Governance

Governance : Development Agenda for New India 2022

The Development Agenda for New India 2022 must insist that we move beyond the government’s fiscal deficit and begin estimating the country’s public sector deficit to get the complete picture of the deficit. Let the Government of India, in consultation with the State governments, set up what may be called the Fiscal Council, which can be authorised to decide how much public sector deficit the Indian economy can afford in a given year

niti-ayog-4th-meeting-team-tetTHE NITI Aayog was expected to introduce the draft development agenda for New India 2022 at the June 17 meeting of its Governing Council. But it didn’t as it reportedly felt that the draft development agenda should be sent to the States for getting their detailed inputs. My take on this is that India needs high GDP growth which is inclusive and is consistent with a sustainable balance of payments situation.

Inclusive growth requires empowerment of our people through, what former RBI governor Raghuram Rajan calls, “a broadly equitable distribution of economic capabilities.” In case we had done this, there would have been no need for initiatives such as Pradhan Mantri Jan Dhan Yojana.

Empowering our people along these lines will require a lot of effort and resources. India’s public finances are not in a shape that they can afford the expenditure involved. Our tax-GDP ratio is very low—about 18 per cent. It needs to go up by at least five percentage points. GST should help. In the meanwhile, privatisation of public enterprises can generate the requisite resources.

The NITI Aayog has articulated a sensible framework for privatising the public enterprises. But the government is not being able to make any progress on the privatisation front. Privatisation of Air India is an example—the Government of India didn’t receive any bid for it. Why? Privatisation of public enterprises like Air India does not necessarily mean that you will fetch a positive price. The government may like to mull over this.

What else can the Government of India and the State governments do to strengthen our public finances? Well, a lot can be done. The first thing that they need to do is to clear the mess in the country’s power sector and thereby ensure that it is no longer the kind of burden it is on the country’s public finances. The Government of India had launched a major initiative, called UDAY (Ujwal Discom Assurance Yojana), in November 2015 to improve the operational and financial efficiency of the State power distribution companies, with the outcomes to be measured through reduction of aggregate technical and commercial (AT&C) losses to 15 per cent in 2018-19 and reduction in the gap between the average cost of supply (ACS) and the average revenue realised (ARR) to zero by 2018-19.

The NITI Aayog has articulated a sensible framework for privatising the public enterprises. But the government is not being able to make any progress on the privatisation front. Privatisation of Air India is an example—the Government of India didn’t receive any bid for it

UDAY is 31 months old now. Has it made any difference? Will UDAY succeed in delivering the intended outcome of making India’s Discoms financially viable, so that they are no longer a burden on the country’s public finances and so that they don’t have to be bailed out again and again?

swachh-bharat-mission-in-ruAccording to Rajiv Kumar, Vice Chairman, NITI Aayog, UDAY has made a positive difference, in the sense that “State utilities have been freed from their debt burden.” The State utilities have been freed from 75 per cent of their debt burden because the State governments have taken over that debt burden. So, if one is talking about the debt burden on India’s public sector, is UDAY really a great deal?

There are certainly some positive signs, but one cannot, because of lack of corroborative evidence, definitely say that UDAY has made a positive difference. One will have to wait for some time before one can say something definite about UDAY’s impact. But there are three things that the Government of India Zcan do in the meanwhile. First, it must put in place a mechanism to have the data available on the UDAY website audited by an independent institution.

uday-logoSecond, the government must create an environment which will incentivise the State Electricity Regulatory Commissions to determine power tariffs which do not include any tax element and do not provide for any subsidies, with subsidies, if considered necessary, to be directly transferred by the concerned State Governments to the intended beneficiaries. Finally, given that India’s power sector is dominated by public entities, the government needs to mull over the wisdom underlying this domination.

What must be done to ensure that the government doesn’t have to deal with such a mess in the banking sector in future, it must recognise that it does not have the requisite capacity to manage certain things. It cannot manage Air India, it cannot manage the country’s archaeological monuments, and it cannot manage the PSBs

I believe there is a very strong case for launching an initiative for privatisation of Discoms. Look at Delhi. Things under BSES Rajdhani Power, BSES Yamuna Power and Tata Power are substantially better than those under Delhi Vidyut Board.

