The Hindu Business Line : Leverage management accounting for productivity

The macro policy framework, the structure of individual industries and micro management practices must be such as to compel individual units to increase productivity. In the efforts to do so, management accountants have an important role to play.

DR C. RANGARAJAN, CHAIRMAN, ECONOMIC ADVISORY COUNCIL TO THE PRIME MINISTER

Management accountants have an important role to play in improving the productivity of our manufacturing and service sectors. The management accountant analyses, prepares and presents information to aid the organisation's decision-making. The theme of this convention, "Accelerating Economic Growth — Unlocking Value by Management Accountants' is both timely and appropriate. A review of the economy in the recent period throws up several interesting insights. Economic growth has averaged 8.1 per cent per annum over the last three years. All forecasts point to an equally good performance in the current year. Our external payments situation continues to remain comfortable, foreign exchange reserves are robust, the investment climate is promising and our comparative advantage in the knowledge economy is fuelling the boom in the service sector. Social indicators have improved too. Life expectancy has gone up, as have indicators in health and education. Indeed, if we can sustain an average annual growth rate of 8 per cent, the child of today will see the per capita income of the country multiply more than four fold by the time she grows up to be 21.

Challenges Ahead

Yet there are many challenges on the way forward. We need to sustain the present rate of growth, if not accelerate it to higher levels. We need to translate growth into poverty reduction. In other words, we need to generate poverty reducing growth — i.e. growth to which the poor contribute and from which the poor benefit. We need to expand employment opportunities and improve productivity across all sectors of the economy. We need to narrow economic disparities across and within States without compromising on efficiency. The agenda for achieving growth and poverty reduction is formidable requiring as it does focus not only on identifying priority areas for action but also on effective and efficient implementation of the policy agenda. If we are to sustain the high rate of growth recently experienced, and in fact accelerate the growth rate to higher levels and translate that growth to broad-based poverty reduction, we must address some important challenges.

Stepping up agricultural growth: First, we need to step up the growth rate of the agriculture sector. The most critical problems are low yields and the inability of the farmers to exploit the advantages of the market. Clearly, we need to modernise and diversify our agriculture sector by improving both the forward and backward linkages. These will include better credit delivery, investment in irrigation and rural infrastructure, improved cropping pattern and farming techniques and development of food processing industry and cold chains across the entire distribution system. We also need to pay adequate attention to dry land farming. Agricultural growth is critical for expanding employment, generating broad-based growth and sustained poverty reduction.

Infrastructure development: The second critical constraint to growth is the infrastructure deficit, more particularly, in power. The infrastructure needs of the economy are large because of the demand generated by economic growth, rise in population, rapid urbanisation as well as the need for making up the accumulated backlog. Provision of infrastructure was once considered to be an exclusive responsibility of the government. Advances in technology which have made unbundling possible; also innovative financial products have changed the characteristics of infrastructure provision making both private sector participation as well as competition possible.

In order to mobilise the necessary resources and build quality infrastructure, we need to put in place appropriate legal, regulatory and administrative frameworks to attract domestic and foreign investment. We also need to address issues of pricing and cost recovery, with subsidies where required, being made transparent and explicit. This in turn will require the establishment of credible regulation for ensuring fair competition across public and private operators, and for protecting consumer interest, public safety and environmental integrity.

Fiscal consolidation: The third critical challenge on the way forward is fiscal consolidation, which is a necessary pre-requisite for sustained growth. The negative consequences of excessive fiscal deficits are standard fare of textbook economics as also staple of a current debate in our country. The arguments against excessive fiscal deficits are well known. They disempower the government's fiscal stance by pre-empting the resources available for physical and social infrastructure, thereby eroding the productivity of public expenditure. In an economy with capital controls where investible savings are limited, fiscal deficits crowd out private investments. Depending on how they are financed, fiscal deficits can have an adverse impact on the economy through inflation, interest rate and exchange rate.

Finally and importantly, fiscal deficits are particularly harmful if borrowing is used to finance current expenditure as happens in the case of revenue deficits.

