Tag: Jean Dreze | Vivek Kaul

21 December, 2017

The Jholawala Who Got It Right

Sense and Solidarity—Jholawala Economics for Everyone.
Jean Drèze
Rs 795.
Permanent Black

Jean Drèze, unlike other economists, has “lived experience” of India. This is clearly missing among most economists who practice economics (for the lack of a better phrase) sitting in their air-conditioned rooms, working in big cities like Mumbai and New Delhi, and just looking at data.

While looking at numbers is important, nevertheless, as Drèze writes in the introduction to his new book Sense and Solidarity—Jholawala Economics for Everyone, in the context of widows who get government pension: “What is no less useful is to spend some time with widows and the elderly and ask them about their lives. If you have a heart, their pain and helplessness will move you like no statistical evidence is likely to.”

And Drèze’s book does move at many levels. Even if you consider him to be a jholawala, you really cannot contest much of Drèze writes in this book, which is essentially a collection of columns which he has written over the years. Drèze defines a jholawala as a disparaging reference used by the corporate sponsored media for activists.

Take the case of godowns of Food Corporation of India hoarding food grains which are rotting, while the market price of rice and wheat has been going up. This scenario played out repeatedly up until a few years back.

As Drèze writes: “The food subsidy is essentially a deficit of the Food Corporation of India (FCI), whose operations are now chiefly geared to keeping food prices up rather than down. This has been achieved, temporarily at least, by accumulating massive amounts of food in FCI godowns.”

Drèze further says that the poor benefit very little from the price support measures of the government. The government buys rice and wheat directly from the farmers at a minimum support price. This tends to help the bigger farmers especially in the bigger states like Punjab and Haryana. It also leads to a lot of rice being grown in a semi-arid like Punjab. Also, it ensures that farmers like to produce rice and wheat and not diversify into other crops.

This is something that most non-jholawala economists would agree with as well.
Or take the case of the humungous bureaucracy that holds back India’s administrative system. Drèze gives the example of the sub-divisional magistrate of Latehar district in Jharkhand.

He talks about a scenario where the pension applications were being forwarded to the state government at a snail’s pace, simply because the sub-divisional magistrate had to sign each application six times. There were 13,000 applications pending, which meant 78,000 signatures were required from the magistrate.

Not surprisingly, it is such rules and regulations that lead to rent-seeking behaviour and increase the distance between good governance and the citizens of this country.
Drèze also goes into detail about the health care system in India. This is by far the best part of the book. Even though India’s growth rate has grown from strength to strength over the last quarter century since economic reforms were initiated, the country continues to lag on the health front.

When it comes to child mortality rates, India lags even countries like Bangladesh and Nepal, which have a much lower GDP per capita than that of India. As Drèze writes: “For instance, despite being about twice as rich as Bangladesh in terms of per capita GDP, India lags far behind Bangladesh in terms of child vaccination rates, breastfeeding practices, the incidence of open defecation, access to safe water, and related indicators. The same point applies if we compare India with Nepal, which is even poorer than Bangladesh.”

This is a big puzzle. Why does the country give such low priority to health? The public expenditure on stands at 3 per cent of GDP for low-and-middle-countries. In India, it is significantly less than that. What explains this?

The answer to this perhaps lies in the section in the book dealing with food security. Here Drèze offers the example of Tamil Nadu and Chhattisgarh and the success of the public distribution system, which sells food grains at a very low price to citizens in both the states. In case of Chhattisgarh it was a political calculation that worked very well for the Raman Singh led BJP. But the political calculation came with political will which ensured that people of the state got their fair share of rice and wheat at the price mandated by the government. And this led to a vocal demand for a functional PDS from the people.
As Drèze writes: “Vocal demand is very important for the success of PDS. This is one reason why the PDS works much better in Tamil Nadu than elsewhere; everyone has a stake in it. Chhattisgarh’s recent success builds on the same principle.”

The moral of the story is that once people get a taste of good governance, they are more likely to demand it than not. This is something that can be applied in case of India’s poor record on the health front. Only once there is political will to improve India’s standing on the health front, will things start changing at the ground level.

