The 3-R formula

It wasn't the lack of ability or understanding. Neither was it due to the wrong intent. The middling performance of the UPA on economic reforms has been baffling. The dream team that happened to preside over a dream run of the economy has so little to show as achievement. Apparently, the missing catalysts were the two Rs—resolve and right men. Without these two, even the most brilliant teams can fail—and the UPA certainly did. Added to the two Rs is another R—revenue. Even a resolute and right army won’t march for long on an empty stomach. Here’s how fixing the three Rs can help the UPA redeem itself as an economic administrator of excellence in its second term.

R1: Resolve
If only the BHEL, NHPC, COCHIN Shipyard and Neyveli Lignite Corporation disinvestments had happened, the government would have been richer by several thousand crores. Better yet, these PSUs would have become more agile, disciplined companies.

If only the additional 2G and the 3G telecom licences had been auctioned, the exchequer would have been richer by Rs 1,00,000 crore and the fiscal deficit at two-thirds of its current level. Better yet, fewer mobile phone calls would have dropped. If only the IRDA Bill had been passed by Parliament, the private sector insurance companies could have penetrated rural India. Better yet, thousands of young Indians would have gotten jobs.

These intentions didn’t translate into actions in the past five years—but not because of the force of resistance. Rather, the resolve to take them through was missing. The first two reforms mentioned above fell through even though they had the Left’s blessings. But Prime Minister Manmohan Singh rolled back, with a snap, UPA’s 1.0’s conservative disinvestment plan after a single call from DMK supremo M.K. Karunanidhi over Neyveli Lignite’s striking employee unions. He also couldn’t prevent former Telecom Minister A. Raja from handing out 2G licences in a scandalously opaque and arbitrary fashion.

Six proposals that didn’t take off for lack of resolve are back on the table 1. Bills raising the FDI cap for insurance companies from 26 per cent to 49 per cent and pension reforms are pending in Parliament 2.Decontrol of petroleum prices allowing the market prices of petrol and diesel to float freely within a band 3. 3G auction in a transparent manner to give more spectrum for the industry and raise funds for the exchequer 4. A road map on disinvestment with sale of sizeable stakes in profitable PSUs 5. A five-year road map for expansion of mass rapid transits in the top 20 cities 6.Permission for organised retail with FDI in 8-10 metros to see how it works

The impression is that Singh’s task is now easier because the Left parties are off his back. This is being optimistic. Truth is, the Left had no views on policies such as telecom licences and much of the financial sector reforms, aside from FDI in banks, pension and insurance companies. The Left wasn’t even opposed to building infrastructure. Yet, roads and power are the most inexplicable failures of the UPA’s first term. What Singh lacked was former Prime Minister A.B Vajpayee’s skill for thrashing out a negotiation. He’s not the seasoned politician that Vajpayee was. He is essentially a bureaucrat: a remarkable doer and follower. Now, the art of being a sincere doer is a necessary condition for even a Prime Minister. But, unfortunately for him and India, it isn’t a sufficient condition. The art of getting people to do what has to be done is absolutely critical in a leader.

It was his lack of resolve that not only cost the economy dear—the ministers of human resources, roads and highways, health and so many others, just didn’t perform—but created a schizophrenic government: the cleanest Prime Minister ever, heading one of the most corrupt Cabinets.

Singh now has another chance to become a true leader, a leader with resolve. Having reported to P.V. Narasimha Rao, Singh would know that. Prime Minister Rao skilfully neutralised the political opposition to Finance Minister Singh’s historic liberalisation plan in 1991. Singh will have to be to his ministers, what Rao was to him.

Happily, early signs of some resolve are already evident. Singh had put his foot down over non-inclusion of several ministers who tainted his previous government with corruption and mismanagement. He told Congress Parliamentary Party’s General Body Meeting on May 19 that while the mandate to UPA has largely come from young voters, it is in the nature of youth to be impatient. “They will not tolerate ‘business as usual,’” he said. He built a case for reform, stating clearly that inclusive growth is not possible without sustainable growth—which requires creating both a stable social and political environment.

