Trouble with reforms

Are these ‘real’ reforms that India needs? Reforming economy can wait, first reform policymaking


Alam Srinivas | January 7, 2013

The reactions from the foreign investors were dismissive. The day the government set up the cabinet committee on investment (CCI) to fast-track infrastructure projects of over Rs 1,000 crore, the research head in a foreign brokerage house commented that “Isn’t this a typical Indian solution to tackle any problem? Will this not add another bureaucratic organization to the existing ones?” Clearly, he did not see the CCI as part of the reforms process.

He was right too. There was already a CCI in place since 2009; only, it was dubbed the cabinet committee on infrastructure and headed by the PM. Like the new CCI, the older one also monitored “implementation of programmes and projects across infrastructure sectors”. The older CCI had substituted the committee on infrastructure, which was set up in 2004. So, effectively the two UPA regimes had only changed the nomenclatures of an existing bureaucracy.

In the recent past, several other government decisions were touted as great reforms measures. But a closer look indicated that they either added another layer of bureaucracy in the decision-making process, hiked costs for the business community, or created a new mess instead of the old one. Most of them did not help the masses; in fact, many increased the burden on people. This begs a straightforward question: are these ‘real’ reforms that India needs?
Let us get back to the formation of the new CCI. Finance minister P Chidambaram confidently said that it would provide a one-stop window to speed up all the clearances required for large projects. But how would it be different from the old CCI? More importantly, could it achieve this objective? An analysis by the ministry of statistics and programme implementation indicated that the new CCI may not be able to deliver the goods in most cases.

The June 2012 study found that over 45% of the 195 central projects of over Rs 1,000 crore had been delayed for several reasons. However, in majority of the cases, the reasons for the delays included “delay in land acquisitions, revision in scope of work, delay in supply of equipment and non-development of modern equipment, delay in award of works, lack of skilled manpower, fund constraint and forest and environment clearances, etc.”

As one can see, the CCI cannot address most of these issues. It can only intervene to hasten the clearances required for the environment ministry. But in all the other matters, the businessman has to deal with state and local authorities (for land acquisition), and hold discussions with his internal board, managers and suppliers (for funds and construction-related problems). Neither Chidambaram nor the CCI can help the businessman in any way.

So, while the motive behind the CCI may be laudable, it may be a non-starter.

Land acquisition bill
The same logic applies to the land acquisition bill that was recently cleared by the government. It too has been applauded as a critical reforms move. There is no doubt that the country needs such an act, only because the poor farmers have been forced to sell their land at cheap prices by both the state officials and businessmen. In some cases, the latter too have colluded with each other.

However, in its current form, the bill will only make land acquisition more expensive and cumbersome for the business community. It will lead to more delays in projects, rather than help save time and cut additional costs. The entrepreneur will now have to pay several times the market rate for the land, and also take consent from 80% of the owners. In practice, both these clauses will ultimately work against the interests of the businessmen.

A small miner from Odisha explained how the ‘consent’ clause rings in more non-transparency, rather than help poor farmers. “In mining, similar permissions have to be taken from the local population, which is done through mass meetings organized by the local bodies. However, this leads to political interference and blackmailing. Politicians, powerful NGOs and even journalists ask the businessman to pay up money, or threaten to disrupt the meetings through violent means. The entrepreneur either pays up or lives with regular delays.”

In the end, it is the vested interests who call the shots, and not the poor farmers, who have no recourse but to listen to the former. After all, the poor are scared of the violence being used against them and their families. Similar situations may arise with the new land acquisition bill, which may lead to an increase in the clout of powerful and politically-inclined interest groups.

Cash transfer
What is likely to become the most controversial of all the decisions taken by the government and dubbed as reforms is possibly the direct cash transfer initiative. To radically curb corruption and improve the delivery mechanism, it aims to transfer cash subsidies and money for the welfare schemes directly into the bank accounts of the people they are meant for. So, the middlemen and official interference are taken out of the entire equation.

But will this lead to better administration and efficiency? In the case of welfare schemes, like the Indira Awaas Yojana, where a specific amount is given to the poor to build houses, cash transfer may be an ideal mechanism. This is because even if the money takes time to reach the bank accounts of the individuals, it will not impact them much as they can spend the money as and when they get it. But imagine the scenario, when cash subsidies become the norm for food, fertilizers and fuel.

In the latter case, the government expects the poor families, which live below the poverty line, to cough up market prices for their purchases. So, they will need to pay '800 per LPG cylinder, instead of '400 in Delhi, and expect the difference to be transferred to their accounts. Now what will happen if the government, being a huge bureaucracy, delays in the transfers? The poor, who has little money to begin with, has to spend huge sums, which he cannot afford.

Several pilot projects on cash transfers across the country have faced problems related to the transfer of the money into lakhs of bank accounts. In states like Rajasthan, the poor families have not received any money for six to 12 months. Now how can one expect them to manage their daily lives in such instances? Obviously, they will reduce their consumption. Now, can this be called reforms? Or will it just create a new mess, which will impact the poor more than before.

Myopic measures
There are several other measures, which are being called reforms, but only show the inherent confusion among policymakers. Take the example of Chidambaram’s efforts to raise huge sums through disinvestment this fiscal to manage the fiscal deficit. Somehow, the FM hopes to raise Rs 30,000 crore, although many of the disinvestment plans have gone awry and have been delayed. So what does the finance ministry do to speed up the process?
It allowed Life Insurance Corporation (LIC) to increase its equity exposure in a single company to 30% of the share capital of the firm. Thus, LIC will now be able to buy more shares in a single company. Chidambaram hopes that LIC, which owns huge chunks of PSUs, will now aggressively participate in the disinvestment of the same state-owned units. In essence, the government will rob Peter to pay Paul, or ask the state-owned LIC to buy shares in other state-owned units merely to prop up the government revenues to reduce the fiscal deficit in 2012-13.

More importantly, the finance ministry took this decision despite the opposition from the insurance regulator, which felt that the move was ‘not prudent’ and it will expose LIC to wild fluctuations in the equity market and lead to potential losses in the future.

In 2008, when the global financial crisis hit banks across the world, Indian policymakers gloated about the fact that Indian banks and other financial institutions were not affected much compared to their global counterparts. The major reason was that the former’s exposure to toxic assets (mostly derivatives) “was marginal and their off balance-sheet activities were limited”. The finance ministry said that additional capital and other controls in India helped.

Now the same finance ministry, and Chidambaram, who was then also the finance minister, feels that Indian banks should venture out into futures trading. How can something which was restricted in 2008, and turned to be advantageous during a crisis, suddenly be allowed with claims that it will benefit the banks to hedge their loan exposures to the agriculture sector? Clearly, there is some form of a double-speak in this policy decision.

At the end of the day, reforms should make the system transparent, remove inherent biases against some or all stakeholders, and improve the delivery mechanism to help the masses. But if what are being touted as reforms today do neither, and make things more difficult, they can only be called as measures with myopic and short-term objectives. They are not the real reforms, and they are definitely not the reforms which are critical to change peoples’ lives.



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