In India, we have been long conscious of the need for fiscal adjustment both at the Centre and the States. After much debate, the Centre has enacted the Fiscal Responsibility and Budget Management (FRBM) Act, taking upon itself the obligation, by 2008-09, of reducing fiscal deficit to 3 per cent of GDP and completely eliminating the revenue deficit. Similarly, in response to the incentives provided by the Twelfth Finance Commission, several States too have enacted their respective fiscal responsibility legislations.

More recently, an argument that has been heard is that the resources required for development may be in excess of the resources that can be made available within the fiscal responsibility restrictions. There is substance in this argument. Nevertheless, the solution does not lie in throwing away hard won gains by abandoning the FRBMs. The solution lies in harmonising the fiscal discipline imposed by the FRBMs with the resources needed for development expenditure. What this harmonisation requires is that both the central and State governments ruthlessly prune their unproductive expenditures, rationalise the plethora of schemes and programmes, and after that identify whether any segment or element of the FRBM targets needs to be re-phased to be consistent with the resource requirements for productive expenditures. Frequent tamperings with FRBM targets will erode credibility.

Building social infrastructure: The fourth important challenge to growth is investment in social infrastructure — particularly in the twin merit goods of primary education and basic health. There are any number of studies that establish a positive correlation between low levels of poverty and improved indicators of health and education. We need to spend more on education and health. But we also need to spend more efficiently because better education and health are a function not just of the quantum of expenditure but also of the quality of that expenditure.

Managing globalisation: Globalisation has been a contentious issue, and a topic of often-acrimonious debate as also high profile protests. Our economies are no longer defined by political boundaries. Globalisation, defined as the free movement of goods, services, ideas and people across borders, is here to stay. We cannot wish away globalisation, nor can we shut our doors and remain indifferent. The only option is to manage globalisation in such a way as to maximise the benefits and minimise the costs. More than many other developing countries, India is in a position to wrest significant gains from globalisation. Even as we make efforts to modify the international trading arrangements to take care of the special needs of developing countries, we must identify and strengthen our dynamic comparative advantages.

Good governance: Identifying challenges and drawing up plans to address them is the relatively easy part. What is infinitely more difficult is the translation of those policies into action. That brings me to the sixth and final challenge that we need to tackle — the issue of governance.

What is good governance? As per textbook definition, good governance is the manner in which the authority of the state is exercised in the management of a country's economic and social resources for maximising welfare. It implies an administration that is efficient, effective, clean, corruption-free and freely accessible to the people. In the ultimate analysis, it is the quality of governance that separates success and failure in economic development. Across countries, application of the same policies in roughly similar contexts has produced dramatically different results. In our own country, we have seen vast differences across States in development outcomes from out of the same mix of development policies. These differences across countries as well as across regions within countries, even as they adopt similar policy packages, arise because of differences in governance. Indeed research shows that per capita incomes and the quality of governance are strongly correlated indicating a virtuous circle in which good governance results in economic development.

Effective resource management is the key to accelerated economic growth. As a nation, we must be able to get more out of the resources that are being invested. This can come only as a consequence of improved productivity. The general impression that the natural resources of our country are large, is not true. For example, India has three and half times the population of the US, whereas, the latter has three times the land area of India. China's population is approximately 1.3 times that of India. But China's land area is nearly 3.1 times that of India. Thus the population density (people per square kilometre) in India was 313, whereas in China and the US it was 129 and 29 respectively. From the point of view of the long-term sustainability of higher growth, the need for greater efficiency in the use of natural resources of land, water, minerals etc., has become urgent. Improving productivity of course is a function of many factors. The macro policy framework, the structure of individual industries and micro management practices must be such as to compel individual units to increase productivity. Improved managerial practices is one important element in this strategy. In the efforts to enhance the productivity of our system, management accountants have an important role to play.

(Edited excerpts from the inaugural speech delivered at the 48th National Cost Convention, 2007, in Hyderabad on January 18)