Bootstrapping revival of growth

28 February, 2013

In a resource constrained environment with rating agencies howling for fiscal discipline, how can the finance minister bootstrap a recovery on the cheap? Here’s a take on what ails the Indian economy, what its symptoms and consequences are and what should be done about it (ideally in the budget).

1) Inability to find a compromise amongst multiple stakeholders in an overcrowded country. All interest groups have different priorities and agendas but no government body is charged with the responsibility to find solutions and drive compromise in the larger good of the country. Organisation in government must be on the basis of solutions and outcomes sought and this outcome must be disclosed and measured. One problem in implementing and enforcing this is the government’s record of not meeting its commitments to those who compromise in a time bound efficacious manner. Budget allocations must be set aside to keep commitments, the details of which should be disclosed along with timelines and there should be a stated compounding delay for delay.

2) Infinite cost escalations because of delays by various government agencies. Government administration should be organised in groupings charged with finding solutions. It must be their responsibility to get approvals to facilitate solutions from other government agencies. All government agencies need to disclose on their website the daily cost of delay as measured by imputed capital cost on notional and actual capital at work. Investing in measurement, disclosure and derived accountability is the cheapest most cost effective way of getting the ICOR back to 4 from the 6.6 level it has slipped to recently.

3) Outlay instead of outcome driven government spending allowing gross wastage subject to only politically correct packaging. Outcome based budgeting will not only increase efficiency eliminate waste but also allow exploration of innovative ways of accomplishing the outcomes. It will also allow prioritisation of outcomes in a resource starved economy ideally in improving governance.

4) Suppressed investments because of ad hoc economic intervention cloaked in socialistic verbiage. Budget should allocate capital to train and certify every minister as well as bureaucrat as well as member of judiciary involved in economic policy. Specific focus of training should include concepts to clarify that a) Ad hoc mandated price controls stifle supply response and reinvestment in all except monopoly businesses and actually end of raising real market clearing prices to all except the specific beneficiaries of largess. Only debottlenecking to increase supply response lowers long term prices b) Ad hoc banning of exports leads to Indian industry being classified as unreliable and undependable in global supply chains causing huge long term losses, stifled supply chains, lost jobs, loss of cluster economies, loss of experience cure benefits. C) Subsidies to items like energy whose consumption increases with per capita income actually subsidises the rich at the cost of the poor. d) Handing out entitlements temporarily distorts consumption patterns and capital allocation but when done by monetising deficits actually lead to the poor being more impoverished not less. e) To improve standard of living of people the only sustainable way is to increase the wealth generating capacity of the economy. This is accomplished by making business cheaper to do, faster, creating relevant enabling infrastructure and talent pool, facilitating economies of scale etc to make Indian businesses globally competitive. This is impeded by loading productive organisations with social responsibilities not aligned to its activities. f) Administrative intervention in market clearing prices creates more problems and increases long term costs and the Indian experience validates this comprehensively. Investment should be made on creating a unit to measure loss and name and shame officials responsible for the same after undergoing the training.

5) Suppressed proclivity to invest in equity because of widespread capture of disproportionate economics by controlling shareholders. Investing in capacity to investigate and prosecute this abuse of fiduciary responsibility will open of opportunity to channel domestic savings into equity systematically reducing cost of capital in the economy.

6) Vast economic resources stuck in non viable economic entities. Investment in creating a bankruptcy law which focuses on quick redeployment of economic assets and retraining of human resources.

7) Economic velocity suppressed because of lock jam in contract enforcement. Invest in increasing capacity in the judicial system starting with abrogating court holidays, running shifts attracting talent by economic incentives as well as upgrading evidence act to make it relevant to the electronic era and giving teeth to the perjury laws.

8) Lack of credibility because of systematic gaming of government finances because of government accounts following cash instead of accrual accounting convention. Selling capital assets to fund revenue expenses ad hoc delays in payments due to fertiliser and energy companies, harassment of tax payers by tax claims, 90 % of which are ultimately overturned by courts pre-emption of financial resources by government borrowings, and not creating savings for meeting long term liabilities accruing to government employees are all consequences of this distortion. Investing in a transition team to move the government to accrual system of accounting would have amazing long term benefits.

9) Stifled investments because of government failure in collective planning. Invest in teams to deliver planned urban capacity, viable target fsi’s per year in urban centres by planned investments in urban public transport, waste recycling and disposal, security, crisis management capacity and plan for recharging ground water via precipitation.

10) Persisting disguised unemployment in farms. Partner with states to incentivise creation of manufacturing clusters in industries that need incremental capacity and in which India has competitive advantages. Possibly electronics, pharmaceuticals, automobiles, home products etc etc.

It’s time to dedicate a budget to the ordinary Indian who wants to work hard, have the opportunity to grow and responsibly take care of his/her economic needs and contribute to society without waiting for a handout or genuflecting to a government plenipotentiary.

(Rahul Bhasin is a managing partner at Baring Private Equity Partners.)

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