How to put economy on sound footings?

By S.V. Vaidyanathan

With the political fallout of differences over disinvestment of public sector oil companies, HPCL and BPCL, casting a shadow over investors’ perceptions about the commitment of the Government to the much-touted disinvestment drive, the Finance Minister, Mr. Jaswant Singh, would feel hard-pressed to hardsell second-generation economic reforms on which hope for accelerating economic growth in the Tenth Plan is anchored. In consonance with his reticent nature and unflappable demeanour, the Finance Minister has not yet spelt out how he intends to get over the impediments stalling the momentum of disinvestment.

But the prompt UTI package approved by the Union Cabinet reflects Mr. Singh’s reassurance to millions of investors who had sunk their earnings in these instruments, though the cost of the bailout needs to be reckoned and the wider repercussions such interventions would invite from other entities in the event of their being faced with a redemption rush.

Be that as it may, the month of September always holds some attraction for successive Finance Ministers, who invariably greet September as heralding hope for the best phase of the economy to begin for the fiscal year. But this year too, the delayed arrival and intensification of monsoon rains in late August did give rise to optimism over the moderation in the deleterious effects of the drought on the economy. Yet the ambitious Tenth Five Year Plan target of 8 per cent GDP set for the inaugural year, i.e., 2002-03, is unlikely to be realised, for obvious reasons.

Two distinctly renowned institutions – the International Monetary Fund (IMF) and the country’s apex bank, the Reserve Bank of India (RBI) – have made it plain that the 8 per cent target is intractable, given the constraints.

In its Article IV Agreement consultations the Fund had with the Indian authorities, subsequently discussed by the Board of Executive Directors of the Fund, the Indian economy is projected to grow at 5.5 per cent in 2002-03; this is predicated on the assumption of a modest recovery in the industrial sector to 4.5 per cent as global demand recovers and as earlier strong rural income growth translates to domestic demand.

The IMF projection is based on a deceleration in the agricultural sector to its historical trend growth rate of 3 per cent, and a leveling-off of service sector growth at about 7.25 per cent. It further noted that the attainment of the 8 per cent growth objective, which is the key to sustained poverty reduction, will depend critically on the pace of progress with fiscal consolidation and structural reform.

While particularly praising "the bold and pragmatic approach to accelerate the pace of disinvestments" and noting "the importance of maintaining the momentum that has been built up", the fund underlined the importance of achieving sufficient momentum in structural reforms to sustain confidence and return India to "a more rapid growth path".

Even as the Fund is focussing on its by-now-familiar refrain of fiscal consolidation and structural reform to put the Indian economy on a higher growth trajectory to tackle the twin ills of endemic poverty and unemployment coupled with overt underemployment, the mandarins of the Mint Street in Mumbai too shed some of their scholastic and precautionary sheen and prescribed pills that are universally being administered.

Thus, in its 2001-02 Annual Report, released early this month, the country’s central bank prescription for the medium-term growth prospects for the economy contains a number of proposals for expeditious action.

These include: legislative changes, in particular, those relating to ownership; regulatory focus; development of financial markets and bankruptcy procedures; fiscal empowerment, especially in regard to finances of States: (improvement in fixing and collection of user charges, extension of the same to non-merit goods and progress in cost recoveries is central to the issue of fiscal empowerment); further reforms in the real sector, particularly in domestic trade; further liberalisation of financial sector and of the external sector; and solving "overhang" problems in various areas, such as cost recovery in the energy sector and management of foodgrains stocks while simultaneously ensuring that such pressures do not continue in the future.

The RBI is of the view that fiscal consolidation requires altering the pattern of expenditure since the level of expenditure of the Central government is "heavily" loaded in favour of obligatory constituents – interest payments, Defence and statutory grants to States – reducing, thereby, the maneuverability of fiscal policy.

Capital expenditure, which adds to the productive capacity in the economy is being progressively pre-empted by growth in revenue expenditures. The RBI draws attention to a disconcerting development in that, while developmental expenditure has been higher than the non-developmental component in absolute terms, the latter has been rising faster throughout the 1990s. The non-developmental expenditure rose by an average annual growth rate of 19.2 per cent as compared with 13.5 per cent in case of developmental expenditure.

Another worrisome point in the realm of fiscal empowerment and revenue maximisation is the steady deterioration in the tax-GDP ratio, despite the substantial restructuring of the tax system since 1991-0=92, whereby tax rates were significantly rationalised and brought down to the levels comparable to developed economies.

The RBI report mentions that the agricultural sector remains out of the tax net and the fast growing services sector has not been adequately taxed. The level of non-tax revenue remained nearly stagnant for Central and States during the 1990s. Here the apex bank emphasises the need for a paradigm shift through "a review of the framework for determination of user charges of departmental and commercial entities and evolve an effective strategy for cost recovery. User charges could be linked to input cost and a process of periodic revision should be automatic".

