Some food for thought
"The best measure of a man's honesty isn't his income tax
return. It's the zero adjust on his bathroom scale."
—Arthur C. Clarke (English Writer, 1917-2008)
Word for the day
Vivify (v)
To enliven; brighten; sharpen.
To give life to; animate; quicken.
First thought this morning
Thirty four long and painful years have elapsed since a large
tree fell shaking the earth in National Capital of India and many other town
too. Hundreds of families have since went through immense pain and suffering.
Every now and then we hear that some progress has been made in
delivery of justice to these families. Yesterday was one such day. Delhi high
court reversed the judgment of the lower court and ordered life imprisonment
for the Delhi Congress party leader Sajjan Kumar. I am sure it is not the last
word, and the matter will be go in to appeal in Supreme Court and may take
another 1-10years to get finally settled.
While the law is taking its own painfully circuitous and
manipulable course, the reaction of various political leaders to the latest
judgment is highly deplorable.
For example, the finance minister who has also served as Law
Minister of the Country in 2003-2004, while welcoming the Delhi HC judgment,
focused overwhelmingly on how the Congress Party had scuttled the investigation
in the matter.
He failed to offer any apology to the victims for the inordinate
delay in serving of justice. As spokesperson for the government, he also failed
in assuring the nation that efforts would be made that such delays shall not be
repeated in future. He also failed in apologizing for the fact that in these
34years, BJP has been in power for 11years. He also failed in commending the
role of Civil Liberty Organizations, which have been mostly branded anti
national and naxals by BJP and its sister organizations, played a key role in
bringing Sajjan Kumar to justice.
He though did not forget to list appointment of Nanvati
commission by NDA 1 and formation of SIT by NDA 2, and that will surely be used
to seek Sikh votes.
Chart of the day
Removing growth impediments
Continuing from yesterday-
The group of economists has made the following suggestions to
remove the growth impediments to the Indian economy,
Fiscal consolidation to create space for more investment
While the center’s fiscal deficit has been steadily brought
down, the combined deficit of the states – even after adjusting for UDAY – has
continued to widen in recent years and, thereby, largely undone the center’s
consolidation. Consequently, the consolidated fiscal deficit in 2017-18, stood
above 6.5%, not very different from its levels five years ago. Our primary
suggestions to make progress on this difficult issue a
- Sticking to the path laid out by the FRBM Review Committee such that the consolidated fiscal deficit is brought down to 5% and general government debt to 60% of GDP
- Provide incentives to states to be aligned with the center’s fiscal goals:
- Use the model of the GST council as a successful example of cooperative fiscal federalism.
- Use Finance Commission awards to reward good behavior.
- Central guarantees for the market borrowings of the states that go beyond pre-specified limits need to be removed gradually so that a state faces market borrowing costs that are correlated with its fiscal performance.
- Better accounting for contingent and off-balance sheet liabilities of the states and the center, so as to estimate overall government financing needs, and therefore its claim on savings.
De-risk the external sector
India’s heavy dependence on oil imports often results in
“boom-bust” cycles on the balance of payments when crude prices change. These
sharp swings complicate monetary policy, as well as exchange rate and liquidity
management, and create undue external and fiscal volatility (since oil prices
also alter the fiscal math). We should:
- Undertake a systematic program to hedge global crude prices.
- Carry out a set of steps to de-risk the external sector by:
- Attracting more FDI,
- Dis-incentivizing “hot money”
- Encouraging more hedging of foreign currency borrowing by firms
- Developing domestic substitute financial assets linked to gold prices.
Fix Stressed Sectors
Careful but quick policy reforms are needed for the
sectors/areas that are stressed. These include agriculture, infrastructure
(including power), exports and banking. Typically, we need to redeploy
government effort in each of these sectors, focusing it on areas where it is
truly needed to play an enabling role, while freeing the sector of excessive bureaucracy
and intervention, which results in inadequate access to markets, distorted
prices, and poor incentives. We should guard against the temptation to focus on
the specifics of the World Bank measures, while neglecting the broader
impediments to producing in India. We now consider each of these sectors in
more detail.
Agriculture & the rural economy
We need deep rooted transformation of agriculture, treating it
not as a sector that has to be propped up through repeated sops, but as an
engine of India’s job creation and growth. For that, it is imperative that we
thoroughly reform agricultural and land policies.
A key source of agrarian distress in recent years has been that
the terms-of-trade confronting farmers has turned progressively more adverse,
partly as a result of policies to combat food inflation. While low inflation is
desirable in itself, the impact on farmers also needs to be taken into account.
