Let them float bonds

Small countries have all the advantages of being price-takers in trade; yet,in times of crisis,size matters.

Written by Yoginder K. Alagh | Published: March 28, 2009 10:38 pm

Small countries have all the advantages of being price-takers in trade; yet,in times of crisis,size matters. Rural and agricultural sectors are still largely undisturbed by the global crisis. Placement at IRMA was fine. Vijay Mahajan is still bullish on insurance policies for the rural poor and other NGOs building financial structures for rural areas are still doing well. It would be foolhardy to think that we can ride out the downturn on rural growth but the sector is holding out. Most of our big programmes for revival are rooted at the local level — airports and big construction projects only carry you so far.

The notion that local-level bodies,municipalities and panchayats cannot be economic agents and do not raise resources is incorrect. Their performance varies widely. While it is quite clear that more needs to be done,resource-raising local bodies are more than just “best-practice cases”. We must learn to measure success in resource-raising efforts,so that lessons can be learnt from the successful. This would enable those who do it to access non-sovereign guaranteed borrowing for their enormous investment needs — as an old committee under Rakesh Mohan had worked out. Once all this is taken seriously,look at efficiency in expenditure. Policy-making is not just trying to get non-existent FDI,but helping those who help themselves by structuring financial institutions and federal finance. This reform has to be at the centre of policies to fight the global recession.

That local bodies differ in performance and our policies towards them are random and unrelated became clear to me in the early ’90s,when I saw that in the backward district of Parbhani in western Maharashtra,we were spending only four hundred rupees per person,but in richer districts in western Maharashtra more than double that figure. Some districts could raise around a tenth of their total expenses from their own resources,which covered all their running expenses and left surpluses for investment; while others depended entirely on the state. Many were financing more than half their investment from borrowing. The pattern continues: in one prominent state a little more than a quarter of local body expenses came from their own resources towards the end of the last decade. The average income was around a lakh,but around a quarter of gram panchayats had income between one to two and a half lakhs,and a substantial number of so-called “large villages”,over a crore. Average expenditure was above three lakh,and around a quarter of the village panchayats had resources between one to two and a half lakh.

These numbers suggest our need to build the architecture of fiscal performance and consolidation. The better units have to become models for the average. National- and state-level agencies have to structure reform to use such experiences as examples for prudence- and rule-based policies. 

Investment finance for rural infrastructure is essential. Efforts to help create healthy balance sheets for local institutions will help them present a rating and a borrowing-risk attractive to financial institutions,which can then be approached for underwriting expansion. The moral of our story is that if the success stories are made models for incentivisation,local bodies would soon meet current expenditures and be in a position to productively borrow — if the Treasury conducts reform permitting it. But it is slow. For example,a policy for urban borrowing is still under preparation. It is easier to buy the bond of a foreign local body than an Indian one.

Financial reform for local bodies and SHGs (as well as newer financial product companies for rural areas) is urgent.

Local bodies will also have to make the rupee go far. Recent studies where panchayats are compared and relative effectiveness measured need attention. Financial restructuring needs institutions which build instruments and collateral for communities and small producers on whom the real — and not the derivative! — economy rests. This market is very robust in India today,as the experience of groups like Basix and IFMR shows. There are synergies between relaxing constraints in local-level spending and getting out of the crisis.

Relaxing the fiscal constraint at the spending level is not really a resources problem,but a restructuring and devolution problem. For state and local bodies to spend along desirable lines — rather than digging and filling up ditches or spending mechanically on Central schemes — best practices have to be replicated in resource-raising and/or free resources being made available as in the Gadgil-Mukherjee formula. Newer financial structures and institutions at state and local levels need organisational and financial market reform at higher levels — the creation of markets for local securities,community collateral and so on. These are reforms that are urgent,relatively straightforward,and have a national and global edge.

The writer,a former Union minister,is chairman,Institute of Rural Management,Anand


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