Modi's second innings: The one thing

From the afternoon of May 23, when it was clear that Narendra Modi was leading the Bharatiya Janata Party-led coalition to an epic electoral victory, email boxes of journalists and editors have been inundated with emails from industry associations, businessmen and financial experts about the many urgent issues that he should tackle. The list is long. India has accumulated many intractable problems over many decades. Now that the BJP has secured an overwhelming popular mandate, everyone who has voted the party to power and also many economic commentators are broadcasting their own wish list for the PM to fulfil.

 

Such lists are gratuitous. Mr Modi probably does not read them; he does not need anyone’s advice, least of all those of columnists like me. Whether good or bad, right or wrong, he makes his own decisions and sticks to them. But while his political victories have been absolute and complete, his economic wins have been debatable, especially since the government has consistently massaged data to make its performance look better. This may be temporarily forgotten, given the current climate of wild euphoria among BJP party members and the blind optimism of the average citizen.

 

What can a top political performer like Mr Modi do to make his regime an extraordinary economic success as well? For one answer turn to Gary W Keller and Jay Papasan’s bestseller The One Thing: The Surprisingly Simple Truth Behind Extraordinary Results. They advise asking this simple question: “What’s the ONE Thing you can do such that by doing it everything else would be easier or unnecessary?” If India has to succeed in its main objective of pulling millions of people out of poverty rapidly, it cannot waste something that we are perennially short of, which is capital. The one thing India needs is efficient allocation of capital, the lifeblood of economy.

 

Broadly, there are three types of entities that use capital in India. One, the central and state governments; two, government-owned commercial organisations; and three, the private sector. No matter who uses the capital, it is beyond debate that capital should be used as productively as possible. Now anyone with a rudimentary understanding of how capital is spent in India would tell you that the first entity is a massive waster of capital.

 

Some 33 years ago, Rajiv Gandhi was seized of this issue and tried to introduce what is called zero-based budgeting (ZBB) in 1986. Under ZBB all budgeting starts from a “zero base” every year, that is, expenses must be justified afresh each year, no matter what was spent in the year before. While traditional budgeting blindly calls for incremental increases over the previous year and tend to perpetuate waste, ZBB puts pressure on spenders to justify expenses each time, and reduce costs. Here is a small example of how ZBB can work. Under the MPLADS (Member of Parliament Local Area Development Scheme), billions of rupees are allotted to MPs each year. Only a fraction of this is spent by MPs and they are allowed to carry it forward. In ZBB, this money will not be allotted to those who don’t spend it, allowing the money to be spent where it is needed more or used more effectively. Much bigger gains will accrue when hundreds of billions will have to be justified across the departments. We may also discover useless expenses, ghost employees and what not.

 

The second-biggest wasters of capital, of course, are failing public sector enterprises (PSEs). We don’t know what Mr Modi intends to do here because under him the PSEs are duplicating a variety of work that private sector players are doing better, even in fast-developing areas like financial or digital infrastructure. That apart, there is hardly any effort made to stop the haemorrhage by PSEs in hotels, airline, telephones, steel, fertiliser, engineering, even photo films, apart from the waste at hundreds of state-level PSEs across states (many now BJP-ruled). Both the government and PSEs, as capital allocators, do not have any incentive to reduce waste of money. Put it differently, they have no skin in the game. They need to be pulled out of the game because they are sucking up billions of rupees, which should be available to consumers and businesses.

 

By contrast, the third kind of capital allocators, those in the private sector, are “supposed to have” skin in the game, whether it is the giant Tatas or a small manufacturer. I write “supposed to have” because it does not always happen. If they don’t have skin in the game, it is because the state or its various arms (netas, babus and public sector bankers) allow them to behave as irresponsibly as the PSEs (best exemplified as crony capitalism). If the private sector is forced the freedom to compete fairly they would be far better allocators of capital than the first two.

 

If a government makes effective capital allocation priority, it would mean a smaller state, lower taxes, higher disposable income, and cheaper goods and services. The state can then allocate its capital to areas that facilitate this structural shift such as improved supervision. After the victory celebration ends, will the BJP convert its political mandate into a mandate to effect structural change through this “one thing” which will make so much of other efforts unnecessary?

The writer is the editor of www.moneylife.in

 

Twitter: @Moneylifers