The way ahead for a vibrant India

Systemic improvements for good governance and important objectives

harsha-vardhana

Harsha Vardhana Singh | June 2, 2014




With a decisive election victory of BJP under the leadership of Narendra Modi, economists and financial markets consider India's prospects to be much better than earlier. The growth rate is expected to substantially improve and inflation is likely to come down to manageable levels.

The new government has been provided several suggestions for sustaining faster growth and development. These include, for instance, emphasis on taming inflation, agriculture policy reform, effective use of unique identification (UID) scheme for disbursing subsidies under welfare schemes, creating an investor-friendly policy environment, fiscal restructuring to improve tax buoyancy, targeting expenditure towards public infrastructure, and governance and policy coherence through simple and non-discretionary rules.1 Likewise, various missions like the food mission, infrastructure mission and jobs mission are emphasised2, and industry associations such as CII and Ficci have proposed several key thrust areas. In a very substantive television interview, the new MP from Hazaribagh, Jayant Sinha, said he could think of at least 50 relevant suggestions, and that much work has been done for some time to seek clarity on the way ahead.

While several of the suggestions and objectives have been around for some time, some are new. In such a situation, the policymaker has to prioritise among multiple alternatives so that effective work can begin with the maximum possible impact. In my view, Modi himself provided some pointers to give focus to this exercise when he said in his Gujarat assembly farewell speech that it is important to bring about changes which have a system-wide impact, thus achieving extensive positive changes. We discuss below some possible initiatives with a potential for large impacts. We first emphasise three key concepts which must always underpin policy effort. In this background, we identify some important policy initiatives as well as specific sectors where improvements would lead to wide-ranging achievements.

Good governance: Every initiative should be considered within the framework of good governance. This is not an esoteric concept, but has been associated with some specific features of policy initiatives. We highlight many of them in the examples below, based on lessons gained from developments in international economic interactions.

Synergise economic and social growth: As much as possible, the effort should be to bring about economic growth which results in social benefits, and implement social projects in such a way that they contribute to economic growth and reduce vulnerability. Positive system-wide changes, including through good governance, become crucial for such a two-way synergy.

Integration with global economy: Today we live in a multipolar economic world, with much greater inter-linkages than earlier. For example, the ratio of India’s merchandise trade to GDP has steadily increased from 17.7 percent in 1999 to 42.1 in 2012. Likewise, India has grown into a more important recipient as well as source of investment, skills and professionals. Thus, our well-being is significantly linked to the new international trade and investment regulations likely to emerge from ongoing plurilateral negotiations such as the trans-pacific partnership (TPP). Further, the likely immense increase in the global middle class (1 billion expected increase during 2010-20) will create a large impetus for global trade and investment, and impose further pressure on resources. India must develop systems which build on a better understanding of these significant developments in international markets.

Based on these three underlying concepts, we now discuss certain important international developments which provide us with insights that can help achieve major economic and social gains.

(a) Global value chains and supply chain connectivity: Three inter-related key changes have taken place especially in this century in global economic interactions: increasing reliance on global value chains or supply chains; greater understanding that services and goods are needed together in supply chains; and that these chains are strongly co-related with foreign direct investment. The significance of supply chains is shown for instance in the emphasis given to it by Asia-Pacific Economic Cooperation (APEC) leaders in their May 2014 meeting. (Other areas of emphasis by APEC include: next-generation trade and investment issues, services, environmental goods and services, intellectual property rights, industry dialogues, and regulatory cooperation.) It is interesting to note that facilitating supply chains would move the policy system towards good governance. Since global supply chains involve quality inputs provided by different suppliers/nations in the chain, it is crucial to facilitate economic transactions, build efficiency of operation, and enable transactions to take place in a timely manner.