A policy priority should be to reduce distortions in farm product prices as
well as input prices. Another important enabler is technology, both in
educating and informing farmers, as well as in opening access to markets. Some
specific proposals include
- Increase investment in research and infrastructure. Eschew loan waivers that divert resources from needed investment.
- Ensure that farmers receive more of what is paid by the consumer by
- Improving farmer access to domestic and international markets by reducing fees, restrictions on competition and building the necessary infrastructure.
- Foregoing frequent closing or opening of access to international markets
- Facilitate farming at scale for relevant crops through the creation of farmer/producer cooperatives, and by enabling easier long-term leasing of land, for which land titling is an important prerequisite.
- Move to a fixed cash subsidy per acre cultivated based on digitizing and identifying plots (as demonstrated successfully by the Rythu Bandhu Scheme of the Govt. of Telangana). Improve and expand the current Pradhan Mantri Fasal Bima Yojana (PMFBY), especially as the climate gets more volatile.
- For landless laborers, the best short-term policy option is likely to be to strengthen the National Rural Employment Guarantee Scheme.
Infrastructure
Accelerating the pace of the infrastructure build-out will help
in a number of ways; it will create jobs in construction and new economic
activity around the resulting roads, ports, airports, railways, and housing; it
will promote inclusion as it connects interior rural areas to markets; it will
make our exports (and import-competing manufacturing) more competitive as it
reduces input costs such as land (as cheaper areas are connected) and power, as
well as improves logistics and reduces transportation costs; it will open up
India to both domestic and foreign tourism, which can be a tremendous source of
semi- skilled jobs. This will require
- Untangling stalled projects through continued efforts to improve the land acquisition process, addressing environmental clearance issues, improving raw material availability and establishing various sector regulators.
- Improving access to land for development.
- Freeing up public resources for investment through public finance reforms (asset recycling, asset swaps, expenditure reform).
- Revitalizing public-private-partnerships with appropriate and enforceable risk allocation.
- Creating Special Economic Zones, not necessarily with a sole focus on exports, but also for domestic production. It is important, however, that the SEZ do not degenerate again into opportunities for land-grabbing and rent-seeking.
Power
Despite having some of the largest reserves of coal, as well as
having substantial unutilized power generation capacity, India is both short of
coal as well as short of power. These are policy self-goals, arising from both
the dominant presence of government in coal mining and power distribution as
well as populist impulses in pricing. We need to:
- Free energy pricing to generate more exploration, especially for cleaner gas, while using carbon taxes (or tradeable carbon use permits) to align private incentives and social costs.
- Expand participation in auctions of mining rights for coal
- Allow more competition in allocation of natural gas blocks and exploitation of natural gas resources.
- Improve access and reliability of the power grid so that the use of inefficient diesel generators is reduced.
- Reform distribution by creating competition for state monopolies.
- Integrate renewables into power production, recognizing there will be a need for additional balancing power and storage.
Exports
India’s non-oil, non-gold current account has deteriorated by
almost 3% of GDP in the last three years, suggesting an urgent need to improve
the underlying competitiveness of the tradable sector. Boosting exports should
be the lynchpin of that strategy. In addition to the ways suggested also
consider Trade agreements,
simpler documentation procedures at ports, and low and stable tariffs are
needed so that we can be part of global supply chains. High tariffs and other
impediments to cross- border trade not only hamper domestic exporters but will
also discourage foreign manufacturers from seeing India as a viable part of
their supply chains.
Financial Sector
Given the non-performing asset (NPA) build up in the banking
system, it is imperative we make the banking system more robust and well
capitalized, expand its capacity to extend credit, and improve incentives to
lend to the most productive sectors. While the recent travails of the NBFCs are
a matter of concern, some of their problems stem from an overly rapid expansion
of their balance sheets as they grew to substitute for banks. Stability in the
banking system will help spread stability to other parts of the financial
system as, of course, will the reverse.
The main challenges for the banking sector are to improve
governance, transparency, and incentives in the banking system. Key measures
should include
- Cleaning up bank balance sheets by reviving projects that can be revived after restructuring debt.
- Improving governance and management at the public-sector banks and then recapitalizing them.
- De-risking banking by encouraging risk transfers to non-banks and the market; and reducing the number and weight of government mandates for PSBs, and banks more generally.
The non-bank financial sector needs a strong banking system as
well as deep equity and bond markets, supported by liquid secondary markets and
a robust regulatory and legal infrastructure. Key priorities include:
- Developing a liquid and deep corporate bond market through policies to encourage institutional investor participation.
