or poly-centric. To get a fix on this issue let us start with a look at the World economy. On the basis of the shares of different countries and unified economic groupings we conclude that the World economy is multi-polar. Table 8 depicts the economic power of major countries relative to the US. Considering that the US is the largest economy in the World we measure each country’s GDP relative to the USA. We take the European Monetary Union (EMU), along with the UK (which is not in the EMU, but is an important member of the European Union) as a measure of an almost unified Economic Union. At this time the size of the EU economy is almost 102 per cent of the USA. The size of China’s economy is 70 per cent of the US economy. Next in size we have the Japanese and the Indian economies which are roughly 30 per cent of the USA (table 8). So there are multiple sources of economic influence even though they are not equal to the US. We believe, that it is not necessary for all economies to be of equal size to have a significant impact on the World economy and to have a role in the world. Historically the Italians, the French, the UK etc have been powerful nations despite wide variations in different parameters. Roughly 30 per cent is a good measure. With this criteria we have five large economies and consequently can conclude that the world economy is multi-polar.
As defined by Waltz State power is the “extent that (one) effects others more than they affect [one]” It is therefore a “combination of its capacity to resist the unwelcome influence of others and conversely to influence others to behave as it wants them to.” Power of a State or country has therefore to be measured relative to another country, and in the contemporary context it is most appropriate to measure it relative to the USA. In our analysis we consider only the power relations between States (countries). That is we do not address the issue of non-State actors.
Economic power depends not just on the size of the economy but also on its technical capabilities. In our academic work, we have applied economic concepts to measure technological capability and economic power. In very simple terms this involves the definition of a technology-skill factor based on the economic theory of production. This is combined with measures of relative economic size, that we have already used above, to define an index of economic power or the over ‘power potential.’ derived in relation to the US.
Part of the attraction of this index is that it can be used to calculate the power potential of over 200 countries in the World and can be extended backwards into past centuries to calculate the relative power potential of all important countries of those eras. These calculations have been done and are available in the references. Here we use this index along with the relative size to identify the global and regional powers. Details for calculation of the Index of power potential (VIP2) are as follows:
.







































































A potential global power may be defined as one whose index of power potential (VIP2) is over 25 per cent. Only two countries meet the criterion for defining a potential global power - China and Japan The USA, by definition, has an index of 100% as other countries’ power is measured relative to it. We define a regional power as one that has an index value of 5% or more. There are five European countries, which have a fairly high value of the index and easily meet this criterion. There are only two Asian countries, India and South Korea, which can be classed as regional powers.
Other countries that can be called regional powers are Russia, Canada and Brazil. Details pertaining to global and regional powers are given in Table 5.
The Indian value of the index is 8.9 per cent. It is still less than the value of the index for most of the European regional powers. Russia’s power index at 6.4 per cent is less than that for India. Yet it appears to be more powerful. Its power does not arise from its economy, but its strategic capital or assets, something that we will touch upon below.
As there are so few countries in the list of regional powers and countries such as South Africa, which are commonly mentioned in this context are not in this list, we weaken the criterion. We define a category of global VIPs that have an index value of 2.5% or more and regional VIPs that have an index value of more than 1.5%. These countries may play a significant role either globally or regionally (table 6). South Africa is the only African country that makes it to this list while other Asian countries in the list are Turkey, Iran and Saudi Arabia. Taiwan, China, Indonesia, Thailand and Hong Kong, China are also on this list.
There is a slight problem with the VIP2 index because it treats natural resource riches on at the same level (or on par with) real technological power. This creates some anomaly.
Global Imbalances
We are now ready to start looking at the future of Asia and the World. Before doing that it is useful to look at one more table that summarizes the current global imbalance that we believe will be substantially corrected over the next half century. For each country we take the difference between the share of a country in world GDP and its share of world population. Then we select the countries with the greatest discrepancy or imbalance (positive or negative) and depict these in table 9. The important thing to note is that the three largest negative discrepancies are three large Asian countries. Those with positive imbalance are European countries along with Japan and the US.