If we compare global best practices with the performance in India, a major gap is the time taken for procedures and policies. Thus, while the insight regarding importance of timeliness in efficient supply chain transactions is crucial for commercial transactions, its significance goes beyond such interactions. Timelines need to be introduced in all governance decisions. This focus would also help introduce other features of good governance, namely, transparency, predictability and stability of the policy process, with a positive impact on both economic and social policy decisions.

Since supply chains exist in all production activities, it is important to identify some key areas of emphasis. These could include sectors whose trade is expected to grow most rapidly in the next decade, and those with a large scope for bringing economic and social change, e.g., tourism, industrial equipment, chemicals, transport equipment (excluding cars), ICT equipment, organic food, transport, renewable energy (especially off-grid power), and some emerging sectors such as biotechnology.

International experience suggests that managing supply chains requires a relevant mix of industrial policies. In this context, we should bear in mind some important lessons from international experience gained with industrial policy.

(b) Insights from industrial policy experience: We summarise below the main thrust of experience in this area, based on two exhaustive reviews of such policies:

“Industrial policy has to be coupled with a good deal of discipline and accountability, applied to both private actors and the state. … Desirable features of good incentive programs include standard setting, automatic sunset clauses, built-in program reviews, monitoring and establishment of clear benchmarks for success or failure, and periodic evaluation exercises.”3 (Emphasis added)

“The idea is to shift the attention from interventions that distort prices to interventions that deal directly with the coordination problems that keep productivity low in existing or raising sectors. Thus, instead of tariffs, export subsidies and tax-breaks for foreign corporations, we think of programs and grants to help particular clusters by increasing the supply of skilled workers, encouraging technology adoption, and improving regulation and infrastructure. While ‘hard’ industrial policy is easier to implement than ‘soft’’ industrial policy measures, tariffs and subsidies become entrenched and are more easily subject to manipulation by interest groups.”4 (Emphasis added)

Thus, it is important to avoid policies which increase operational costs or reduce efficiencies. The focus should be on policies which build systems, and generate learning and skills. In this background, we provide below several other examples of possible initiatives which will have wide-ranging positive effects for building dynamic comparative advantages and improving efficiency of operations across sectors and objectives.

(c) Government procurement, another important area where good governance disciplines are being developed with widespread impact: Government procurement is estimated to cover more than one-fourth of India’s GDP. Thus, in addition to infrastructure and cluster or skill development, government procurement is an important area where good governance can have a major positive effect on the nation’s efficiency. An important feature of introducing good governance principles in this area is that with increasing use, these principles would incrementally become part of overall government functioning. To improve the scope of good governance in this area, the content of the public procurement bill 2012 should be strengthened and given wider reach. These principles include transparency, non-arbitrary and fair procurement, use of pre-established objective criteria, timeliness combined with provision of reasonable time for response/submission of interest, adequate notice and process for seeking comments from stakeholders before formulating policy, and administrative/judicial review process.

(d) Hasten implementation of projects with large systemic effects: There are a number of projects with a large potential for system-wide effects. Important examples include: the eBiz project of the department of industrial policy and promotion to facilitate and introduce good governance in investment policy 5; making corporate social responsibility more relevant and coherent for meeting local needs; giving a fillip to the social enterprise sector, combined with training and better impact analysis; implementing widely the idea of mobile courts to address local issues (this was an idea of the 13th finance commission headed by Vijay Kelkar); building capital infrastructure through existing employment schemes; introducing support for industries and technologies that address waste management; and introducing an apprentice and vocational training system linked to schools especially for potential high school dropouts from age 12 or 14 years.

Likewise, it is important to emphasise specific projects which have a major impact on meeting basic needs and improving the quality of life. Two such areas are improving female literacy and providing clean drinking water. These would have social and economic benefits far wider than their immediate focus areas.