Will the political dispensation in both the Centre and the States display the requisite will to go the whole hog in fiscal empowerment? Being a stickler for convention and a martinet, the Finance Minister should gather the gumption to stake his personal reputation in effecting a seismic change in the mindset of people inured of freebies so that posterity would be beholden to him for his farsightedness.

It is not for nothing that the RBI has contended that proper targeting of subsidies is needed to reduced leakages and misappropriation.

The RBI hailed the dismantling of the administered price mechanism in the petroleum sector as it would not only bring transparency to the fiscal operations but would also improve the productivity, efficiency and global competitiveness of the domestic petroleum sector. In this context, formulating a long-term energy policy, taking into a count the future of public sector oil companies, is necessary to exploit the strong forward and backward linkages of the energy sector with other sectors of the economy.

Foreseeing the fracas over disinvestments of the public sector oil companies but without directly alluding to it, the Bank imperceptibly states that it is necessary to recognise that there is no evidence for automatic reaping of efficiency gains merely from the transfer of ownership form public to private, even as the debate around ownership versus efficiency rages on undiminished.

On the contrary, there is some evidence suggesting that efficient public ownership in select sectors could bring with it external economies of scale and scope which create a supportive milieu for private enterprise, especially when projects involve a long gestation lags and where the critical minimum infrastructure is to be created.

But an essential pre-requisite for such positive results to be realised is to make the management of public enterprises autonomous but a accountable in terms of economic performance.

If only the warring Ministers in-charge of their departments, be it petroleum or fertilisers, realise that they lose nothing when the controlling stakes under their charges are transferred or divested, the process of disinvestments would gather pace and the required resources could be gleaned without raising avoidable ruckus.

But where the Ministers refuse to honour their commitments for disinvestment already approved by the earlier Disinvestment Commission or the Department of Disinvestment and cleared by the Union Cabinet, they only pose a challenge to significantly scale down government equity stakes in non-strategic domains, which is mere political opposition and not driven by any genuine concern for security perceptions or workers’ welfare.

As the RBI has said that the healthy process of combining restructuring with progressive reduction of government equity holding in non-strategic enterprises through disinvestment route needs to be pursued vigorously, the Government would do well not to renege on its commitment to disinvestment as what is at stake is investors’ perceptions, both individual and institutional, the erosion of which is bound to retard growth impulses permanently. INAV

The present ills of governance

By N P Tripathi

The major ills afflicting governance are mainly three: corruption, centralisation and the stranglehold of the bureaucracy.

The cleverly woven web of corruption has made governance, worth the name, impossible. A large number of institutions have been set up Anti-Corruption department, Vigilance, Lok Ayukts and CBI et al to check this evil but to no avail. Infact, inspite of all these institutions corruption has been, and is still, increasing steeply. The electoral system we have is mainly responsible for this.

Corruption has to be checked from the top. There has to be strong political and bureaucratic will to stamp it out. The five-stars culture, which our politicians and bureaucrates at the helm of affairs practise, and the preferential treatment they enjoy has to yield to atleast some modicum of austerity.

Instead of hauling up lower functionaries, those at the highest level should be reined in and cases started against them should be settled during the course of a year or so and not drag on endlessly like those in Bofors, Bombay Stock and telecom cases. Unless example is set by the persons at the helm of affairs, no visible improvement can be expected.

Inspite of the much-touted agenda of decentralisation, we are effecting more and more of centralisation . How else can one explain the enormous growth of the secretariat- Mini-secretariat Bahukhandi and Bapu Bhawans etc. Besides the uncalled for increase in the number of ministers, the strength of Principal Secretaries, Secretaries, Special Secretaries has gone up manifold. About twenty years back there were hardly fifteen to twenty secretaries and special secretaries, besides the Chief Secretary and one Principal Secretary.

The secretaries' meeting could be held in small rooms, and even in the control room. Now they have to be held in big conference rooms or Tilak Hall. What the section officers and under-secretaries used to do is now being done by special secretary and secretaries. This statement is no exaggeration. One of the senior principal secretaries gave me this reply recently when I confronted him with the question of poor disposal of cases in the face of such a big increase in the strength of officers. The upshot-fat pays and substantial perks for lesser work and accountability, a glaring example of lack of intellectual integrity at the top.

Moreover, an important setback on account of the immense increase in the strength of the secretariat is that the line departments pass on the buck to the secretariat at the slightest pretext unless they are interested or have been made to take interest through pressure. The secretariat seldom pulls up the line departments, on account of their vested interest, for making unnecessary references.

The root cause of snail's progress in the disposal of cases in the secretariat is that inspite of the increase in strength and so called modernisation, the archaic system of files moving step by step from the reference clerks (RCs) upwards still continues to be followed.