Singh’s key job would be to translate the nervous energy produced by the size and tilt of the mandate into action. He told his fellow MPs on May 19: “I will ask every minister to set time-bound targets for implementation of our election promises and the various programmes and policies of each ministry.” Which brings us to the second R—right men.

R2: Right men
A general, no matter how brilliant, is only as good as his lieutenants. During UPA’s first term, Manmohan Singh—while honest and capable— added to his lack of resolve by appointing a string of suspect lieutenants to key ministries. If UPA 2.0 has any chance of fulfilling the promises of clean and efficient governance, he needs to make sure that he chooses the right man or woman for the right job.

Singh can blame his allies—and the rotten eggs they foisted upon him—for the non-performance and corruption that several ministries became famous for during his first tenure. DMK’s T.R. Baalu stood out for helming the roads and highways ministry into one of its most dismal performances. A. Raja—also from the DMK—became notorious for the clandestine manner in which he handed out telecom licences. These two men brought much disrepute to Singh’s otherwise clean image.

That doesn’t diminish the fact that several of Singh’s own ministers performed poorly. Education, clubbed under Human Resource Development, languished under veteran Congressman Arjun Singh, despite receiving fat fund disbursements. Arjun blatantly refused to report to Singh and treated the education ministry as only his fiefdom. Power Minister Sushil Kumar Shinde was another non-performer under whom the creation of new power generation capacity consistently fell short of its target by 50 per cent, year after year. Even much-favoured technocrat, outgoing Deputy Chairperson of the Planning Commission, Montek Singh Ahluwalia, failed to impress.

The Planning Commission consistently found faults with states and other ministries at the Centre, but did hardly anything to improve the implementation and monitoring of the centrally-sponsored schemes. While the state governments found it hard to trust the suave and sophisticated Ahluwalia, he too did little to work with them.

However, it looks like Singh may well have learnt a thing or two from his past missteps. He seems determined to find competent, veteran politicians with solid track records to head key ministries. “I have made up my mind,” he said, about the selection of candidates. At the time BT went to press, he had yet to disburse any of the key infrastructure portfolios and was still making overtures to key ally DMK, without making them any offers.

Singh’s call for retaining one of UPA 1.0’s best-performing ministers, RJD’s Raghuvansh Prasad Singh, for the Ministry of Rural Development, is commendable. Raghuvansh Prasad had, in fact, worked tirelessly to get the National Rural Employment Guarantee Scheme (NREGS) going. It is largely because of him that 56 per cent of all wages are paid through banks or post office accounts, which reduces leakages. Eventually, it was RJD strongman Lalu Prasad Yadav’s adamant refusal to let him go, which prevented Raghuvansh from joining Singh’s team.

The choice of finance minister, especially during an economic slowdown, is always a tricky one. UPA’s Finance Minister for four years, P. Chidambaram, has had a short but impressive recent stint as home minister. So he will have to stay put. Instead, Singh seems to have made the right choice by appointing experienced political heavyweight, Pranab Mukherjee, who was also India’s Finance Minister between 1982 and 1984. Can he pull India out of its current economic mess and spur revenues? That will depend on how well Mukherjee will handle the challenges in attempting to fix the third R—revenue.

Too few good men... Pranab Mukherjee : The Trouble Shooter FM, Congress, 73 Has good knowledge of the task at hand. Is a political heavyweight who is open to reforms. Will bring continuity to policy-making as he presented the interim Budget in February. Sharad Pawar: Mr Populist Agriculture & Food Supplies, NCP, 68 Owns businesses. Gave the UPA some of its biggest headaches. Often more busy with cricket than with affairs of his ministry. Slipped out of Parliament during debates on high food prices. Failed to deliver on much-needed agricultural or PDS reforms. Mamata Banerjee: Sound and Fury Railways, TMC, 54 Likely to focus on West Bengal with little time for Rail Bhawan. Was a populist railway minister between 2000 and 2001.Aggressive and energetic but with little knowledge or bent for reforms. ...And some bad ones from the past TR Baalu: The Speed Breaker Roads,Highways and Shipping, DMK, 68 Not one project completed on time. Changed as many as four chairmen of the NHAI and filled its board with his men. Embarrassed PM in Parliament over favours he sought for his son’s companies Kings Chemicals and King High Power. Legacy: Disinterested private participants, demoralised NHAI, time and cost over-runs. A Raja: The Missed Call Telecom & IT, DMK, 46 Defied PM and reported only to Chennai. Smart and sharp but conducted policy in a suspect, dubious manner. His resistance to auctions for 2G licences cost the exchequer an estimated Rs 60,000 crore. Legacy: Number portability and 3G licence auctions still pending. Sushil Kumar Shinde*: In the Dark Power Minister, Congress, 67 Couldn’t deliver even half of the targeted increase in generation capacity. Little enthusiasm or knowledge of ministry’s work and priorities. Legacy: Despite the UPA’s claims of an aam admi agenda, one in two rural households still does not have an electricity connection. *Is part of the new cabinet, too.