Also, it is time that the government spent more on the health front. Of course, the government doesn’t have an endless amount of money. Hence, it must allocate what it earns, properly, which it has not been doing.

Drèze talks about a huge amount of money being spent every year as fertilizer subsidy, with doubtful social benefits, and environmental damage. And above all this, it basically benefits rich farmers, who are a strong political lobby.

There are other reasons as well, including a big public sector. A big public sector was at the heart of the Nehruvian model of development. By the time late seventies and early eighties, a central government company was present in almost every sector. From condoms to colas, the government made it at all. Of course, the capital that went to the setting up of these companies could have easily gone towards more important areas like health and primary education. But it did not.

Not surprisingly, many of these companies ended up making huge losses. The government continues to subsidise the losses of many of these companies. One of the biggest of them is Air India. The company has made losses of Rs 35,891 crore, between 2010-2011 and 2015-2016. Another such company is Hindustan Photo Films Manufacturing Company. Between 2004-2005 and 2015-2016, the company has made total losses of Rs 14,960 crore.

Just between 2011-2012 and 2015-2016, the loss making public sector enterprises have lost close to Rs 1,40,000 crore. Now that is a lot of money. This does not include the loss making public sector enterprises run by the state governments across the country and the losses that they make. It also does not include the bad loans of the public-sector banks which are written off and the government has to infuse fresh capital into these banks. A lot of money is required to keep the unviable parts of the government going.
And at the cost of repetition, every rupee that funds these companies, essentially gets taken away from healthcare and other important areas like education.

To conclude, Drèze writes lucidly with a lot of passion on issues that really impact India. These are not issues that you will see corporate economists and analysts talk about, given that they are perpetually busy in selling the India growth story still going strong.
Of course, one may not agree with everything that Drèze has written. His views on Aadhar may not go down well with the supporters of the current government. Also, his views on cash-transfer may not go down well with many economists and analysts (including the reviewer) who look at it as a way of tackling huge corruption that prevails in India.

Nevertheless, most of the issues that Drèze writes and analyses, are the real issues that are holding back India and they need to be tackled sooner rather than later on a war footing.

The column originally appeared in Equitymaster on December 20, 2017.

