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Shyam Saran: A three-point agenda

The next government would do well to focus on governance reform

Shyam Saran 

Shyam Saran

General are round the corner and there is pervasive anticipation of political renewal. That the new political leadership must be bold and decisive is readily conceded - as is, too, the urgency of implementing economic and regulatory reforms and restoring faith in India's growth story. However, without tackling the serious issues that continue to plague India, any change will be largely atmospheric and, therefore, ephemeral. What are the indispensable elements of efficient

First, smart decision making requires comprehensive and accurate data, their careful analysis and evaluation, and setting outcomes against objectives. While reasonably detailed and credible may be available on most sectors of the Indian economy, the same is not true of most social sectors, of resource endowment and use, and of most areas of governmental activity. There is no regular survey of social attitudes and perceptions, nor of changes in gender relations or inter-community relations. Without this informational base, decision making becomes more a series of calculated hunches or mostly impressionistic assays into the unknown.

The first order of business for a government that means business is to get its facts right - in order to ensure the first-rate collection and collation of in every field that is considered critical to effective and ensure public scrutiny and evaluation. Most ministries and government agencies treat generated by them as confidential. Sometimes confidentiality is merely a cover for sloppy, or even non-existent, data. There is an aversion to allowing specialised private agencies or research think tanks to undertake data collection and analysis, as is done in several other countries. And any suggestion to open their activities to public scrutiny would be considered insurrectionary.

The various entitlement schemes of the government such as the Mahatma Gandhi National Rural Employment Guarantee scheme, the Bill, the Right to Education Act or the may all be well intentioned, but only detailed and objective surveys carried out by trained personnel using scientific methodologies would inform decision makers whether outcomes match objectives and what in the relevant scheme works and what does not. Efficient governance would dictate that before such schemes are adopted, there should be a comprehensive enough database to enable proper design of the scheme, one that sets out the programme's regulatory and administrative requirements. In India, the prevalent practice is to first adopt a scheme and then go about working out its institutional and regulatory requirements, usually through a hit-and-miss process. This entails enormous waste.

Second, policy decisions must not create arbitrage opportunities, where incomes outstrip from productive investment. The Indian economy will not get onto a high-growth path and expand industrial manufacturing as long as risks and returns remain acutely distorted. Controls on prices or on the scale of any economic activity for ostensible social or distributional objectives will inevitably create arbitrage opportunities, unless the state has both the will and the machinery to prevent such opportunities from being exploited for profits. The larger the scope of controls and the greater the financial fallout of their imposition, the less is the ability of the state to prevent the misdirected allocation of resources or the generation of unaccounted profits.

Therefore, as a rule of thumb, before imposing any control over price or economic activity, the state must carefully examine whether it has the capacity and the legal and regulatory instruments to ensure that the objectives of policy are likely be met. If the answer is no, then it is better to avoid the policy decision in the first place. It is widely recognised that more than 40 per cent of subsidised kerosene is used to adulterate more expensive fuels and that the poor are not the beneficiaries of this state largesse. Over the years, a powerful mafia has entrenched itself, feeding on the enormous, unaccounted and virtual risk-free profits generated by the illegal trade in kerosene. If this is the outcome - so utterly the reverse of what was originally the objective - should it not be discarded? The revenues freed up as a result could be better used to empower the poor through better education or health.

If businessmen find that they can make bigger profits - involving much less risk - through preferential pricing decisions or subsidised land allocation by governments, then there will be no incentive to undertake investment decisions that require risk taking and entrepreneurial spirit. Why risk investing in manufacturing when there is money to be made through speculative land transactions or trading in licences or permits obtained through government favour?

What is the logic of raising, year after year, the minimum support price for wheat and rice, benefiting a small class of surplus farmers and traders - since it only leads to mountains of rotting grain in a country notorious for malnourishment of its children? And then, to compound it all, paying out hefty subsidies for exporting our high-priced grain to distant markets? The Indian economy has tied itself into knots, thanks to ill-conceived and badly designed regulatory and control regimes and indiscriminate subsidy allocations. If the incoming political dispensation really wishes to clear the decks for India's return to economic dynamism, then cutting this Gordian knot must be high on its

Third, effective governance requires setting high standards and the pursuit of excellence. Instead, for the last several years, we have happily embraced a race to the bottom. The latest blow is the yet another raising of the entry age to the civil services to 30 and for reserved categories to 35. This will ensure that those joining the services will have less adaptability and even less ability to learn and innovate. While the scale of our drug and pharmaceutical industry has significantly expanded, the regulatory mechanism remains underfunded and lacking in the technical and professional capacities to ensure that safety standards are observed. It's the same story with the civil aviation sector. And innovation and rights are undermined because our office is simply not able to cope with the rapidly expanding and much more demanding workload. There is no reason why the capacities of these regulatory bodies in terms of funds and specialised personnel should not be linked to the size and scale of the industry and activity to be regulated, and to ensure that the highest standards are enforced. Failure to tackle these issues will condemn India to the lowest ranks in a fiercely competitive global marketplace.

There will be many demands on a new government, which will inevitably inherit a crowded Unless there is early focus on the critical challenges of governance, India's long-term prospects will remain sub-optimal.

The writer, a former foreign secretary, is chairman of the National Security Advisory Board and of RIS as well as a senior fellow at the Centre for Policy Research, New Delhi

First Published: Tue, March 11 2014. 21:50 IST