Our thesis is that these imbalances are going to get reduced but not eliminated over the next 50 years or so. That is how rise of Asia is likely to come. Note that Japan is depicted as having a positive imbalance. As this is corrected it will slow the growth of Asia, but overall the effect will still be a rising Asia. A legitimate question can be asked, that for many centuries these imbalances have not been corrected, even though there have seen glimmering of change even earlier.

Table 7: Average GDP growth (1980 to 2004)


However, if we come to the more recent period table 7shows the average GDP growth over the last 25 years. When we look at the performance in terms of per capita GDP growth we find that with the exception of two European countries the fastest growing economies are all Asian. In terms of GDP growth, the two European countries are replaced by countries from other continents. The rapid growth of many Asian countries has resulted in a closing of the per capita income gap with the rest of the World. Note that India is ranked 9th in both cases. So what is happening is that with globalisation and policy reform the countries of Asia, which were earlier left behind, are beginning to catch up. We expect a number of Asian countries to continue to be among the fast growing economies in the World.

Population and Growth Projections
The basis of our projections of economic size and the power potential index projections, are the population projections of the UN and our own projections of per capita GDP (or income). The UN population projections are shown in table 10. There are two big spikes one pertaining to China (green) and other to India (red). The table shows that China’s population will grow more slowly than India’s over the next 50 years or so. Therefore the population of the two will become almost equal around 2030-35 and India’s will be marginally larger by 2050. Secondly, relative population of Japan, Russia and parts of Europe such as Germany is likely to decline. So population is going to play a role in the relative decline of Russia, Europe and Japan.
We have to digress somewhat to discuss why EU can be treated as an almost unified economy but not a single power. In economic matters it acts as a unified whole in several dimensions such as at the WTO negotiations. However, at the World bank, G8, G20 etc each country has a separate presence even when EU may co-ordinate certain aspects. In matters pertaining to national security such as the question of raising a small force in Europe, the issue is being debated endlessly. Thus the EU is not even a ‘Virtual State,’ like others virtual states in history like the British empire and the USSR. The British Empire, even though it contained a separate entity like India, was a virtual state in the sense that the empire acted as a unified whole in projecting power. The USSR consisted of Russia and countries of Eastern Europe and was a virtual state because it acted as a unified state. The EU is far from it and the prospects of it becoming one over the next 10 to 15 years are very low. Of course, if it becomes a ‘virtual state’ then it would be a power, but the prospects have become bleak after the rejection of the new constitution and the rise of nationalist sentiment in several countries.
So given this uncertainty about the EU, our conclusion is that the world can only become tri-polar. Why do I say that ? It is a very simple concept. For China and India to equal the US, they have to have a per capita income only ¼th of the US because their population is about four times. Though nothing is inevitable the likelihood of this happening over the next 20 years for China and the next 40 years for India is quite high. For any other country, such as Russia, Brazil Germany or Japan to equal them in terms of economic size or power they have to have a much higher per capita income than the USA and there is little prospect of that during the next 20 years or more.
Per Capita GDP growth projections are shown in Table 8. The only important thing to note here is the forecast that India will start growing faster than China sometimes in the next decade (2010-2019). To appreciate this we need to briefly outline how the Chinese economy functions. First, China’s objective is growth maximization. The basic objective of the Communist Party of China is to retain power and they have come to conclusion since 1980 or perhaps a little earlier that the best way to do that is to maximise the rate of growth of the economy. Some analysts have in the past confused this with the very different USSR system which collapsed. The Chinese system is a highly decentralised system, unlike the USSR. It was decentralised in Mao’s time long before China started moving to a market oriented system. The growth objective is very easy to translate to even public sector companies. Basically, at a firm level it becomes a corporate growth maximisation strategy. So the strategy prevails not only at the national level, but at the provincial, city and down to the public sector company levels.