- Enhancing liquidity in the government debt market and making it more attractive to institutional and retail investors
- Developing missing (or nascent) markets like fixed income derivatives to hedge the credit and interest rate risk of fixed income securities.
Making growth inclusive and sustainable
A good job is often the most important form of inclusion. In
addition, we need to help individuals obtain the human capabilities that will
enable them to secure and hold that job, as well as protect those who cannot
get jobs. Let us now turn to proposals on inclusion.
Education
The single greatest limitation of the Indian education system is
its inability to deliver universal functional literacy and numeracy in primary
school. Several studies show that students who fail to achieve basic skills by
the end of class 3 learn very little in subsequent years even if they are
enrolled in school. Our top education policy priority is therefore:
- A national mission to achieve universal functional literacy and numeracy by class 3. Key elements of delivering on this mission should include:
- Improve incentives of existing teachers to attend and teach well
- Providing districts/schools with resources to hire supplemental tutors/utilize new technologies that will provide small-group instruction to students so that they can be taught at the right level.
- Independent measurement of learning outcomes with rewards/recognition to states/districts/blocks/schools based on improvements in learning.
The Right to Education (RTE) Bill’s input-based approach to
education quality was unlikely to succeed given the extensive evidence that
most school inputs are neither necessary nor sufficient for improving learning
outcomes. We therefore recommend:
- Repealing all input-based mandates for schools under the RTE (for both public and private schools) and changing the approach to regulation of private schools based on transparency and disclosure as opposed to input-based mandates.
- Such an approach will facilitate (as opposed to inhibit) the expansion of quality private- school providers.
- It would also facilitate localized cost-effective innovations by government schools, which may be made difficult by the RTE (such as hiring tutors without formal teaching credentials for providing supplemental instructional support)
- Finally, since school education is mainly in the domain of state governments, we recommend that the MHRD seriously implement the initiative established by the NITI Aayog under it’s “School Education Quality Index (SEQI)” initiative. Implementing the SEQI consistently, and tying some amounts of central funding to the extent of improvement in these indicators over time will help to:
- Shift the policy focus to outcomes rather than inputs and programs
- Encourage state-led innovation in cost-effective policies to improve outcomes
- Facilitate documentation and sharing of best practices across states
While improvement in schooling is a key building block to
education, we cannot neglect either vocational training/skilling or college
education. Both will be critical to providing our youth with the wherewithal
for the jobs of the future. High quality research universities will be
essential, both to train the teachers for our colleges as well as to fuel the
innovation needed for the next stage of our growth.
Dealing with the skills shortage
There is wide recognition that the current models of publicly
subsidized skilling are not performing very well even though skills are
extremely scarce. What seems to work better is the skilling provided by private
firms that are training their own labor force. We propose that:
- The law be amended to allow for multi-year fixed term labor contracts, renewable when they end. Severance payments should increase steadily with duration of tenure. The intent would be to move more of contract labor into these fixed-term contracts. These will protect labor better, both initially and over time, and give business some flexibility, as well as greater incentives to invest in training labor.
- We study why public-private partnerships have in general not been a success in skilling and identifying and share best practices, since we cannot afford to give up on this vital issue. In particular, it is worth exploring whether it works better to get firms to expand their existing training programs to include trainees they will not necessarily hire, since these training programs clearly provide useful skills -- rather than relying on stand-alone training firms.
- Governments could set up paid internships for those under twenty-six to work as support staff in government departments in field or staff positions. Performance on these could be an eligibility requirement for applying to government jobs. This will both help relieve the manpower problem in government and generate on the job skilling.
Women’s labor force participation
There are clearly both supply-side issues--families not allowing
women to work, women feeling disempowered—and demand-side issues—lack of
women-friendly jobs in the private sector as well as discrimination. Some useful
first steps here:
- Greater representation of women in state and national parliament, as well as in public administration, the judiciary, and the police has been shown to reduce bias against women and encourage families to invest in women as earning members.
- Public safety is an important issue for women, and increasing women in the police is a way to make women feel safer.
- Going beyond quotas, increasing awareness of the costs of not having more women in the work force, as well as behavioral change interventions targeted at both women and their families to encourage women’s work are also needed.
- Women-friendly policies in the private sector need to be encouraged but legislating that they will need to pay for child care and maternity leaves may just discourage employing women. These need to be subsidized by public funds, at least until private firms start recognizing that they need women.