23 July, 2013

Why Amartya Sen is right about India's education system

Vivek Kaul
It has become fashionable these days to criticise Nobel prize winning economist Amartya Sen. This writer has also been guilty of doing the same on at least one occasion. But there is nothing wrong with the points that Sen makes on the Indian education system and its weaknesses, in his new book An Uncertain Glory: India and its Contradictions, which he has co-authored with his long time collaborator Jean Drèze.
Several surveys conducted over the years have clearly shown the low level of learning among a wide number of students that prevails across the length and breadth of India. Drèze and Sen cite a few such surveys in their book. The ASER Survey 2011, which was an all India representative survey of school children in rural areas found that only 58% of children enrolled in classes 3 to 5 could read Class – I text. Less than half (47%) were able to do simple two digit subtraction. And only half of the children in classes 5 to 8 could use a calendar. These were not difficult tasks by any stretch of imagination.
Several such surveys with dismal levels of learning among children in rural areas keep coming out. But surprisingly even urban areas don’t seem to be doing any better.
The WIPRO-EI Quality Education Study 2011, surveyed more than 20,000 students in 83 ‘top schools’ in five metro cities (Bangalore, Chennai, Delhi, Kolkata and Mumbai). And the results were surprising. “For example, only third of these ‘top school’ students in Class 4 knew who was the alive person in a list of four: Mahatma Gandhi, Indira Gandhi, Rajiv Gandhi and Sonia Gandhi ( a small number thought, interestingly enough, that it was Mahatma Gandhi who was still alive). About two-thirds of the students in Class 4 could not master the measurement of the length of the pencil with a ruler,” write Drèze and Sen.
When compared to other countries, India comes in right at the bottom. In the PISA Plus survey conducted in 2009, the Indian performance in a list of 74 countries or economies that were a part of the survey was very bad. “And this is the case even though the two Indian states that participated in PISA Plus happened to be two of the better-schooled states, Tamil Nadu and Himachal Pradesh. In a comparison of overall reading ability of 15-year-old students in these 74 countries or economies, both Indian states figure among the bottom three (in company of Kyrgyzstan),” write the authors.
The bureaucrats and politicians like to point to the fact that India has more schools now than ever before. The 8^th All India Education Survey which was released earlier this year found that the number of schools in the country increased by 27% between 2002 and 2009. Shashi Tharoor, minister of state of Human Resource Development writes in a column in The Indian Express today “Take education, the subject of my own ministry. Literacy rates have risen to 74 per cent; more than 75,000 schools were opened and nearly a million teachers appointed in just the last three years.”
But Tharoor doesn’t tell us anything about the learning process. Opening, more schools doesn’t really mean anything on its own. Despite this increase in the number of schools there seems to be a lot that is wrong with the way things are being taught in Indian schools. One reason often offered for the poor state of India’s education system is that the teachers are not paid enough and hence they lack the motivation to teach properly.
Drèze and Sen prove this to be wrong. “Consider primary-school teacher salaries as a ratio of per capita GDP. In 2001 this ratio of teacher salary to the GDP per head was estimated to be around one in China, somewhere between one and two in most OECD countries, and a little higher in developing countries, but not higher than three for any of the countries (except India) for which data is available. More recent data suggest similar ratios of teacher salaries to GDP in 2005 and 2009. For instance, the OECD average hovered around 1.2 between 2002 and 2009. In India, however, it seems that the corresponding ratio was already around three before the Sixth Pay Commission scales came into effect (in 2009, with retrospective effect from 2006), and shot to around 5 or 6 after that,” write the authors.
What it means that Indian teachers get paid five to six times the amount of money that an average Indian makes. In fact the ratio is higher in a few states when we compare the average teacher salary in that state with the average income in that state. In Uttar Pradesh, the ratio is at 15.4. In Bihar, it is even higher at 17.5. For the nine major states of India the ratio in 2012, stood at 4.9. This leads Drèze and Sen to conclude that “whatever may be the source of the problem of low teaching efficiency, the blame cannot be placed on any alleged lowness of salary of school teachers.”
These high salaries have forced state governments to stop recruiting regular teachers and move onto contract teachers. As Drèze and Sen point out “Faced with the cost of escalation involved in these salary hikes, many states have stopped recruiting regular teachers and have increasingly come to rely on hiring ‘contract teachers’ to do the teaching. The salaries of contract teachers are typically a fraction (as low as one fifth or so, in many cases) of what the regular teachers earn.”
A large proportion of these teachers are untrained or are trained through what the authors call en masse correspondence courses.