Of course, there are some political economy issues associated with privatisation of public enterprises. It’s not just politicians and policymakers who oppose privatisation of public enterprises, other people, including employees in the concerned administrative ministries/departments, also do so. But this is something that can be managed.

The second thing that needs to be done relates to the finances of the public sector banks (PSBs). They have piled up huge NPAs. Available data suggest that they add up to about `10 lakh crore. But there is reason to believe that they are higher. This is because the PSB managements have an interest in not disclosing the truth about their NPAs. The government which owns these banks also has an interest in not disclosing the truth.

The haircut involved in cleaning the PSBs’ NPAs may add up to about `6 lakh crore. How should this be financed and what must be done to ensure that the government doesn’t have to deal with such a mess in future?

air-india-aeroplaneThere were rumours that the government may finance the haircut by invoking the bail-in provision in the Financial Resolution and Deposit Insurance (FRDI) Bill (the Bill was expected to be tabled in the Parliament in the upcoming winter session but has since been withdrawn). In a recent discussion on the FRDI Bill that I participated in, some participants shared reports of people withdrawing their fixed deposits from their banks. Former RBI governor YV Reddy, in an address at Shivaji University at Kolhapur on June 9, is reported to have said that “the FRDI Bill has caused nationwide concern, and rightly so…the proposal has itself created a panic and some withdrawal of deposits has taken place. To an extent, some permanent damage has been done to the trust in safety of bank deposits.”

AS regards the issue of what must be done to ensure that the government doesn’t have to deal with such a mess in the banking sector in future, it must recognise that it does not have the requisite capacity to manage certain things. It cannot manage Air India, it cannot manage the country’s archaeological monuments, and it cannot manage the PSBs. The PSBs got into trouble partly because they had, post-Lehman Brothers’ collapse in 2008, as former RBI governor YV Reddy has put it, “been encouraged to lend to infrastructure, which was not the core competence of the banks, apart from creating asset and liability mismatch.”

swachh-bharat-abhiyan-campaAccording to a widely-held perception, the PSBs have also run into problems because of the culture of inflating project costs, with a part of the cushion so created used to finance elections. This clearly suggests what the government needs to do: It must develop a consensus among political parties on how elections should be financed, with the PSBs managed by people who are highly competent and, what’s more, who believe in ethics.

THE Development Agenda for New India 2022 must insist that we move beyond the government’s fiscal deficit and begin estimating the country’s public sector deficit (deficit of all public entities in the country), in order to get the complete picture of the deficit. Let the Government of India, in consultation with the State governments, set up what may be called the Fiscal Council. Given that the relationship between public sector deficit and the macro-economic situation is not linear, let the Fiscal Council decide how much public sector deficit the Indian economy can afford in a given year.

As regards the issue of GDP growth being consistent with a sustainable balance of payments situation, we need to manage things to ensure that the rupee is not under pressure. This will necessitate controlling inflation and managing the current account deficit

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This brings me to the issue of ensuring sensible management of public expenditures. The present government at the Centre keeps on announcing public interventions of all kinds, but are they being monitored and evaluated the way they should be? Take, for example, the Swachh Bharat Mission. Toilets are being built in record numbers. But, as a recent (June 14) article by Shaon Lahiri and Radhika Menon points out, the Mission “can be considered truly successful only if the construction of toilets leads to substantial improvements in people’s health. And that can happen only if toilets are used by everyone. Our metric for defining success needs to be long-term changes in health indicators such as reduced child mortality, malnutrition and stunting.”

As regards the issue of GDP growth being consistent with a sustainable balance of payments situation, we need to manage things to ensure that the rupee is not under pressure. This will necessitate controlling inflation and managing the current account deficit. For controlling inflation, we should avoid initiatives which kill the incentives for reducing costs, such as cost-plus pricing schemes. We should also mull over the opposition to the acquisition of Flipkart by Walmart, on the ground that Walmart squeezes suppliers in order to be able to sell goods at low prices to its customers.

As regards the management of the current account deficit, I believe the time has come to mull over the idea of reducing the current account deficit to zero and then aim to have a surplus. This will obviate the necessity of our incentivising capital inflows through FDI, FPI, NRI deposits, ECBs and so on, so that we may be able to comfortably finance our current account deficits. gfiles end logo

GOVERNANCE / Policy / Development / Anand P Gupta
Vol. 12 | ISSUE 6 | SEPT 2018
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