Healthcare
There is much to be done to reform the healthcare system in
India. Increasingly, non-communicable diseases (NCDs) like heart disease,
diabetes, and cancer play a much bigger role, so healthcare needs to be
reoriented to address these.
- Expand the public health outreach efforts to private sector providers including those without a medical degree. Given that they provide most of the primary healthcare, they have the reach to transmit our public health interventions (immunization, exercise, testing). Studies in West Bengal suggest that training the private sector health providers improves their performance (measured by sending them “fake” patients) by a very significant amount. Based on that West Bengal has already begun to train many thousands of private sector health providers. Overall, it might make sense to
- Build a second district hospital in every district head-quarter outside the state capital. Once it is built and is operational, refurbish and modernize the existing district hospital and bring it to acceptable standards. The current district hospital is typically over-crowded in part because it is the only part of the public system that works somewhat better and private alternatives are expensive. The second hospital will provide much-needed back up for the Ayushman Bharat Scheme if the private hospitals do not cooperate. They can also serve as centers for diagnosis and treatment of NCDs.
Environment
Even while business complains about the difficulty of getting
environmental approvals, the quality of our environment leaves much to be
desired and with climate change looming we should be thinking in terms of
reaching peak emissions within the next decade or so and then sharply reducing
them. For all of this we need to get more professional about the environment
and climate change, as well as more transparent about the regulatory process.
- A new environmental protection law should be enacted under which pollution regulation is delegated to a fully independent regulator who is appointed for a five-year term and removable only by impeachment. The regulatory agency must be funded automatically through a charge of a fraction of industry revenue. The regulator must be required to use the best available scientific and economic evidence to set pollution fees for pollutants (or inputs closely linked to pollutants) equal to the estimated monetary value of the harm that they cause, and to levy fines for non-compliance. In addition, the regulator may limit or ban some pollutants, and shut down industries that fail to comply. Revenue from fees and fines should go to the government to be used to compensate losers, finance pollution control and clean alternatives, or for the general budget, and should not go to the regulator.
- Policies that would improve energy pricing in the short term pricing can include:
- Setting Coal India prices at international parity
- Price electricity at social marginal cost and then use revenues for fairer energy access through, for instance, funding connections under Saubhagya (free of fixed costs) and giving fixed transfers to agricultural users.
- A separate policy is needed for pollution from cooking and heating fires that is responsible for 25% of Indian air pollution.
- Adopt EURO fuel standards faster than at present.
- Long term planning changes includes city design that seek to increase public transport, micro electrical vehicles and cycling. India should invest in rail that is easier to electrify (relative to roads). Building regulations should minimize artificial heating and cooling
- Congestion pricing of city traffic by onboard GPS tracking should be mandatory, with revenues used to improve pavements and public transport. The municipality could compensate existing vehicle owners and drivers through a temporary refund of automobile use taxes.
Social Protection
India has more than 400 separate social protection schemes. A
vast majority of them are funded at very low levels and do very little.
However, they absorb some amount of bureaucratic capacity. And despite the wide
variety of schemes available on paper, as the many protests make clear, people
do not feel protected. In particular while MGNREGA provides some support for
the rural landless, most other relatively poor people have only the PDS to fall
back on. This is one reason that it is so difficult to remove any government
scheme, however inefficient. There is a clear need to create a reliable
pipeline for providing compensation for losers, as we move towards a more
rational system of social protection. The Direct Benefits Transfer is a good
starting point and building on it by being credible in compensating losers will
be key. Specifically we suggest
- Going through the hundreds of schemes and getting rid of most of them, to leave us with a small number that are targeted towards important forms of risk that people face.
- Moving beyond the cash vs kind debate by adopting a choice-based approach on an experimental basis. For example, we could give beneficiaries the choice of opting for a cash transfer instead of subsidized food through the PDS -- instead of policymakers opting for one or the other. With mobile banking and the PDS being digitised with e-PoS machines to enable portability of benefits such a choice-based approach is feasible.
- Automatically indexing social protection programs (such as pensions) to inflation to ensure that their value is not eroded over time. This is especially important since recipients of social welfare pensions are among the most vulnerable.
These suggestions are good and effort of the team is
commendable.
I would however like to make the following two comments:
(1) There are any
theoretical suggestions in this. It would be great if the panel of experts
could actually list some tangible actionables to this.
(2) These suggestions
may improve the status quo materially. In that sense most of these are
incrementalist ideas. I sincerely feel that in many areas we need to break the
status quo and think about some radical changes.
I have been frequently presenting my suggestions on these lines.
Would be happy to reiterate in next couple of days.
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