In fact the irony is that the contract teachers despite their lack of training do no worse than regular teachers when it comes to teaching. This has led to a dualistic system where trained permanent teachers work side by side with teachers on contract who have been hired at a fraction of the former’s salary. A good system would have been something in between. As Drèze and Sen write “It would have been nice to see some sort of a middle path emerging from this dualism: new terms and conditions for the teaching profession, with decent salaries, good qualifications and some security of employment, but not unconditional, permanent plum jobs that undermine work incentives and ruin the integrity of the profession.” The system as it has evolved is neither here nor there. A good education system cannot be built on the back of teachers whose contracts are always running out.
The Right to Education Act which came into force as on April 1, 2010, prescribes a pupil teacher ratio of not more than 30:1. This has become very difficult for state governments to fulfil given that following the Sixth Pay Commission pay scales is a very expensive proposition for a large number of states. “On the other hand, meeting them (i.e. the conditions under Right to Education) by hiring untrained contract teachers would become, strictly speaking, illegal,” write the authors.
Also, the bigger trouble is that the Right to Education allows automatic promotion from one class to the next. Board examinations are not allowed till Class 8. Imagine the consequences of a student who is not picking up things in a certain class being promoted to the next class. As Drèze and Sen put it “If a large proportion of children learn virtually nothing for years on end in a particular school, it is important to know it,well before they are sent for slaughter in the Board Examination (if indeed they reach the end of Class 8 without dropping out).”
Economist Abhijit Banerjee, who is also the co-author of Poor Economics, explained this scenario very well while speaking at a literature festival in Mumbai late last year. He said “Think of all the class IV children who cant read. They are learning social studies and all kinds of other wonderful things except they can’t read. They are learning nothing. They are sitting in a class watching some movie in some foreign language without subtitles…The dropout rates are high. And I am always shocked that why does anybody comes to school at all? You are sitting there in class and you can’t read, you can’t write, why are you even there? What is going on?” Now imagine what will happen to students who will keep getting promoted without any exams.
The only people who gain through no exams are the teachers, especially in a system where learning is so low and there is very little supervision of what is really going on. As Banerjee put it “
The public education education is a system for the teachers, by the teachers and in the interest of the teachers. This is a system which essentially does not want any metric of performance. The excuse they give is that we don’t want children to be tested because children feel bad if they don’t do well. Its true that children feel bad if you tell them in public that they have done badly. But there is no reason that testing means public declaration of results. In Massachusetts(in the United States) where I live, test scores are only revealed at the grade level. So, for example, all fourth graders may have done badly at some school, but I don’t have to know if someone did well or badly.”
The Right to Education is thus creating more problems. The trouble is that like all such big Acts which try to address everything, it has ended up addressing nothing. The basic thing that any Act on education should be addressing is the lack of learning among students in schools. But that is clearly not happening.
Small experiments have been carried out around this problem. And they seem to suggest that addressing the lack of learning is neither very difficult nor very expensive. As Banerjee put it late last year “We did one experiment in Bihar which was with government school teachers. This was in summer around two years ago. The teachers were asked that instead of teaching like you usually teach, your job for the next six weeks is to get the children to learn some basic skills. If they can’t read, teach them to read. If they can’t do math, teach them to do math. At the end of six weeks, these teachers were given a small stipend. They had also been given a couple of days of training. At the end of six weeks, the children had closed half the gap between the best performing children and the worst performing children. They had really improved enormously.”
What changed suddenly? Why did the government school teachers do so much better? “The reason was they were asked to do a job that actually made sense. They were asked to teach the children what they don’t know. The usual jobs teachers are asked to do is teach the syllabus – which is very different. Under the Right to Education Act, every year you are supposed to cover the syllabus,” said Banerjee.
The solution to the problem is very simple. For the first few years of school the children need to be taught the basics like being able to read, write and do simple Math. Such a system is likely to lead to better results. As Banerjee put it “One thing that we forget is that the perfect is the enemy of the good. We are trying to have an education system that is perfect and that every child should come out with wisdom at the end of it and as a result they learn nothing.”
The trouble is that small simple solutions do not seem to have enough vote grabbing potential.
The article originally appeared on www.firstpost.com on July 23, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