Secondly, there are two ways in which they have sought to achieve fast grwoth. The first is public investment. A lot of people forget, that in 1980 China was a Communist country and 100 per cent of the assets of the country were owned by the Government/Communist Party. All the profits and returns to capital generated in the economy could be used by the party/State without the need for tax distortions. The system they have maintained is that all returns from public assets (which constitute a very large fraction) are re-invested. So there is a very high rate of investment. That is one prong of the strategy but this strategy alone would not have worked just as it did not work in the USSR. The second prong is the market. This is coupled with two engines of growth, FDI and exports. Exports by State linked entities enjoy virtually free run on the banks, while export oriented FDI and most other FDI enjoys a host of freedoms (including from labour rules) that is not available to domestic private parties. FDI is has been critical to China’s growth over the last 25 years because their entrepreneurship was decimated by the Communist party. Historians report that two million entrepreneurs were killed during the Communist Revolution. Therefore reforming China did not have any entrepreneurship base of the kind we have in India. Therefore, to have a productive growth they instituted and evolved the market led, FDI-Export led growth model. That is the basic reason for their success.
To project their growth into the future we need to know what are the weaknesses and risks pertaining to China. People who want to see China fail emphasise the weaknesses but one has to be realistic. I am of the opinion that strengths and weaknesses are the two sides of the same coin. First look at government ownership which enables high rate of investment in China. One of the failings is that it leads to creation of excess capacity which further results in falling returns and rising non-performing assets (NPAs). China analysts keep writing about the weakness of the banking sector. In reality it is a deliberate subsidy provided through the government owned banking system. It is therefore a disguised form of fiscal deficit. So they keep pumping money into unprofitable and/or failing public sector units. This is a systemic weakness, the other side of the coin of strong re-investment by profitable public sector companies. They will have to resolve this contradiction if they want to keep growing.
The second thing is that rising exports are critical to growth when the public sector has such high investment rates irrespective of expected returns on investment. The Chinese are already the second largest exporters in the world and there is a limit to the export share they can garner for themselves. If it keeps growing, eventually it would become 100% which is impossible. So at some point the high growth of exports that has sustain overall growth has to slow down. This overdependence on exports will soon turn into a weakness as export led growth cannot continue indefinitely. The third weakness is that the FDI-export model has a knife edge character. We learnt this during the 1997 ‘Asian crisis,’ when the high growth economies of ASEAN and East Asia suddenly slowed down considerably. Before the crises it looked as if high growth would go one for ever, then a sudden unexpected shock derailed them resulting in drastic reduct in the growth rate.

The fourth weakness is the worsening income distribution, much unlike other Asian countries. The Chinese Communist Party drastically curtailed spending on social welfare and diverted all the money including profits into investment. Consequently hardly any money went into social sectors. So the income distribution has worsened drastically. Anyway, given all these strengths and weaknesses they will have to chart an appropriate course, but the economy will gradually slow down.
The growth analysis in the book titled ‘Propelling India from Social Stagnation to Global Power’ underlies the projections about Indian growth a brief over view may be helpful. The book shows that the pre- 1980 period was characterized by socialist policies and stagnation. The economy grew at 3.5 per cent and poverty actually worsened. That is the greatest contradiction of this period of “Indian socialism.” Contrary to what numerous economist and development experts said there was no trade-off between growth and poverty reduction, slow growth went hand in hand with rising poverty rates. A policy shift toward freer markets occurred in the 1980s, starting slowly from the second term of Smt Indira Gandhi in 1980. It was fully underway by 1985 after Shri Rajiv Gandhi became PM in 1984. This raised the growth rate of economy by about two percentage points to 5.5 per cent. The 1990 reforms raised the growth rate further by 1.3 per cent to about 6.8 % per cent. More importantly, the effect of the 1990 reforms have spread slowly through out the economy so that the underlying growth rate of the economy has been rising gradually. Table 11 depicts the rising growth of the Indian economy. You can see that at the end in 2006 it is roughly between 7 and 7.5 per cent. The issue is whether this will keep growing. Our view is that an average growth rate of 8.5% to 9% is feasible over the next five years(See Table 12). Sustaining such rates of growth over a longer period of 15 years or so will only be possible if government systems are seriously reformed. There are some people who think it will continue rising even further to 10 per cent or more, but this is over-optimistic.
