R Ravimohan: 'And' is better than 'or' in India

Hybrid developmental models are a must for effectively addressing our burgeoning growth and population.

Most economic, regulatory, and planning models traditionally require an "either/or" choice to be made. For instance, in planning there is either the centralised, or the market-based economy model. Regulations also similarly tend to essay a one-size-fits-all law that treats every situation as same and every player equally. In a world where smaller countries have become rich and prosperous, developed their markets, and improved the quality of life, many of these theories have found good empirical evidence and indeed effective results. Come populous countries like India and China, much of the theories flounder, as these mega countries I believe dance to different rules.

Quite simply, India is much too big and diverse a country to be ensconced in a simple, single model. It is fair to say that maybe a Switzerland, a few Singapores, an Indonesia, and a Sub-Saharan Africa coexist within India, not only in terms of per capita income and other demographic and economic statistics, but also in terms of behaviour of cohort groups and the disparate needs of people in different strata of society. The sheer number of segmentations that this market is amenable to clearly indicates that the traditional "either/or" model will not be effective. What we need in this country is clearly an "and" model.

Both the big size and the vast disparities in demographics make a strong case for a disaggregated approach to tackling any national level issues in India. Let us take the case of urban planning. From the current level of 250 million, the number of people living in cities will double by 2015. Already new urban conglomerates such as Gurgaon have come up with apparently little urban planning regulation. Many new towns in the form of SEZs are taking shape on the drawing board. Since many such initiatives are on, what governance model should be put in place to regulate urban development? Should a new regulation determine how these towns should be developed or should the development be left entirely to the market? Most western experience would argue that a controlled approach is likely to yield a more uniform and perhaps harmonised outcome, while a purely market-oriented approach risks haphazard growth. On the other hand, the controlled approach begs the question of the ability of the system to bear the burden of regulating the huge new township development and also the avoidable costs, delays, and overheads.

Instead of favouring one or the other, what if we created a model of parallel development with a graduated system of control commensurate with appropriate incentives. Under this system, towns could fall under different categories. In each category, a set of controls, costs and obligations will be cast on towns, with a symmetrical set of benefits also available in that category. For instance, for towns that are most centrally controlled and regulated, the state can provide a set of benefits, including assistance in obtaining land (with or without price concession), availability of public infrastructure of road network, waste disposal, sewerage, etc. At the other end of the spectrum, towns that grow with least control and obligations might have to do all of these at their own cost and responsibility. Of course some minimum criteria, in terms of public safety, interconnectivity and standards of town planning perspective, would have to be prescribed for all towns. If this scheme is nicely finessed, we might get the benefit of the required pace of growth of urban spaces, with controlled exposure to downside risk of uncontrolled development.

Urgent solutions in addition to urban space are needed in the areas of poverty alleviation, education, health, employment, water, power, sanitation, credit availability and counselling, women empowerment, even spreading of growth across the country, etc. It is difficult to see how these vast and complex problems can be solved by adopting unitary models of either central or public sector control. Only an inclusive and graded approach has the reach, delivery mechanism, and financial power to address the developmental issues of a large, populous, and diverse country like India.

One example of how a system like this might look is the regulatory model we have adopted in our country to oversee the development and operation of the financial system. There is a core group of highly regulated and supervised entities called the scheduled banks, which have severe entry and operating norms set down by the Reserve Bank of India (RBI). At the next level, the non-bank finance companies (NBFCs) have lighter regulations. The RBI uses third-party tools, such as credit ratings, to assist in supervising a large number of NBFCs. This nicely leverages the RBI's own resources, yet providing them adequate oversight. The residual NBFCs, nidhis, co-operative banks, chit funds and micro-finance organisations, and other saving routes are progressively stacked up in decreasing order of oversight and regulation, as the RBI's own wherewithal to supervise them gives way and the state's apparatus tends to take over at a different level of oversight. This governance structure has vastly spread the credit delivery mechanism much wider than what just the banking system would have been able to achieve, while maintaining relative order. Some imperfections in this existent system could be ironed out by more systematically streamlining the relative rights and obligations of each sub-group so that the more regulated entities, like banks, enjoy clear-cut operational advantages than others, while also allowing other forms of credit organisations to thrive.

Undoubtedly, any hybrid system of governance, regulation, and development as envisaged is riddled with risks. First, development must be with a human face, equity, fairness, and should be inclusive. In the case of private sector involvement in some of these basic building blocks of human living, such as city administration, health, education, etc, these issues take on even more importance. Therefore, clarity of intent, symmetric risk reward, and balancing obligation and privilege are key. Accountability and transparency in the public-private interface are other big concerns that need to be effectively addressed. With these checks and balances, hybrid developmental models are a must for effectively addressing our burgeoning growth and population. The diverse market will also allow enough room for experimentation, allowing our country to develop models that best suit our needs.

ravimohan@crisil.com