15 July, 2013

Five questions govt needs to answer on food security

Vivek Kaul
Sonia Gandhi wants the chief ministers of fourteen states in which the Congress party is in power to role out the food security scheme in letter and spirit, and in quick time. Some media reports suggest that the scheme will be rolled out on August 20, which also happens to be the birth anniversary of Sonia’s late husband Rajiv.
While there seems to be a great hurry to launch the scheme there are some basic questions that the government needs to answer.
a) It has been pointed out time and again that the right to food security is likely to benefit 82 crore Indians. It seeks to cover 50% of the urban population and 75% of the rural population. The trouble is that no clear eligibility criteria for identifying the intended beneficiaries has been specified. It has been left to the state governments. As Jean Drèze wrote in a recent column in the Business Standard “For instance, the identification of eligible households is left to the discretion of the government. In the absence of clear eligibility criteria, no one is really entitled to anything as a matter of right; this defeats the law’s purpose.”
So the question is how will be the intended beneficiaries be identified.? The lack of a mechanism already seems to be causing problems. A report in the Daily News and Analysis points out that a presentation being made Sheila Dikshit, the chief minister of Delhi, was cut short by food minister KV Thomas. As the report points out “Dikshit’s presentation was cut short by food minister, when she mentioned that 32 lakh beneficiaries of existing schemes would be covered by the food security ordinance. She was reminded that in Delhi 72 lakh people are estimated to gain from the food security scheme. She had mentioned that Delhi had 2.62 lakh BPL card holders and 2.21 lakh are in the rehabilitation colonies and other 40,500 are in slums. Even these figures made just 26 lakh persons. Delhi CM then added another 10 lakh beneficiaries covered under the Antyodaya Ann Yojana and Anna Shri Yojana. She was told to undertake a fresh survey and draw the list of beneficiaries.”
Haryana Chief Minister Bhupinder Singh Hooda was in a similar situation. “Similarly, Hooda also come out with a figure of just 39 lakh beneficiaries. He was also told that as per the population of his state, he needs to draw a list of not less than 1.69 crore,” the DNA reports.
So the calculations of the Delhi chief minister tell her that there should be 36 lakh beneficiaries(26 lakh + 10 lakh beneficiaries under the Antyodaya Ann Yojana and Anna Shri Yojana) of the food security scheme in Delhi. The food minister feels that there are 72 lakh estimated beneficiaries. Dixit has been asked to do a fresh survey and draw up a list of beneficiaries. The gap of 36 lakh (72 lakh minus 36 lakh) need to be filled.
Hooda needs to fill in an even bigger gap of 1.3 crore (1.69 crore minus 39 lakh). Both Hooda and Dixit want to launch the scheme on August 20, which is a little over a month away. How are so many people going to be identified in such a short period of time? And the bigger question is why has no method for identification of intended beneficiaries be prescribed? Sheila Dikshit plans to distribute food security cards to those eligible for the scheme.
b)What is the food security scheme going to cost every year? The finance minister P Chidambaram in the budget speech he made earlier this year said “I have set apart Rs 10,000 crore, over and above the normal provision for food subsidy, towards the incremental cost that is likely under the Act.” The total food subsidy in the government budget for 2013-2014(i.e. The period between April 1, 2013 and March 31, 2014) is set at Rs90,000 crore. Chidambaram’s estimate will be lower for this year simply because the scheme will be launched in large parts of the country only during the second half of the year.
Economist Surjit S Bhalla writing in a column in The Indian Express puts the cost of the food security scheme at Rs 3,14, 000 crore. Bhalla’s calculations are fairly simple and straightforward to understand and put across the likely cost of the scheme more than clearly.
The Commission for Agricultural Costs and Prices of the Ministry of Agriculture in a research paper titled National Food Security Bill – Challenges and Options puts the cost of the food security scheme over a three year period to Rs 6,82,163 crore. During the first year the cost to the government has been estimated at Rs 2,41,263 crore. Andy Mukherjee, a columnist for the Reuters, puts the total cost of food security at $25 billion or Rs 1,50,000 crore (assuming $1 equals Rs 60).
And if all these numbers aren’t enough there is the original estimate of Rs 27,000 crore when the idea of the Right to Food Security was first mooted in the National Food Security Bill tabled in the Parliament in December 2011. As Jean Drèze and Amartya Sen write in An Uncertain Glory – India and Its Contradictions “The additional resources required to implement the Bill were officially estimated, at that time, at Rs 27,000 crores per year.”
So how much is the food security scheme eventually going to cost the government and in turn the taxpayers? The estimates as one can see vary anywhere from Rs 27,000 crore to Rs3,14,000 crore. Can the government at least provide us a clear estimate of that? Or would that even be possible for the government to do, given that it has specified no method to identify the intended beneficiaries. Hence, it has no idea of how many people it will eventually end up covering under the scheme. So how does it calculate the cost?