Regarding the Indian poverty the 11th Plan Approach paper has said is that the poverty rate in India in 2004 was about 22.5 per cent (MRP). This is not unusual for a country of our per capital income. Given our 1.1 bi population, the number of poor is about 250 million. There are only two countries in the world (China and USA) whose total population is more than the number of poor in India even if the poverty rate is normal. The size is huge because the population is huge, this must be kept in mind.
We have, however, not done badly in terms of relative per capita income. As far as income distribution is concerned if you rank all the countries for which data is available, we come out at 31 out of 127. That is we are in the top 1/3rd bracket where as China is in the bottom 1/3rd. This is one thing in which we are much better off than China. We can be rightly proud of it.
The reason for giving so much importance to economic growth is because an improvement in the welfare of the people is directly related to the increase in average income of the country (for any given income distribution). It is important to keep in mind that there are two types of goods – private goods and public goods. Private goods are those which people can buy with their income and can consume themselves. This consumption is the basis for calculating poverty rates- We define some consumption level and find out what proportion of people have a consumption less than this level. In contrast to private goods, Public goods have to be supplied by the government. For example, nobody can have personal road to move around in the city or across the country. In India the major failing of government (and its intellectual advisors), has been in the supply of public goods and services. This is the most fundamental failure of governance (and government policy). It is in Public goods and services such as police, legal system, administration, political system, roads, public health, public education that we have failed relative to other fast growing economies such as China. These depend on the government and this is where deterioration and the biggest failures have persisted over decades. Because of this weakness we are modest in our growth assumption for India, assuming that a growth rate of 7% plus will persist for a decade or so and then decline very gradually.
Evolution of Major Economies
We are now ready to look at the evolution of the major economies of the World. We start with a projection that reflects the conventional wisdom that prevailed circa 2004.
Table 13 reflects conventional wisdom (2004) GDP growth trend for major countries relative to the USA over the period up to 2049. This was based on an erroneous use of GDP at current exchange rates. It suggested that Japan’s economy (range) would decline gradually and that of China (pink) would rise at a faster pace to replace it as the second largest one with its GDP about 30 per cent of the US. India’s economy (green) would rise from very low to moderate level approximately equal to that of Japan at that time. The US would therefore continue to be the predominant economy and power for most of this century. China, though a significant player would not be in a position to challenge the USA, while India would at most be a swing State. In the case of Europe, even the conventional wisdom, expected that it would decline relatively and that China and India would rise relative to Germany, France, UK , Italy , etc.
Our academic work during the second half of 2004 (Dec 2004 working paper) sharply contradicted this projection. There were also reports that a CIA study had given more importance to India than that given by the prevailing conventional wisdom (CW). Our 2005 paper showed that the CW is totally wrong because over the next 50 years the size of the Chinese economy would be two times that of the USA and the Indian economy could be as much as 140 per cent of the US economy. This was a completely different view of the world from the prevailing conventional wisdom.
Tables 14 and 15 show the GDP at PPP of countries relative to the US GDP at PPP. The former depicts the Multipolar World Economy, with the EU (EMU+UK) included, while the latter shows the large countries of Europe separately. We see that China’s economy will equal the US in about ten years. India is likely to take 30 years to reach parity. It is therefore a lesser economic competitor of the USA. Russia’s economy will rise to equal a declining Japan by around 2050 (table 14).
Table 16 depicts GDP (PPP) relative to the USA for ASEAN and other Asian countries like S. Korea and Australia. Korea in global terms has increasing relevance and will become significant over the next 20 years as Europe, Russia and Japan decline relatively. The problem with ASEAN is that it is not even a cohesive economic bloc like the EU was even in its earlier avatar of an economic community. ASEAN can therefore not even be called an economic power. The potential exists. The size of ASEAN will by 2050, be about 42 per cent of the USA, compared about 60 per cent for the EU.
