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God's country and curse

The country's natural bounty, it is said, has been offset by its politicians. But the failure is everyone's, including the media, says V. Anantha-Nageswaran, looking both at the fisc and the polity.

THE RESERVE Bank of India lowered the short-term interest rates for the second day in succession on Thursday as the rupee showed signs of stability. It is a welcome step. However, more needs to be done. To combat currency weakness with higher interest ra tes over a sustained period would harm economic activity. This could be particularly damaging when higher energy prices could significantly undermine India's growth prospects.

India is a big importer of oil. In the first four months of the current fiscal year, it bought oil $5.5 billions, nearly double compared to the same period a year ago. Sure, a weak rupee adds to the import bill. However, in the trade-off between that and lower economic activity, the central bank should be mindful more of the latter risk. Economic growth is a minimum pre-requisite for poverty reduction. The capital market too would suffer with tighter money and lower growth. The success of the privatisat ion agenda depends on the strength of the capital market.

Allowing the rupee to weaken instead of keeping the cost of borrowing high would, probably, be the lesser of the two evils, as it would help export efforts and offset higher imports. Rupee weakness is a symptom of the lack of investor interest in India. Higher interest rates are only a short-term palliative for this malaise. The real problem, as always, lies with our politicians and their interest groups.

Prof. Jeffrey Sachs, fresh from a four-week visit to South India, told his audience in Singapore last week that India needs infrastructure, which is the strong point of Singapore. He said that Singapore businessmen should exploit this opportunity. The re sponse was cool. The next day, the local business daily, Business Times reminded its readers that it would be frustrating to deal with Indian bureaucracy at all levels. In effect, it cautioned that the benefits of investment would not measure up to costs of dealing with India. A fair point.

Our politicians have consistently put their self-interest above nation's all along. This is rational individual behaviour. However, how and who makes them take into account national interests? In other words, how could we make their personal and national objectives converge? What are the incentive and penalty mechanisms that we could set up, to ensure that? Singapore rewards its civil servants with very high salaries so that there would be no incentive to accept extra rewards and favours.

What if the greed of politicians and bureaucrats knows no bounds? Apparently, bureaucrats with wealth of over Rs. 500 crores do exist in India. Solutions that appeal to higher values or moral fibre appear a trifle unworkable and even naive in the world o f high cynicism. Ensuring appropriate behaviour in national interest is more a managerial issue than a moral issue. Approaching it in that fashion is more likely to yield dividends.

Insights that corporations have drawn from research on agency theory could be applied in this context. For instance, the government could reward bureaucrats in administrative ministries for achieving deficit, manpower reduction targets. Even the privatis ation agenda could do with similar incentives for it to succeed.

Surely, this would not fully offset the loss of patronage, power and financial rewards from award of contracts that would follow from privatisation of public sector enterprises. However, it would put them under public scrutiny even more glaringly. There would be yardsticks to measure achievements, as only that would facilitate the administration of an incentive system. Hence, highlighting failures will be easier. Development of this idea would require a separate treatment, however. Otherwise, it is unre alistic to expect endogenous political reforms.

Therefore, it has to be an exogenous shock. Educational awareness of citizens would help. There again, the state machinery has to raise education standards. State machinery is in the hands of politicians. We are back to square one. Moreover, an educated public does not automatically mean a vigilant public. Media appears to be the lone hope.

But, in my opinion, the media has failed to bring the real underlying issues to the fore. Take the case of the hunger strike and the violent bandh that the Congress (I) and the Communist parties foisted on Hyderabad while opposing the hike in power tarif fs. The media dutifully covered the sensational aspects of the protest. However, what about the underlying issues? Did any one elaborate the issues behind the power tariff hike? Did they realise the damage that is being caused to the international image of Hyderabad by these irresponsible political parties?

What are the facts of the case? The editor of a business daily wrote in June itself about the issues involved in Mr. N. Chandrababu Naidu's power tariff hikes. They are as follows:

At the lowest slab for low-tension (non-agricultural, non-industrial) the hike in tariffs is from 80 paise to Rs. 1.35 -- a 70 per cent increase. At the highest slab, the increase is from Rs. 3.40 to Rs. 5.25. The State's Electricity Regulatory Co mmission had recommended an even higher peak tariff of Rs. 7.05 per unit. The AP Government has persisted with significant cross-subsidisation: agricultural consumers will now pay just 35 paise per unit.

Despite these increases and the assumed `efficiency gains' of Rs. 500 crores, the subsidy this year will be over Rs. 1,500 crores. Without the tariff increases, the subsidy would have had to be higher by Rs. 2,000 crores. Current and future taxpayers wil l have to pay for this.