c) The food security scheme aims to provide subsidised wheat and rice to nearly 82 crore people. In order to procure the required rice and wheat the government already has an elaborate procurement system in place. It uses the Food Corporation of India and various other state agencies to buy rice and wheat directly from the farmers. The rice and wheat thus bought will be later sold at a subsidised price by the government.
What does the government plan to do in bad years when the production and/or procurement of rice and wheat are hit? In the current year the procurement of wheat by the government has declined by 33 per cent to 25.08 million tonnes. This has been attributed to aggressive buying by private traders. As of now this is not a reason for worry for the government primarily because of the excess wheat that it had bought during the previous years.
But what happens in a year during which production of rice or wheat is hit. As the CACP research paper cited earlier points out “With 60 percent of India’s farmland dependent on monsoon rains, drought years can slash production and force the country to import large quantities. The government already procures one-third of the cereals production and any increase in procurement will have enormous ramifications on the cereal economy/markets and would crowd out private sector operations with a consequent effect on open market prices.”
The government has the option of importing grains. But that is easier said than done, specially in case of rice. “Rice is a very thinly traded commodity, with only about 7 per cent of world production being traded and five countries cornering three-fourths of the rice exports. The thinness and concentration of world rice markets imply that changes in production or consumption in major rice-trading countries have an amplified effect on world prices,” the CACP paper points out.
Andy Mukherjee of the Reuters explained the consequences of what would happen during a year of bad harvest, a lot more clearly, in a recent column. “When the domestic Indian crop is insufficient, the programme may destabilize a thin global rice market…Once the bulk of Indian consumption bypasses the local open market – where prices can and do rise in years of bad harvest – the full brunt of the country’s demand will have to be met by supply from Thailand, Vietnam, Pakistan and the United States. That will in turn cause prices to surge for countries dependent on imports, such as Nigeria, Senegal, Bangladesh, Indonesia and the Philippines,” he writes. Not only is the price of rice going to go up in India, the world prices will go up as well. We will start exporting food inflation in the years to come.
d) Are the states really ready to launch the food security scheme? Of the fourteen Congress governments in the country only two have committed to launch the scheme on August 20, 2013, the birth anniversary of Rajiv Gandhi.
The government plans to use the public distribution system (PDS) to distribute rice and wheat. Estimates made by CACP suggest that the currently the system has a leakage of 40.4%. “In 2009-10, 25.3 million tonnes was received by the people under PDS while the offtake by states was 42.4 million tonnes- indicating a leakage of 40.4 percent,” the research paper points out. This is a marked improvement from 2004-05 when the leakage was around 54.1%.
Drèze and Sen in their book An Uncertain Glory – India and Its Contradictions divide the PDS into ‘old-style’ PDS and ‘new-style’ PDS. “Basic features of the old-style PDS include narrow coverage, large exclusion errors, erratic supply of food and massive corruption. The new-style PDS is based on a focused effort to tackle these interrelated problems, and to achieve broad coverage, low exclusion errors, regular supply, and relatively small leakages,” write the authors.
States like Tamil Nadu, Chattisgarh, Andhra Pradesh, Himachal Pradesh, Odisha and Rajasthan, are a part of the new style PDS, Drèze and Sen point out. But large states like Uttar Pradesh and Bihar are still on the old style PDS. This will ensure a tremendous leakage of rice and wheat that is distributed at a subsidised price in these and other states which still have old style PDS.
e) The government ultimately plans to move food security onto the cash transfer system from the current PDS. So beneficiaries will be paid in cash which they can use to buy rice and wheat from the open market. But what will happen to the elaborate grain procurement system that the government has built through the Food Corporation of India in that case? As Drèze and Sen write “If the PDS were to be replaced with cash transfers, the government would have to devise good ways of using all the rice and wheat it procures every year. The procurement system has a momentum of its own, and is unlikely to be dismantled any time soon. Upbeat estimates of massive ‘food subsidy’ savings in the event of a transition to cash transfers effectively assume a discontinuation (or at least a sharp reduction) of foodgrain procurement, but this assumption is rarely discussed. Nor is the political feasibility of discontinuing food procurement given any room in these calculations.”
These are important questions for which the government needs to answer or they will comeback to haunt us in the time to come.
The article appeared on www.firstpost.com on July 15, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)

