Opinion

The different routes to reform

A Srinivas | Updated on November 30, 2014

Making Growth Happen in India: A Road Map for Policy Success, V Kumaraswamy, Sage India, Price: ₹650

V Kumaraswamy graduated from IIM Ahmedabad in the 1980s. He has been working with the industry since the mid-1980s. He has been writing on reforms and economic policies in publications such as Business Line and Business Standard. This is his second book.

A refreshing and uncluttered take on the reform question in India



Here’s a surprisingly insightful book on a subject — India’s reforms experience — where economists fall over each other to produce books, only to be noticed by the high and mighty and picked for plum jobs and conferences.

Kumaraswamy’s work is unaffected; if his prescriptions are critical of the pro-welfare camp (represented by economists such as Amartya Sen, Jean Dreze), they will certainly not go down well with a section of the reforms brigade either (Surjit Bhalla, Bibek Debroy, Arvind Panagariya and other ‘minimum government’ enthusiasts).

Kumaraswamy brings to bear his rural experience as a qualified executive with Corporate India. In doing so, he comes across as an uncluttered micro-economist with an innate knowledge of business behaviour. The book belongs to a ‘centrist’ genre that favours the reforms process but acknowledges its serious drawbacks.

The title is misleading as the book is more about making jobs the primary goal of development. The author is not comfortable with the idea of growth as an end in itself. A focus on ensuring that everyone produces something worthwhile for a living, without depending on schemes such as MGNREGA of which he is very critical, runs through the book. This, he believes, will create a wage-goods based economy, rather than one based on goods produced for a few, by a few.

Out of the box views

Unlike Debroy, Bhalla et al, Kumaraswamy’s disapproval of the jobs scheme does not extend to everything the government does. While agreeing with the ‘Washington consensus’ school of Indian economists that subsidies are misdirected at the well to do, Kumaraswamy points out that that the government should expand its economic activity into new areas.

To do this, he says, the government should not just slash subsidies but raise more revenue through higher tax rates, rather than go entirely the GST way — not sounding at all like the typical ‘ardent reformer’! On many other policy issues of the day, he bucks the established view. Let’s take a few examples.

PDS management: “It is possible to get private players in consumer products distribution (such as ITC, EID and Levers)…The government can invite competitive bids for each state or region…with the players bidding the least amount of support for a given level of procurement prices and final PDS prices being awarded the contract.” The auction system should allow five to six players per region, as in telecom, he says. The disbursement of the bid amount can be about half at the procurement stage and the rest based on final sale, Kumaraswamy argues rather compellingly. With PDS leakages being close to half, this option may be tried out where the State machinery is weak.

Farm productivity: In an interesting insight that should sound like music to anti-GM groups, Kumaraswamy says that the focus on agricultural productivity will hurt the poor, besides being less than strictly necessary. Per capita availability of foodgrains and pulses conforms to nutritional norms; the question, then, is one of distribution, he argues. Productivity gains can hurt producers through a fall in prices in closed markets such as India. A 15 per cent increase in productivity can release 20 per cent of the land and 10-11 per cent of the population in agriculture. With no alternative skills, we would be inviting malnutrition, hunger and joblessness.

Divestment: The state should divest in profit-making PSUs rather than loss-making ones and plough the proceeds into social and economic goods such as education, medical diagnostics, skills development and hygiene — till they leave a critical level, and exit. “This is what a typical venture capitalist or angel investor would do… This approach continuously recycles government investments and enables… (the) private sector to specialise in mature sectors... It is quite possible that the Government exits from one sector in one geographical area and invests in the same sector in another backward area.”

One cannot help wondering why Thatcherism in the UK, of which he makes just a fleeting mention, has not been examined in detail.

Financial inclusion: Banks should be free to charge more than 30 per cent rates in remote pockets of rural India where the moneylender’s writ runs at much higher rates. Banks can also provide credit guarantees to moneylenders rather than treat them as adversaries, so that the latter’s lending rates fall.

Delivery of services: “There is an essential difficulty in delivering services to people located in uneconomical numbers over a vast area and little buying power. One may argue that…costs in the distribution of goods are not applicable to services. (But) there are other hurdles and peculiarities – like the consumer companies marketing ₹ 1 or ₹ 2 sachets for soaps and shampoos…But we cannot create sachet packets for many of the government services… One cannot encapsulate primary education in 2 weeks; one cannot construct toilets at 1/24th the cost just because it is effectively used only for one hour in a day.” The upshot: there is no escaping high delivery costs.

Loose ends

Kumaraswamy’s belief that education lacks takers in rural India, where the opportunity cost is high owing to the cost of finance, does not seem true for many regions. It is not uncommon to find small farmers sending their children to the nearest ‘private’ school and pulling them out of a government one. The problem in education lies elsewhere: in the quality of instruction which is only churning out an army of unskilled secondary school drop-outs, as the Pratham surveys have pointed out. The author’s concern about skills deficit rightly leads him to question the exclusive focus on the three ‘Rs’ as opposed to vocational education. But the pursuit of education in search of a white-collar job is driven both by caste and its opposite, the loosening of caste barriers.

Indeed, it is surprising that a book devoted to delivery systems does not throw any light on the positive impact of lower castes’ representation in government. This is visible in the southern states. Kumaraswamy’s view that the MGNREGA is killing work ethic and driving up wage costs is questionable. As a large farmer in Chittoor district once explained, labour is a vulnerable, visible target while the other issues (such as input costs, electricity and prices) are beyond his control. The assertion of lower caste farm labour should also be seen in political terms, rather than the conscious preference for MGNREGA-induced leisure over farm work.

Pranab Bardhan says in an essay in Indian economy: Problems and Prospects (edited by Bimal Jalan, revised edition 2004): “It is a paradox of liberalism that one often needs a strong state…to impose on the firms the discipline of dynamic market competition, resisting…forces of clientelistic pressure.”

Reforms have failed to liberate the state from such interests, while it has succumbed to newer ones in the wake of globalisation. Making the transition – and directing the economy towards wage-goods production — is a political question, beyond the scope of the book.

Published on November 30, 2014

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