While Mr. Naidu's predicament was juicy stuff for journalists, they chose to ignore the report of the Comptroller and Auditor General on the financial management of the West Bengal Government. The details are worthy of repetition:*The State government's fiscal deficit more than trebled in four years, to 1998-99, increasing by over Rs. 5,000 crores.

*Revenue expenditure nearly doubled in the four years, while the State's tax revenue grew at 8 per cent per annum.

*Capital expenditure actually declined. The level of State debt more than doubled. Arrears in tax collection more than quadrupled.

*The State Government invested Rs. 3,532 crores in various companies. Its return is less than Rs. 50 lakhs -- just over 1 per cent of the investment.

*The Government lost Rs. 9.45 crores in running 26 agricultural farms due to ``decline in farm produces and increase in establishment cost''.

*The Rs. 1,659 crores advanced to municipalities has not come back, having become overdue.

*Over Rs. 5,000 crores of `excess expenditure' in 1996-99 has not been explained, and therefore not regularised.

*In the State Public Works Department, physical verification of stores has not been done for 10 years.

The carefully-constructed image of incorruptible Communists lies in tatters. This Marxian waste and sleaze would put the social-justice corruption of Mr. Laloo Prasad Yadav to shame. As the editor points out, extrapolate these numbers and one could under write the economic disaster of the State in the next four years. This is a matter of national importance and in most other countries would remain front-page news for days and weeks. In India, it hardly merited a mention in any major newspaper.

In order not to be accused of bias, most newspapers also chose to mention only in passing the increase in the minimum support price (MSP) of paddy of Rs. 20 per quintal announced by the Centre for the 2000-01 kharif marketing season. In doing this, the G overnment ignored suggestions from the Ministry of Consumer Affairs, and the Expenditure Reform Commission (ERC) to freeze support prices. The increase is from Rs. 490 to Rs. 510 for the `common' grade and from Rs. 520 to Rs. 540 for Grade A. The story d oes not end here.

The Commission for Agricultural Costs and Prices (CACP) had, last year, recommended a price of Rs. 465 and Rs. 495 for the above varieties and suggested an additional incentive of Rs. 25 for States that charge a minimum agricultural electricity tariff of 50 paise per kWh of power consumed. Not surprisingly, the Government ignored the recommendation linking the MSP to the minimum agricultural power tariff and increased the MSP to Rs. 490 and Rs. 520. Now comes another Rs. 20 increase for the upcoming sea son.

In a report that capped a week of fiscal irresponsibility, a business daily said that the Finance Ministry had watered-down the Fiscal Responsibility Bill that was designed to ensure financial prudence both at the Centre and in the States. According to t his report, the proposed Fiscal Responsibility Act would not ensure any commitment on the part of the government to pare fiscal deficit over the years. The Act will not prescribe numerical targets nor would it contain provisions for the RBI to impose pen alties for slippage. When there are no targets, the question of penalties does not arise?

Credit Suisse First Boston (CSFB) claimed that its sources in India demurred. There would be quantitative targets for deficit reduction and that, in the case of slippage, automatic revenue generation measures would kick in. History suggests that one shou ld take the Business Standard seriously rather than the clarification issued by CSFB to its clients.

Further, even if the CSFB report were true, it shows that the government is comfortable drawing more productive resources away from the private sector in order not to disturb its profligate ways. In that sense, it is ironic that the Fiscal Responsibility Act would put more money in the hands of the government when private appropriation of public funds is the normal practice at all its levels.

It is useful to remember that, on the rare occasions the media articulated latent public outrage, the government has yielded. Both happened in the 1980s: public pressure forced the withdrawal of the Anti-Defamation Bill the Rajiv Gandhi government had wa nted to enact. Similarly, Indira Gandhi's unfair dismissal of an elected state government in Andhra Pradesh led by N. T. Rama Rao led to such an outcry that the government had to be reinstated. The media has to realise that the gravity of the fiscal prob lems that we face now is far worse than any of the above.

The joke that Gods chose to offset India's natural bounty with its politicians in deference to the wishes of western nations who were afraid that India would dominate them otherwise is actually the tragic truth. That is why, the message from the Kerala T ourism Development Board that Kerala is god's own country should be paraphrased to refer to our politicians as `God's own curse'.

(The author is the Regional Head of Investment Consulting (Asia-Pacific) in Credit Suisse. The views expressed here are personal. Response can be sent to nageswar@singnet.com.sg)