(e) Use new technologies for commercial, social and good politics purposes: New technologies are used abundantly for commercial and social projects. We feel that they can also be extended to improve political performance and accountability. At present, India has a number of important social schemes which are not properly implemented on the ground. The government could select any two or three important schemes to begin with, and allocate responsibilities for their monitoring/implementation to some specific political persons at different levels of operation, starting from the district level onwards. All such information could be electronically collected and centrally monitored. Those who are able to perform well could be rewarded. This process would start building a focus on proper implementation of government schemes, develop a modern and relevant information base for political performance to achieve social objectives, and infuse a sense of accountability from the grass root level onwards in politics. A positive result would potentially create grounds for greater commercial and economic activity. Thus, social progress can lay the base for better economic progress of the poor, and vice versa.

(f) Prepare for the changes in trade and investment regulations taking place in much of the world: Today, several new regulatory frameworks are emerging for trade and investment, primarily through bilateral or plurilateral negotiations among just a few economies. India is outside the framework of two major ones which will lead to much higher standards of access to markets than any of those which include India. These two are the trans-pacific partnership (TPP) and the trans-Atlantic trade and investment partnership (TTIP) negotiations. The point is not necessarily to participate in these negotiations, because that is at present beyond the state of India’s policy preparedness. Instead, we need to take account of the fact that when these ongoing negotiations are concluded, be it in two or five years, they will result in higher standards for products sold in the markets covered by them. Together, TPP and TTIP account for about 50 percent of global trade. For India to be able to sell our products there, or to link up with supply chains involving these economies, we will need to upgrade both our standards regimes and the capacity of our producers to meet those higher standards. We need to anticipate what is likely to happen through these mega-free trade agreements, and begin the preparation for meeting those standards now. Waiting for the results and then commencing preparations would be too late. Reports suggest that China has already started adjusting its own capacities and standards to enable its producers to meet the higher standards. Against this background, good development has been the recent focus given by India’s commerce secretary to establish conclaves between industry and government to improve the formulation and capacities for technical standards. There is a need for expanding and implementing such important initiatives.

(g) A lesson from China’s policy emphasis: Finally, we want to share the recent emphasis given by China in its reform policies. The thrust of this can be seen from a joint publication of China’s Development Research Centre of the State Council and the World Bank6, which significantly reflects China’s views. Six main points of emphasis are:

“First, implement structural reforms to strengthen the foundations for a market-based economy … Second, accelerate the pace of innovation and create an open innovation system … Third, seize the opportunity to ‘go green’ … Fourth, expand opportunities and promote social security for all … Fifth, strengthen the fiscal system … Sixth, seek mutually beneficial relations with the world by becoming a proactive stakeholder in the global economy, actively using multilateral institutions and frameworks, and shaping the global governance agenda.”

For India, we need to keep these objectives in mind and go beyond them to bring about a framework of effective governance combined with initiatives which have major system-wide positive effects. They will help change our society and contribute to the important focus given by Modi in his speech after being elected the leader of the BJP parliamentary party: dedication and commitment to uplifting the poor and bringing an era of hope and positive thinking.

1. Ashok Gulati, “Tame the killer inflation first”, Financial Express, May 19, 2014; Alok Sheel, “What it takes for an economic turnaround”, Indian Express, May 19, 2014.

2. Subir Gokarn, “Three national missions on priority for the Modi government”, Business Standard, May 19, 2014.

3. Salazar-Xirinachs, Nubler and Kozul-Wright, eds. (2014), Transforming Economies. Making Industrial Policy Work for Growth, Jobs and Development. UNCTAD and ILO, Geneva

4. Harrison and Rodriguez-Clair (2010), “From Hard to Soft Industrial Policies in Developing Countries”. Vox article, http://www.voxeu.org/article/hard-soft-industrial-policies-developing-countries

5. http://dipp.nic.in/English/Ebiz/Integrated_MMP-eBiz.pdf

6. The World Bank and Development Research Centre of the State Council, the People's Republic of China, 2013, “China 2030. Building A Modern, Harmonious and Creative Society”, pages xxi to xxiii. (Web link: http://www.worldbank.org/content/dam/Worldbank/document/China-2030-complete.pdf)

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