R3: Revenue
For decades it was customary for every new government to declare that the previous government had left the coffers empty. The new finance minister would like to shout this from the rooftops—but can’t. The last government was, in fact, his own. The contrast in the state of government finances between 2004 and 2009 is stark to the point of being scary. In 2004, when the UPA assumed power, tax revenues had grown 17 per cent, subsidies had barely inched up by 3.5 per cent, overall expenditure growth was almost stagnant at 5.4 per cent and fiscal deficit had actually fallen from 4.5 per cent of GDP to 4 per cent.

{mosimage}Here’s what awaits the UPA when it assumes power for the second time: growth in tax revenue has collapsed to about 4 per cent, subsidy bill has shot up by 45 per cent and total expenditure is up 21 per cent. As a result, the fiscal deficit has jumped from 2.7 per cent to 6 per cent of GDP in just one year. To get an idea of how wide the UPA has steered off its own course, consider this: In July 2004, the then UPA Finance Minister P. Chidambaram had resolved to wipe out revenue deficit (difference between government revenues and expenditure; fiscal deficit is revenue deficit plus borrowings) by 2009.

High-expense social schemes coupled with ballooning subsidies threw expenditure out of control Growth in tax revenues fell along with falling growth in industry and economy More than doubling of deficit in a year has money market worried Several revenue and expenditure proposals being considered holdout hope

But the reality in 2009 is that the revenue deficit has jumped to four times its level in 2007-08. And it’s not likely to come down anytime soon. “Any further stimulus measures and the implementation of the remaining part of the Sixth Pay Commission hikes, the fiscal deficit would remain under pressure,” says D.K. Joshi, Principal Economist, CRISIL. On one level, crying over the size of the deficit is pointless since a global economic meltdown has facilitated its current, lofty levels. In fact, every country is running historically high deficits—the US’s hole is at 10 per cent of GDP while China’s is at 3 per cent—a record high in six decades. However, in India’s case, the real issue is the quality of the deficit rather than the size. “A large deficit affects the funds available for the private sector. There would either be a crowding out of resources to the private sector or the current account deficit would have to be expanded,” says former RBI Governor Yaga Venugopal Reddy (see 60 Minutes, page 62). Ultimately, populist schemes like NREGS and the farm loan-waiver programme may be fiscally imprudent, but politically most desirable— or so the message from the election seems to be.

{mosimage}So, what could be a way out of this economic quagmire? Sound expenditure management is obviously crucial, since revenue growth is linked to an economic upturn—something that is not entirely in government hands. One way, says Arvind Virmani, who completes his tenure as Chief Economic Advisor to the Finance Minister in June, is to initiate targeted subsidies since “right now, there is no mechanism to monitor who is getting what, how much or anything at all from various programmes” (see Do It the Smart Way, page 54). Another must: phasing out the administered price mechanism (APM) in the petroleum sector. Goods and Services Tax (GST), planned from April 2010 onwards, is estimated to generate at least $15 billion (Rs 72,000 crore) annually. Finally, disinvestments of public sector companies will also boost revenues and regular reviews of economic performance should help keep performance on track.

Both the current global economic squeeze as well as India’s fiscal mess are grim realities. Nevertheless, if the new government is able to get its 2Rs right—firm resolve as well as the right men for the task at hand—in addition to the third one, of the right kind of revenue management, it stands a strong chance of climbing out of the current economic morass.

—Additional reporting by Rishi Joshi