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Economic Survey: Dressing up government for a market economy

Vivian Fernandes

Updated: July 9, 2014, 8:49 PM IST
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This year's Economic Survey is a delight to read, especially the chapter on 'Issues and Priorities.' It is an essay on the role of the government in an open economy where it is expected to keep its hands-off all activities except those where choice is inhibited because of monopoly power (utilities) and asymmetric information (healthcare), or where private usage imposes public costs (cars). In doing so, the Survey is not exceptional. Those mentored by former Chief Economic Adviser Kaushik Basu were also quite insightful.

On governing for outcomes, the Survey says outlays should be linked to targets, and departments held accountable for achieving them. The distinction between plan and non-plan expenditure should go and with that the role of the Planning Commission in making allocations. The Finance Ministry should be the sole allocator. The outlay of every department must be justified by results which will be certified by third party auditors.

Giving an example, the Survey says government spending on elementary schooling has risen 120 percent between 2007-08 and 2011-12 from Rs 5,202 per child to Rs 11,418. Yet the share of children preferring private schools has risen. Their learning outcomes are nothing to rave about. According to an annual survey of education (ASER), only 59 percent of Class III children in private schools could read a Class I text, perhaps because they have inadequate resources. But students in public schools did worse. If the government had acted on the feedback, it would have made design and management changes and redirected spending to achieve superior results.

In healthcare, while there is need to ensure a certain number of doctors, nurses and hospital beds per 1000 persons, an obsession with vaccination, sanitation and provision of clean drinking water would have yielded better outcomes. This meshes with a recent survey, which found that attitudes need to be changed to end open defecation. Once people realized there were other ways of enjoying the great outdoors than by squatting in a breezy field, they would themselves invest in toilets without the government having to persuade with subsidies.

In infrastructure the Survey says, the experience of the past decade shows that the risk bearing capacity of the private sector is limited, particularly for regulatory risks induced by the political system. Instead of large contracts that combine a variety of risks to be borne by consortiums of developers and operators, the Survey suggests an alternative. In public private partnership projects, private developers have very little exposure. Between 2004 and 2013, the share of lending to infrastructures in total bank credit rose from 4.5 percent to 14 percent. Banks are nursing huge amounts of bad loans. The survey proposes that a highway could be built by a private contractor with the government paying for it. After that it could be contracted out for a year to produce data about traffic volume and toll revenue. On this basis, a 20-year contract could be given for tolling and maintenance. This would bring the government a stream of revenue to finance more infrastructures and create a set of operating companies. Not being itself an owner, the government should be able to regulate them fairly.
A fast-growing economy would need government structures that evolved continuously to drive the pace of growth and not impede it.

Though India depends a lot on cross border flows and its firms are more globally integrated now than they were, the laws have not evolved accordingly. Section 6 of the Foreign Exchange Management Act prohibits all capital account activities unless they are explicitly permitted. But Section 5 which governs the current account permits all except those that are expressly prohibited. If all rule-making under FEMA were vested in one department, and all transactions are permitted except those that are forbidden, India would have effectively created a single window for foreign direct Investment.

A Productivity Commission, the Survey says, would establish benchmarks against which governance outcomes would be measured. The Commission would review laws, regulations, organization structures and process designs. This should be a statutory body without executive powers, obliged to undertake reviews and release its findings to the public.
First Published: July 9, 2014, 8:49 PM IST

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