What ASEAN does quite successfully is to use its high growth rates and favorable location to get a lot of attention. ASEAN is located strategically in relation to China, India and the Middle East and thus has leverage. But in terms of becoming a power to reckon with, they must first get much more integrated and strengthen ASEAN institutions. Only then can they hope to become a ‘virtual state’.
Tables 17 and 18 depict the evolution of the Power Potential of different powers in terms of the index of power VIP2 discussed earlier. The former gives the picture of India vis-a vis the current regional powers that it is likely to overtake. The latter shows the bigger picture with respect to the USA and China. In about 20 years or less India would become a global power(table 17). Its power potential would reach 25 per cent. By that time Japan would have declined to below 25% and soon cease to have a power potential to classify it as a global power. However, for the next 20 years or so Japan will remain a global power and is can still play a significant role in the World. Indo-Japan will therefore remain of great importance for us. It will also be in our interest to collaborate with the EU and or the developed countries of EU to accelerate our development in the next 20 to 25 years.
Table 18 depicts the transformation of Global Power equations from Unipolar to Bi-polar and subsequently to Tri-polar World Order. Currently, it is a unipolar world given that China’s power potential is far below the US. The huge current disparity will narrow substantially in about 25 years to become about 60 per cent of USA, and the world will start becoming bi-polar again. It is not essential for the power of the challenger to equal that of the dominant power for this to happen.
Once a threshold of 60% or so is crossed, US policy will start changing as it will not be able to do the things in Asia which they are currently able to do. Similarly, the effect of China on all the other countries will start getting felt. China’s power potential will be larger than the arithmetic sum of all the other countries of Asia put together.
Beyond this India will continue to catch-up slowly and by 2050 our GDP will be about 70 per cent of China and power will be roughly half of China (according to this conservative projection). This aspect has been shown in Table 19. This is very important for our economic diplomacy, political diplomacy and national security.
When I presented this tableical depiction in 2004-5 there are many people who felt that China’s growth will decline rapidly. Consequently, I projected different scenario’s including one of faster catch –up (Table 20). There are three trend lines for each of the two countries indicating high, mean and low. The scenario which I call ‘China low and high India scenario’ is most optimistic from our point of view. In this scenario if China grows according to the low scenario and India according to the high scenario, then we will catch up in terms of GDP growth in about 20 years. Remember the other scenario which I consider more realistic, even by the year 2050 we would only be 70 per cent. (See table 19).
There is generally a lot of difference between the power potential and actual power of a country. Actual power depends on the power potential (index), strategic assets and technology and the “will to power.” Strategic technology encompasses defense technology, nuclear technology, space platforms and so on. It is driven by public expenditure on development of strategic technology which also depends on economic power and strategic assets. For example, Russia is really cashing in on and benefitting from the huge investments made during the USSR period. The stock of strategic technology they built up does not disappear, it gradually declines but it is still there and they are very skillfully exploiting whatever is left, to maintain their power. There is a risk, however, in that over-investment in strategic assets can reduce the funds available for investment in the economy, consequently kill the golden goose. Russia over invested in strategic technology and therefore, they declined economically.
The third aspect is the ‘will’ to acquire power. This can be illustrated by comparing Japan and China . For 50 years since the Second World War Japan had no desire to become a powerful country, and, therefore, they have not become and they have not looked at it in those terms. They are not interested in strategic technology. Only recently has this begun to change. This window of 25 years in which Japan can still be classed as a global power is going to be very important for Japan and I believe for India also. Both must utilize it to develop wider and deeper interaction for mutual benefit.
An alliance with technologically advanced countries can play a major role in acquisition of strategic and defence technologies. We seem to have had a brahminical attitude that we must develop everything ourselves. That is not what major countries have done historically. Let me remind you, Russia, after World War II grabbed the German scientists, the German equipment and German blueprints and took them to Russia. They did not develop everything from scratch. If you really have the will to acquire power you just have to go after it wherever you can get it from. Another example is Pakistan. In economic terms it is not even a regional VIP, yet it has a strong will to counter India. It therefore went out and got the strategic technology from wherever it could lay its hands on it.

