Criticism is good. It keeps people on their toes. But too often, we end up measuring what can be measured easily instead of what should be measured. The government’s role in an economy is to define its organisation as well as efficiently discharge the duties assigned to it. While all performance evaluations of the Indian government focus on flashy reforms, its daily functioning, being harder to measure, gets ignored.
Let’s start with the organisation of the economy. The Central government’s role in it has shrunk dramatically since 1991. Relative to the size of the economy, Central expenditure is near the lowest in three decades. Its extractive presence in economic transactions has gone down — rates of excise and customs are only a fraction of those in 1992 and income tax rates are also lower. Further, the number of large sectors that it dominates is down from 18 in 1991 to five now — railways, coal mining, banking, defence production and nuclear energy.
Of these, only the first three are critical for growth and each has powerful vested interests that prefer the status quo. Taking them on requires strong political will and a high level of preparedness for brinkmanship. For example, how do you reform coal mining when a large number of your power plants are running with less than four days worth of coal inventory? Even a flash strike would cripple India, let alone a prolonged confrontation.
At this point in the debate, critics of the government point to the strong electoral verdict: if it cannot summon the political will now, then when? But such simplistic arguments ignore the enormity of the problems and the consequences of brinkmanship gone wrong.
I recall the CEO of a fast-growing Indian company confessing to me in early 2009 that “at the time of the 2008 financial crisis, as loans dried up and global trade was screeching to a halt, 70 per cent of my senior management was less than one year into the company. I didn’t know who could perform under pressure and who would wilt.” Without understanding where the strengths and weaknesses in the team are, the new captain of a ship cannot start risky manoeuvres.
Just to put size in perspective, a company with tens of thousands of people is considered large by global standards, and three to five years for a turnaround is par for the course. This is when an employee’s career progression and compensation are linked to her performance. The Indian government employs more than three million people, who are mostly not incentivised to work hard, even if some do out of a sense of duty.
To be fair to the critics, the government hasn’t given any indication of big reforms in coal, banking or railways yet. But it is too early to conclude that it lacks intent. Another frequent criticism of the government is that subsidies and fiscal deficits are too high. These are problems but not really showstoppers: fiscal deficit ratios have rarely been lower than they are now and the economy has fared well enough. With general government expenditure on salaries as a percentage of GDP much lower than in most major economies (India: 6 per cent, US: 10 per cent, UK: 11 per cent, France: 13 per cent), it is hard for it to shrink further.
The burning problem isn’t that the government is too large but that it doesn’t work well.
That brings us to the second part of its role — making more than three million employees discharge their duties effectively. This is hard to measure, but is far more important than flashy reforms, particularly given the deterioration on this front in the recent past.
Take the Jan Dhan Yojana, for example. Few oppose doubling the number of Indian households with bank accounts. But banks were unwilling to reach out to the unbanked without people wanting to transact. And the unbanked could not transact because there were no banks near them. This deadlock continued till the government chose to launch this scheme and break the vicious cycle. It will take two years or more to assess whether financial inclusion improves. But at least an attempt has been made. Not a new thought, but good execution.
By most accounts, bureaucratic appointments are being made on merit and lobbying for positions is being discouraged. Files are moving, clearances are flowing and with inter-ministerial debates more or less devoid of personal ego clashes for now, the government is working as one organisation. Within two weeks of the weak start to the monsoon, administrators of the districts most at risk met in Delhi to plan for drought. Running through the “to-do list” of the petroleum ministry published in an industry journal, I encountered “Investigate how the Myanmar-China gas pipeline was allowed to happen when India was a stakeholder in the gas fields?” National interest seems to be back in focus again.
Many small steps have been taken — news of which has been relegated to the inside pages of papers — that can, over time, add up. For example, putting the process for getting environmental and forest clearance online significantly improves transparency. Permitting self-attestation of documents can save tens of millions of people several hours — and money. The process to repeal outdated laws, if followed through, would obviate misuse against innocent citizens. Till the proposal to give bail to undertrials who have already served half the maximum sentence they could get was announced, I doubt many knew that two-thirds of India’s incarcerated were undertrials.
So, to say that the government isn’t working is like blaming a batsman for not hitting sixes when singles are nicely moving the score along. At this early stage, a high-stakes move that goes wrong could destroy the government’s credibility — like getting out stumped going for a six. As competitive money printing in developed markets floods global markets with liquidity, even the “foreign investor”, whose attention emerging markets seem to crave, doesn’t have too many options.
But the other extreme of this cautious approach is “tough reforms will be taken up in the first year of the government’s second term”. Such a strategy could easily boomerang, as voters hate being taken for granted. Even on the more strategic changes, the government must stay true to its promises and take advantage of opportunities that arise serendipitously. For example, the recent Supreme Court decision on coal blocks might provide the Centre the opportunity to push through substantial reforms in mining. This, together with PSU bank recapitalisation, could demonstrate the resolve of the government to mend things for good, not just devise patchwork solutions.
The writer is the India Equity Strategist for Credit Suisse