Millennium Post

More than just a coin toss

In 2009, Indian industry was doing well (C3). It was investing almost 2 per cent of GDP abroad; it was also receiving much foreign direct investment. Foreign portfolio investment was also flooding into the stock market. Over the next two years, its fortunes declined. It stopped investing abroad, and foreign portfolio investment inflows came down. Financing of the balance of payments posed no problem because the Reserve Bank of India (RBI) kept interest rates up. But the financial inflows also dwindled as the state of the economy worsened. In early 2013, India was attracting roughly 7 per cent of GDP in capital inflows; by the middle of 2014, they had come down to just about 2 per cent. India is no longer the flavour of the month. The prime minister wants to make it one. He has a problem: how to do it? And what to do about it.

Defeat inflation
Inflation has been the bane of India. India has never had hyperinflation like some Latin American countries. But its inflation rate has been higher than the developing-country average. Inflation makes India internationally uncompetitive. The government could in theory prevent that by continually devaluing the rupee. But it is difficult to get the timing of the devaluation right; and there are powerful domestic forces that prevent or delay devaluation. So the government, together with the RBI, should follow fiscal, monetary and food grain policies that would bring inflation down to zero.
Make agriculture internationally competitive.

The government is wrong on food security. India is producing more than what food grains it needs. It has a huge surplus in rice, and has emerged as the world’s largest rice exporter in some years, second largest in some years. It is self-sufficient in wheat. Its food grain prices are often not competitive, but that is because the government keeps raising support prices and hoarding food grains to support the prices. It must stop hoarding. It must stock only enough grains to prevent famine – no more than 20-30 million tonnes. These stocks must be renewed every year: equivalent grains must be bought immediately after harvests, and sold off in the rest of the year. That will make grains much cheaper, and increase all consumers’ purchasing power. The centre must not support agricultural prices. States may be allowed to do so if they want, but they must not be allowed to restrict the flow of grains across their borders.

Bring efficiency into the power industry
 The high cost of electricity and uncertainty of its supply are the chief causes of India’s international uncompetitiveness. Luckily, most state electricity boards are bankrupt, and cannot continue to subsidise their consumers; they will have to depend on the centre, and agree to its terms. The centre must produce power at the lowest cost, and sell it at a uniform, viable price, only to states that agree to sell power to their customers at a similarly uniform, viable price. If they want to continue subsidising power to farmers, they can adopt the Gujarat practice of a separate distribution network for farms that is fed electricity only outside peak hours, when capacity costs need not be charged.

The centre should also buy barge-mounted power plants, like those that Wärtsilä has sold to West Indian islands, park them in ports, and supply those states that agree to its policy of uniform pricing.
Privatise oil and coal industries, but make sure of competition.

The coal industry is close to a central government monopoly. So is the oil industry except for Reliance. Reliance has the world’s largest and most efficient refinery. It could have helped transform the Indian oil industry. But the Congress government subsidised kerosene and LPG produced by its own refineries and refused to give the same subsidies to Reliance’s supplies. So Reliance exports most of its refinery output. It is now time to introduce competition and fairness into energy industries. The government companies should be divided up and sold off to different buyers, so that there is competition in the coal and oil industries.

Debureaucratise the financial industry, and allow competition
The RBI and the Securities and Exchange Board of India (SEBI) have killed off competition in the financial industry. The result is that Indian banks have some of the world’s highest margins between borrowing and lending rates. The Indian capital market is dead; it raises little risk capital, and most of what it does raise goes to those who keep the big financial institutions happy. It is a shame that Subrata Roy, who tried to take cheap credit to the poor, has been locked up without any legal basis. The government should implement the report of the Financial Services Legislative Reforms Commission, and ask it to produce a report on how to reform SEBI and RBI. If we want Bombay to become a global financial centre like London or New York, we must learn to debureaucratise our regulators.

Abolish all import restrictions, build a dozen medium ports, and let our neighbours use our ports without any hassles

Despite all the trade liberalisation, India is still one of the world’s most restrictive traders, and consequently has missed many opportunities. Indian import duties are low except on agricultural goods; but even the lowest import duty gives customs and commerce ministry officials the chance to harass and extract bribes. Their empire of corruption can be dismantled only if all import restrictions are removed; then India can offer its port and airport services to neighbouring countries, especially Bangladesh, Nepal and Pakistan. Indian port capacity is limited because with a few exceptions, ports are owned by the government, which has neither the money nor the imagination to develop them.

India should design and construct a dozen new ports along the east and west coasts to take ships up to 20,000 tonnes, and use them both to develop the coastline and to transport goods and people. These ports can then be the jumping point for developing trade with other Indian Ocean countries.

Free up investment in education and health
Our universities are lousy; most of them give second-rate education. The last government introduced competition; that brought down fees, but it also brought down quality. It thought of allowing good universities from abroad, but could not attract them. What matters is not great names, but good training. We should choose countries/regions with good education systems, such as the US, the UK, Germany, Scandinavia, Korea and Japan, and let them set up any training institutions they like in India, provided their home regulators regulate those institutions. We should adopt the same model for hospitals and medical colleges. Invite the Khan Academy to make a great business in India. Let us not regulate them ourselves; in particular, let us not regulate their fees. If we allow competition, it will bring down costs. Channel investment from one country to a few cities; let them imbibe its language and culture. Do not imprison children in government schools with unwilling and incapable teachers. Let children pick up skills anywhere; just give them cheap and extensive opportunities to take examinations and test their skills.

Replace subsidies to the poor with a negative income tax
The Congress may have had good intentions, but its subsidies to the poor gave a tremendous lead to India amongst corrupt countries. Collecting millions of tonnes of food grains and delivering them to millions of poor in thousands of villages is a stupid idea. It is easier to deliver money to them, not through banks and business correspondents, but through microfinance institutions like M-Pesa and PayPal. RBI hates them, but it must be restrained from strangling them. Give poor people an unconditional subsidy; do not make them break stones and make roads in midsummer sun.

Collect data for groundwater recharge
Water shortage is a highly predictable problem, and humans cannot do without water. India has postponed a crisis for the past 40 years by means of borewells. Now, water extraction from borewells has led to a drastic fall in the water table and rise of fluoride in the extracted water. So typically for India, various authorities have gone about banning new borewells and restricting exploitation of old ones. What we need is more knowledge and technology. The government should invest in detailed regional water resource surveys and in working out what is the most economic solution in each place. Groundwater recharge will be found to be the best solution in many places; where it is, that is what the government should invest in.

Revamp national afforestation programme
Traditionally, the government has monopolised forests and restricted human access to them. There is also considerable wasteland that is not put to any use; it is just neglected. There is a National Afforestation Programme that has tried without much success to involve villagers in afforestation.

The entire issue of land use has to be taken out of the hands of bureaucrats and rethought in terms of its best use for the people. The question to ask is, what uses would give the highest material benefit to the population, and how and by whom should the land be managed for that benefit? This question calls for fresh thinking; the government should appoint a commission, and keep foresters and bleeding-heart do-gooders out of it.

That should be a good enough list for the government to start with. It will no doubt lead to discussion and controversy, and the government will need a machinery to resolve the issues. The machinery will have to be designed; all we can be sure of at this stage is that it will not be called Planning Commission. Governance Now
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