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Equal and excellent?

Why the proposed reservation in government procurement is misguided

Written by Manish Sabharwal | Published: October 20, 2011 3:33:27 am

The Central government has proposed that 4 per cent of its annual purchases be reserved for units run by Dalits or tribals (SC/ST). This reservation — estimated at Rs 25,000 crore — will “boost entrepreneurship among the disadvantaged by giving them assured state clientèle without the fear of competition from entrenched businessmen”. While reservations are a legitimate choice for society,we must not pretend there are no effective policy alternatives. In fact,a broader fix of the entrepreneurship ecosystem will do a better job of helping the true “economically disadvantaged”.

The headline of this article is drawn from a brilliant book called Excellence written in 1961 by educationist John Gardner. He raised difficult questions like,how equal do we want to be? How equal can we be? What difficulties does a democracy encounter in pursuing excellence? Can we be equal and excellent? He felt answering these questions was important because if a society cannot rouse itself to the pursuit of excellence,the consequences will be felt in everything that it undertakes. He observed that most societies of which we have any historical records were beautifully organised to keep good men and women down. In such societies an individual’s status was not determined by gifts or capacities but by membership in a family,caste or class. Such membership determined the individual’s rights,privileges,prestige,power and status in society. Status was not earned,and birth determined whom you bowed to,who bowed to you,the weight of your voice in the community,and the kinds of suitors who sought your son or daughter’s hand. While religious reform and democracy were important,he believed that it was the entrepreneurship of the Industrial Revolution that started the change.

India’s experience is similar; the socialist policies adopted after Independence amplified hereditary privilege as size and political access rather than wits,courage or intelligence determined success. Since 1991,most entrepreneurship and energy has come from the children of liberalisation — not children of old money,royals or politicians. Of course,India is not yet a meritocracy and reservations seem an attractive option to sabotage the “sexually transmitted CEOship”. But is the only alternative replacing the tyranny of hereditary privilege with reservations for the traditionally disadvantaged? As a society,we must explore other ways to right historical wrongs that do not diminish the achievement of excellence but do diminish the advantage of inherited privilege.

Reservation in government procurement will breed corruption,however structured. Who decides which firm is an SC/ST supplier? Does it need to be SC/ST owned or managed? All things being equal,will the SC/ST firm receive an advantage in price (doesn’t have to be L1 in tender) or quality (doesn’t have to meet specifications)? Will the preferences be given on the insane first-come-first-serve used in telecom? Will shortlisted SC/ST firm owners be means tested for sifting out the “creamy layer”? This programme will not only require a new battalion of bureaucrats to operate but it will breed corruption (under the table auctioning) and fraud (dormant SC/ST partners).

Any entrepreneur can create two kinds of companies — a baby or a dwarf. The difference between the two is not food (money) but DNA (team,strategy,ambition,culture,etc). While all job creation is welcome,desirable companies from a public policy perspective are those that grow in employment,profits and taxes (babies). But why is an overwhelming proportion of companies in India dwarfs? The cultural argument is weak because Indians in America are 0.1 per cent of our population but produce an equivalent of 10 per cent of our national income. A more plausible explanation is that India’s hostile habitat for entrepreneurship is biased in favour of big companies because entrepreneurs have to substitute for a flailing state by generating their own power,digging for their own water,providing transport and manufacturing their own employees. This baby vs dwarf is captured nicely by Professor Amar Bhide in “What holds back Bangalore businesses”.

While Bangalore may not be representative of India,but even data from this fertile soil suggests that Bangalore companies grew slower,used more capital and created fewer jobs than comparable US companies. Our environment breeds low-productivity companies that do not create and exploit economies of scale and scope. Fixing this hostile entrepreneurship ecosystem to create decent jobs is the only solution to the broader political desire for equality. Mayawati’s recent proposal to include Muslims and the economically disadvantaged in reservations is an interesting attempt to create a “bigger tent”. But policy must be careful to not target equality of outcomes — this can be achieved by taxing the rich and throwing the money in the ocean but won’t help the poor — but should focus on equality of opportunity. This needs shifting the focus of reforms from the sins of commission to the sins of omission (infrastructure,skills,education,labour laws,employment exchanges,apprenticeships,regulatory cholesterol,contract enforcement,financial markets,etc).

Many people change their views about the fairness and desirability of SC/ST reservations as they grow older because life teaches us about the advantages of choosing our parents wisely,the value of timing,and the importance of luck. In retrospect,I certainly realise that I was born on the tenth floor. But as Gardner pointed out,a society can deal with inequality by protecting the slow runners,curbing the swift runners or let individual differences determine the result. As somebody with a ringside seat for the tragedy we call our labour markets,I fully recognise the need for helping the slow and traditionally disadvantaged with a more inclusive entrepreneurship,education,employment and employability regime. But let’s not curb the swift or sabotage merit by compromising the quality and independence of our public sector procurement. It will take hard work but India can be equal and excellent too.

The author is Chairman,Teamlease Services,

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