12 July, 2013

Chidambaram and Sharma’s US visit is a waste of time

Vivek Kaul

The finance minister P Chidambaram is currently in the United States trying to solicit foreign direct investment(FDI) into India. This is one of the things that the government is trying to do in order to control the depreciation of the Indian rupee against the dollar.
Foreign investors wanting to start new industries and businesses in India bring in dollars through the FDI route. To do business in India the foreign investors need to exchange their dollars for Indian rupees. Hence they need to sell dollars and buy rupees. When this happens, there is a surfeit of dollars in the foreign exchange market, and this ensures that rupee gains value against the dollar.
At least, this is how it is supposed to work in theory. A big reason behind soliciting investment through the FDI route is that money brought in through this route cannot disappear overnight.
The question is will this work? Just inviting foreign investors to set up shop in India is not enough. The sales pitch needs to be followed up with a lot of serious background work. As Deepak Parekh, Chairman of HDFC, India’s biggest home finance company recently said “Look at our Foreign Direct Investment (FDI) policy. Ministers go all out to woo investors, but when investment proposals come, we cannot take decisions…Our policy on FDI is akin to inviting guests over to our house, but when they arrive, we refuse to open the door.”
The commerce minister Anand Sharma is also doing the rounds of foreign investors in the United States, along with Chidambaram. He cited some of the things that the Indian government had been doing to address complaints of foreign investors. One of the things that he talked about was the setting up of the Cabinet Committee on Investments (CCI) headed by the Prime Minister Manmohan Singh. The CCI was notified at the beginning of this year, on January 2, 2013, to ensure faster clearances for the implementation of major infrastructure projects.
But nothing of that sort seems to have happened. As The Economist points out in a recent article “a new committee headed by the prime minister, Manmohan Singh, has tried to push forward projects tangled in red tape…But the committee has not made a meaningful difference. On The Economist’s count, the fresh capital investment it has sanctioned (rather than discussed or delegated to other bodies) amounts to 0.4% of GDP, spread over several years.” The bottomline is that the ministers at least need to get their sales pitch right.
Foreign investors will not jump to set up shop in India just because a few ministers from India come calling. Any foreign investor will look at the ease of doing business along with the prospective returns that he can make, once he has got the business up and running.
Every year the World Bank puts out a ranking which measures the Ease of Doing Business across countries. In the 2013 ranking, India came in 132nd on the list. India’s ranking was the same in 2012 as well. When it comes to starting a business India is 173rd on the list. What this means is that foreign investors have an option of starting their business in a much easier way in 172 countries other than India.
When it comes to enforcement of contracts India is 184^th on the list. The broader point is that why will the investors come to India when they have better options available elsewhere? Also it is worth remembering that the Western world in general and the United States in particular is currently dealing with the aftermath of the financial crisis. There is great pressure on companies to set up new businesses or expand current ones in their home countries. In this scenario if they do decide to go abroad and set up new businesses, it needs to be a very good proposition for them.
Foreign investors can get money to set up businesses and industries in India, but some basic infrastructure like power, roads etc, needs to be provided to them. And that is missing in India. As Jean Drèze and Amartya Sen, who are seen as the intellectual gurus of the current Congress led UPA government, write in their new book An Uncertain Glory – India and Its Contradictions “There has been a sluggish response to the urgency of remedying India’s astonishingly underdeveloped social infrastructure and of building a functioning of accountability and collaboration for public services. To this can be added the neglect of physical infrastructure (power, water, roads, rails), which required both governmental and private initiatives. Large areas of what economists call ‘public goods’ have continued to be neglected.”
This is something that needs to be set right if the government wants foreign investors to set shop in India.
What also does not help Chidambram and Sharma’s sales pitch is the fact that Indian businessmen do not seem too keen to expand their businesses or set up new businesses in India. The investment by Indian businesses has fallen from 17% of GDP in 2008 to 13% in 2012.
As Ruchir Sharma points out in Breakout Nations “At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 %, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2% just five years ago. Given the potential of the Indian domestic market, Indian companies should not need to chase growth abroad.”
How will Messrs Chidambaram and Sharma ever be able to explain this dichotomy to the foreign investors?
Foreign investors are no fools and they have realised over the years that it is not easy to do business in India. The spate of scams from 2G to coalgate has also contributed to them staying away. FDI into India has fallen in the last three out of the four years. For 2012-2013(i.e. The period between April 1, 2012 and March 31,2013), FDI fell by 21% to $36.9 billion, as per government data. The United Nations Conference on Trade and Development (UNCTAD) in a recent release said that FDI inflows to India declined by 29 per cent to $26 billion in 2012.
In order to attract foreign investors to invest in India and set up new businesses, a lot needs to be set right. And that needs to be done in India. Ministers visiting the United States on junkets is no way to solve the issue.
The article originally appeared on www.firstpost.com on July 12, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)