I vividly recall that over twenty years back in one of the secretaries meeting convened by then Chief Minister of UP, I put up a note to the effect that every officer from under secretary upwards should dispose of atleast five to seven cases everyday directly. The reference clerk should put up the file straight to the officer concerned and the first note in the file should be his bypassing the upper division Assistant and section officer.

The Chief Minister was unable to react to the note and he passed it on to the then Chief Secretary. Nothing came out of it. The note was lost in the maze of papes and files. So, unless this primitive and obsolete system is discarded in letter and spirit there is no hope of effective improvement in the delivery system.

I remember that when Bangladesh was created in 1971 and President Mujib took over, he realised very shortly afterwards that the secretariat was the biggest bottleneck in the progress and went to the extent of suggesting that if progress has to be achieved the secretariat should be bombed and razed to the ground.

Against this, both in the Centre and the States the secretariat in our country has become very powerful and the line departments have been marginalised. Even in the good old British days, from whom we have inherited the present system, things in this regard were much better. I vividly recall an incident of around early fifties when I was posted as Divisional Forest Officer, Gonda. Mr Hasan of the then ICS was the Commissioner of Lucknow. He came on tour to Gonda. After the day's inspection, he rang up the Chief Secretary and took the latter to task for some orders issued by the revenue department of the secretariat impeding work in the field. Can anyone even dream of such a thing these days? Mind you, there was popular Government in the state then headed by late G B Pant.

The tremendous increase in the strength of IAS and PCS officers in the secretariat has created vested interest amongst them. They want to continue staying in the capital Lucknow or Delhi, depending to their cadre, enjoying special pay, other perks and the unethical personalised services provided by the line departments. Such officers take a very theoretical view of things bereft of the ground realities. They curry favour of the powers that be to get more cushy jobs.

Another important reason for the centralisation is the feudal mindset of the politicians and bureaucrats in power notwithstanding their loud proclamations to the contrary and their so-called commitment to the uplift of the unfortunate sections of the society.

The strangehold of the IAS in the administration has annihilated the initiative and creativity of other services completely. The politicians in power find it very convenient to live in the illusion that all the talent available is in this service only. Even the two other all India services (IPS and IFS), the poor cousins of the IAS are meted out very step-motherly treatment.

What is most shocking that in these days of specialisation and increased general awareness even the Fifth Pay Commission has put a seal to this abominable set up. As for the state services, they are regarded, most arrogantly, as positively inferior.

A review of the working of the departments headed by the IAS from the very inception like Co-operative, Registration, Land Consolidation, Rural Development, Land Revenue and Land Ceiling will prime facie reveal that they are as good or bad, if not worse than the other departments, headed by the non-IAS.

To assuage the feelings of the officers of the other services they have given junior posts in the secretariat. But they are seldom allotted any important work. Let alone handling establishment matters. They are not allowed even a peep in such cases, even if they are senior on the fallacious plea of lack of objectivity.

An IAS officer can deal with IAS establishment being gifted with the supersense of objectivity but a departmental officer being less gifted cannot. What a philosophy!

In this connection I may be pardoned for giving a example of my personal experience in this regard. I was inducted in the UP secretariat as a special secretary in January 1974 and worked in that capacity or a year befored becoming full fledged secretary of the same department.

During my tenure as special secretary, establishment of the department was handled by much junior deputy and undersecretaries before being put upto the secretary and minister, bypassing me completely. But the moment I became full-fledged secretary much to the annoyance of the IAS compeers of the time, I started handling the establishment. In retrospect, I feel things were much better then. At least a departmental man could become full-fledged secretary, notwithstanding the fact that the departmental heads for all the four and half years for which I was secretary of the department, were all senior to me. In the present ambience such a thing is an absolute impossibility. But even if such an exception does take place, at least the establishment work will be transferred to some IAS officer working under someone else.

Another glaring example of the hollowness of the concept that the IAS officers are better equipped at handling establishment is the medical department. In this department there exists a post of Director Administration for the last twenty five years or so.

This post has always been manned by an administrative service officer and the responsibility attached to the post is of handling the establishment of the department. One would expect the medical establishment to be very well managed as a result of this arrangement.

The state of the hospitals (barring probably those in the capital), primary health centres, rural dispensaries and the indulgence in private or the malpractice by the doctors is a staring example of this mismanagement. Every Govt official is assured three time bound promotions in the service.

There are hordes of doctors who have been and are denied this entitlement till they retire on the plea of seniority disputes, absence or anomalies in service rules and other flimsly grounds. Compare this with the quick and very timely promotions of the IAS officers. The management of the cadre of most of the other State services is equally bad unless they have some bullying or nuisance value.

PTI Feature