Conclusion
To conclude, there is a likelihood of change in global world order from a uni-polar to bi-polar world by 2025, and to tri-polar by 2050. If the European Union becomes a virtual state by then, the World would be quadri-polar. The balance of power in Asia is going to be critical. China will equal the collective power of Asian democracies --India, Japan, Indonesia, Russia, South Korea as well as Australia. I believe Russia is likely to use its Asian connections to enhance its power in Europe. China’s economy will be only a little smaller than the US plus India and we know from history that there is heightened risk of conflict when a power rises so quickly. The only exception has been the rise of USA relative to the UK. These two had very similar values and systems, which is not true for the USA and China. As long as China has the single party rule (Leninist party), its system is not likely to change enough to become similar to the USA. We cannot however, completely rule out the possibility that 30-40 years later China may become a democracy. If this happens, then of course there will be a different situation.
Given the most likely scenario, it becomes essential to reduce the risk of conflict in Asia. I believe that closing the economic and technological gap between India and China would produce a better balance of power and less temptation for China to use its rising power and result in greater stability. It would also permit a greater freedom of action for smaller Asian countries to rise. As far as ASEAN is concerned it is not even a proper economic entity. You must have heard that Brussels in Europe has a huge bureaucracy of the EU. ASEAN does not even have a proper secretariat. So unless they change, ASEAN does not have a major role in the next few decades. If 25 to 30 years later, they realise that they need to do something, then things may change.
Regarding technological cooperation, India has traditional connection with Russia and with Japan Cooperation is being strengthened. The EU appears to be quite receptive. With the USA I feel that the nuclear agreement is quite critical to facilitate better mutual trust. As an economist I believe in more competition. If you are exclusively tied with one country, it has a monopoly and you are at its mercy. If there are more countries trying to sell you equipment and technologies, you are in a stronger position. I do not agree when somebody says don’t have close relations with country x or country y. As far as I am concerned, you gain substantially if there is competition and that should be our objective. We should also utilise our democratic credential to have access to better technologies.
Relations between India and China are going to be critical for a stable balance of power. I feel normalisation of bilateral relations between India and China are very important and we must exploit our huge market potential. They are heavily dependent on exports for economic growth. There has to be some limit beyond which China cannot raise export share of the US market. Somebody will wake up and say you should not go further. So they are looking for new markets and one of them is India. There are a lot of barriers. We can start by removing barriers. We should trade with China like other countries -- Japan, Russia or anybody else. We can then move to free trade in goods and services through a bilateral agreement that encompass both goods and services.
With regard to Sino-Indian relations, there are three key issues, which I feel are important from the Indian perspective. One is a fair and equitable border settlement where I have a simple rule that the terms should be ‘no worse than’ offered by Chinese Prime Minister Chou en Lie in 1960. Secondly, China must stop Nuclear Proliferation to countries hostile to India. I did research on nuclear proliferation to Pakistan and was amazed to find that every single piece of equipment they needed for the bomb, was purchased in Europe. Yet they were not ready. The record shows that they got plutonium for the bomb and everything they needed for the final explosion from China, despite having got all the equipment from Europe. That is something we should be concerned about. It cannot be that China wants good relations with India but then goes on doing this. That should be part of our diplomatic engagement with them. Obviously, we don’t need to fight and swear at each other but it must be part of our diplomatic effort. Finally, it is important that China should recognize India’s due role in Asia and in the world. Five years ago they thought India was a nobody and China could behave in any way. That is changing and it is a good thing. But still we find that they are trying to build economic structures which exclude India. In my view, it is very important if we want to have a genuine peace and security in Asia, that we build inclusive structures where both India and China have equal roles. One of these ideas is as the Prime Minister of India said the Asian Economic Community and some ideas floated about the Asian Energy Community. Other areas must also be explored which include all major countries of Asia including India and China.