The ‘governance gap’

The other day, the new Chief Economic Advisor to the Union Finance Ministry, Raghuram Rajan, said that a “gap” had developed between the level of the economy’s performance and governance which needed to be closed if the country was to cruise ahead on the road to growth.

Rajan is not saying something new, because it is well-known that Indians are great traders and even innovators, and that they are doing well for themselves economically all over the planet --- in fact, much better outside the country than within it. Indeed, the point has been made time and again that the “working environment” within the country is not conducive to the performance-level that Indian entrepreneurs can easily deliver. In other words, the standard of internal governance has been found wanting, which needs improvement, which is what the new CEA is also saying.

Two main hurdles

Applying a broader perspective, Rajan also said that the two principal hurdles in the way of future economic performance are the external environment and the internal governance parameter. Since we do not have any control over the former, it is the latter that must be tweaked for good results on the growth front.

In his words (as quoted in an interview), “Governance, broadly speaking, (is) about permissions, land acquisitions . . . there is a whole range of things that need to be done”, adding, “Given that we have the capacity to generate domestic demand, (of) higher value to us would be to get our internal act in order (compared to the external environment)” .

Rajan is absolutely right in his formulation of the problem; the difficulty is getting down to the implementation stage. He has mentioned just two aspects of “governance”, namely, permissions and land acquisition. Obviously, he wants the permissions-scenario to be revved up in that the “windows” are effectively reduced to a minimum, which will facilitate quicker conversion of investment plans into running projects. The process of land-acquisition needs to be made a lot easier, with the active assistance of the authorities, so that projects can see the light of day quicker.

Political persuasion

Now, it is common knowledge that both these areas have generated a lot of controversy which has made actual progress in the respective spheres excruciatingly slow. In every case without fail, the obstacles have been politically inspired by parties both within and outside the UPA coalition. But it is not always politics which is scuppering the prospects of smooth governance, as the debate over lower interest rates in a regime of high inflation has shown. Even the Union Finance Minister has said recently that the RBI must “walk in the same direction” as the Government in the job of tackling the obstacles on the road to growth.

The present Congress leadership has chosen the path of forcing reforms (a synonym in today’s circumstances for good governance) in an effort to put the economy on the right track. The political opposition to the move is there for all to see, and it remains to be seen whether the Manmohan Singh Government will have the political guts to maintain course. In other words, good governance today is coming up against political imperatives, thrown up by the canvas of parliamentary democracy, which is leading to a widening of the “gap” referred to by Rajan.

Clearly, you cannot steamroll over politics to get your way on governance issues in a multi-party democracy, especially in a situation where there is a coalition Government with varied pulls and pressures making the job of efficient policy-making even more problematic. The art of political persuasion must take over, which is not quite the metier of technocrat economists such as Raghuram Rajan, et al . So where does all this leave the nation’s economic growth?

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