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Thursday, Sep 30, 2004

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Institutional mechanisms do matter

A. Vasudevan

The foreign experts issue can be solved by reconstituting the Planning Commission consultative groups with experts from the public sector or the Indian academia and other domestic activities. For insights into the market experiences of other countries and the policy implications of replicating them, in India, the Commission could seek the views of foreign experts informally. But it is best to avoid changing the existing institutional mechanisms unless there is political consensus, says A. Vas udevan.

INSTITUTIONS that include not only the rule of law and property rights but also organisations and formalised mechanisms need to be understood in their proper perspective in order to appreciate the criticality of public policy in countries that are ruled by multi-party governments. Public policy is the art of the possible. It can be made to deliver public good quickly and effectively by observing the established practices and procedures that go with institutions.

Any attempt to overtake such established norms would lead not so much to loss of credibility as to inappropriate use of the human resource embedded in public policy-makers. This would all the more be the case when economic objectives are diverse and prima facie appear conflicting, and when there exist widely different perspectives on the approach to achieve the objectives.

An instance where short-circuiting of established norms has received a beating relates to the inclusion of experts from multilateral institutions and foreign consultancy firms in consultative groups of the Planning Commission for working out the mid-term appraisal of the Tenth Five Year Plan. The first official justification was on the ground that outsiders would help bring about objectivity and frankness as well as diverse viewpoints.

The justification appeared reasonable since India has a rich record of having experts from multilateral institutions, foreign academics and foreign consultancy firms tendering advice in the past on macroeconomic as well as sectoral issues. The former Reserve Bank of India, Mr S Venkitaramanan, provided in these columns (Business Line, September 20) an excellent and a comprehensive account of such advice received in the past by the government, and public sector banks. The latest move of the Planning Commission, however, has become controversial when the Left groups opposed the inclusion of such experts (referred to for convenience as foreign experts in this article) in the formal, and structured institutional mechanism such as the consultative groups.

The Prime Minister seemed to have assured the Left that their sensitivities would be addressed. A remark by the Plan panel Deputy Chairman, Dr Montek Singh Ahluwalia, subsequently, however, turned the Commission's move into a controversial one, leading to a decision by six academics to abstain from the meetings of the consultative groups that have such `foreign' experts. In response to this decision, the experts from the multilateral institutions and a foreign consultancy firm have reportedly sent in their resignations from the consultative groups to the Deputy Chairman.

There are two issues here. First is it true that mid-term appraisals would be less objective if foreign experts were not included in the consultative groups? Those who are aware of contemporary Indian economic history would recall that mid-term appraisals could well be prepared internally without being self-congratulatory. For example, in 1963, the Commission prepared the mid-term appraisal of the Third Plan without any foreign expert input.

A peek into the pages of The Hindu of that year reveals that the document was hailed as frank, self-critical and objective. It is, of course, true that this had to do with the personality of Jawaharlal Nehru who wanted the Commission to be frank in its assessment.

The second issue is whether the work that consultative groups put in deal with hard numbers about the positioning of different projects and sectors vis--vis the Plan targets that ultimately provide signals about future policy initiatives or whether it is a purely of monitoring sort. Consultative groups are expected to both monitor the developments as well as evaluate the policy options to achieve the targets in the remaining period of the Plan. If the twin tasks were not assigned, there would be no need for the consultative groups.

There has also been speculation that the growth rate in the remainder of the Plan would not be as high as 8 per cent, and therefore the targets for different projects/sectors may well need to be modified. The modification or even the maintenance of the Plan targets would entail certain policy implications. That is why there was political sensitivity to the composition of the consultative groups.

Besides, one needs to appreciate the context in which the controversy has arisen. First, the Planning Commission is being revitalised to be able to provide policy inputs. This is supposed to bring the Commission back to the pristine glory that it had enjoyed in the 1950s. Second, the economic regime has changed from the centralised structure that existed before 1992 to one that brings about disciplined market orientation in the working of the economy. In the extant regime, the role and behaviour of the market participants become the crucial test of the effectiveness of the policy initiatives.

The participants would watch every initiative of the Government and take actions to neutralise any possible adverse effects of the expected initiatives. The Government, on its part, would have to anticipate such actions of the market and ensure that policy effectiveness does not deviate from the original expectations. This is a kind of what economists call the game-theoretic approach.

Given the above formulation, changing the established procedures relating to the formal institutional mechanisms would be viewed as providing to members of the consultative groups an opportunity to know not only the menu of policy options but also the pros and cons of each of the options. Any one familiar with the working of policy-making bodies would know that the ultimate decision-making would be judgmental but it would depend to no mean extent on how effective and marketing savvy the members are in their deliberations. One should not rule out networking of members in a manner that their interests are furthered. The Commission, therefore, has to make efforts to be seen as impartial and a `listening post'.

To be fair to the Deputy Chairman of the Commission, it should be recognised that our experience with the functioning of the markets is limited — perhaps to less than ten years. The Commission, therefore, needs to have a view of the details of the experiences of other market-oriented economies. Such details are not secured from consultations with the multilateral institutions from their regular or technical missions. Nor can they be obtained from the general literature of country experiences, notwithstanding the academics' claims on this matter.

It is even now possible to get out of the controversy by reconstituting consultative groups with persons either from the public sector or from both the public sector and Indian experts drawn from the Indian academia and other domestic activities.

Whether the choice is for the former or for the latter, the Commission could informally invite presentations from outside experts, both foreign and domestic, about the market experiences of countries and the policy implications if the foreign experiences were to be replicated in the domestic economy.

However, in the latter case, one has to make sure that experts from outside the public sector are of different political hues so that the neutrality of policy-making process is preserved. Members of the groups would deliberate over the presentations but their conclusions cannot be any more than advice. This is simply because only the executive arms of the Government take final decisions.

The lesson of this episode is clear: As hinted by Mr Venkitaramanan, one should get foreign expert advice only informally. It is best to avoid changing the existing institutional mechanisms unless there is political consensus on the subject.

(The author, a former Executive Director of the Reserve Bank of India, can be accessed on

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