‘Since we are not fixing institutions, India is falling apart’: Arun Maira

Published: March 13, 2013 - 17:55

With his longstanding experience in consulting and hands-on leadership, Arun Maira brings an outsider’s perspective into the Planning Commission. In a free-flowing discussion with Hardnews, he says the economy has yo-yoed between ‘Bollyworld’ and ‘falling apart’ because of lack of political will to initiate administrative reforms. Excerpts from the interview: 

Sadiq  Naqvi Delhi

 We managed the 2008 crisis well. Why are we suffering so badly now?

In 2005, the World Economic Forum did some scenarios for India. They were of the view that economic forecasts are generally wrong, they extrapolate things. The economist just looks at economic factors, ones that go within their models and declare everything else exogenous. That means the quality of the institutions of the country, the politics of the country or the anger in the society of the country, are all exogenous stuff. We can tell you investment rates and so on as if investment will be carrying on regardless of social conditions and political conditions in the country. So they are flawed models, the macroeconomic models. The macroeconomists know it, now that they have got so many big things wrong. We used the scenario technique in 2005. We conducted the survey in India, using the scenario technique, using the different forces in play and projecting which direction these forces could take, and we developed conditions of the model.

Three scenarios emerged. One, called ‘Pehle India’, was the scenario in which most forces were aligning in a positive fashion and India would be able to fulfil its economist sort of story of being a very large economy. Another model was present in 2005, which they called ‘Bollyworld’, where they said there are a lot of tensions building up, whereas there was GDP growing, and people were becoming richer. Poverty was not reduced adequately, but, more important, the difference between those who were finding they were not very well-off and those who were shooting up like stars was very obvious. So the result of these tensions, they were noting even then, was the growth of violence in the cities, the growth of the Naxalite movement. So the tensions were obvious. And if we let them be like that then, they projected, India would be what they called ‘Atakta Bharat’. So then we had said that if under ‘Pehle India’ we fix these tensions, improve the institutions, we could get a 9-10 per cent growth for many years. External factors could play a dampener, but India was not so much dependent on external forces. Under the Bollyworld model, they said the situation would continue for two-three years for the tensions were out there, so you would go with 9-10 per cent growth for the next three years and then the decline would start. And they said if tensions erupt more strongly, and there is a logjam of sorts, then it could even bring you down to five percent in seven-eight years’ time. That is what happened. It is not that it was not anticipated.

So what had to be fixed? It is the quality of the government institutions, institutions of big business who were not cognizant of what impact they were having, the mistrust that had built up. We had an anti-corruption movement which said precisely this, fix the institutions. And also after the rape incident. The foreign investors are also saying the same thing.  So it wasn’t a matter of opening up the economy for more investments. Unless you fix the institutions, which the investors also want fixed, the citizens also want fixed, your economy will get into an ‘atakta’ situation. That is what has happened.

So, when we developed the 12th Five Year Plan this time, we agreed that we would use the scenario planning technique. Some of us actually said that we better use this other technique as well and not just rely on macroeconomic models. In the opening pieces of the 12th Five Year Plan we have these three scenarios that we can see in the next 10-odd years. The diverse group of social scientists, civil society and economists came out with three scenarios. The first one is muddling along. That is, we try to fix one institution, and then another one comes in the way, then we say let’s fix that first. Then this reform, that reform, so it’s just muddling along. The better scenario was, if the governance is tuned up, if the institutions are tuned up, we would have a scenario called the ‘flotilla advancing’.  And the third scenario, if we allow the muddling along too long and the tensions in the system to build up, would be a falling apart of this growth story. Since we are not fixing the institutions, the falling apart is pulling the growth further down. India has to fix its institutions. It’s long overdue. India has had reforms since 1991. Almost everything is open now except for some financial sector things over which we have some sensible controls, which even the macroeconomists say shouldn’t be opened so soon. There is pressure to open them, but we have some good financial management people. So India is as open as any other country in terms of trade and investment. 

Looking at the institutions, the kind of things people are demanding now, do you think their demands are justified… Like the demand for an all-prevailing Lokpal to stem corruption?

We need institutional reforms. People are demanding institutional reforms, they are absolutely right. This is one great case — both communists and capitalists are asking for the same thing. They are completely on the same side. You got to fix your system in the country. I wouldn’t say that the problem is this particular thing, the agenda is clear. Now the solution should be in terms of governance reforms.

More than two years ago, the administrative reforms commission, after five years’ work, had given its recommendations in 15 reports. The police, IAS, judicial system, everything. It took five years after consulting the stakeholders, getting foreign experts, so I would take that as a starting point. Start from there because there is so much work done. Don’t appoint yet another commission. We have had so many committees on the fuel pricing. We must take advantage of work already done. Take that work forward. 

 The whole reform hullaballoo last year was just a sort of cosmetic exercise….

Exactly. Several of us have been saying that, since the investors and citizens are urging administrative reforms and since you have already done a massive study of the administrative reforms required, please have a group to implement them. We are talking more of economic reforms, what are we saying about administrative reforms? 

 So is there a disconnect between government policies and ground realities? We see so many projects get stalled and billions of dollars get stuck….

That is exactly what I am saying. Decisions are stuck. This is Atakta Bharat, falling apart. Why? Because there is too much contention among the stakeholders in the system, insufficient collaboration, too much confusion between departments, the states and the Centre, hardly any co-ordination or too little coordination. The result: you cannot implement things. So you keep announcing intentions, like the one to open the economy for multi-brand retail. But ideas cannot be implemented because we didn’t get consensus among the stakeholders. 

 It is felt government economic policies are not communicated properly and that is stemming growth…

We have been talking too much to the masses in terms of numbers, the GDP numbers. They don’t make sense to anybody. If you want people to support your policies, you’ve got to speak a language they understand. I am all for growth, but I want us to concentrate on ‘growth of what’. GDP is just one of the things. It is a result of the growth of good institutions, livelihood, environment. If you manage the growth of all those things in a focused way, you will get GDP growth. Our policymakers have been too economically focused. Maybe because our prime minister is an economist and Montek (Singh Ahluwalia) also. 

Unemployment is rising. Anger is spilling onto the street as well.…

Absolutely. There are forces in a system. The desire of a young person to get a job is a force in the system. If your policymaking is not recognising that force, you will have social unrest, which will then prevent smart economic solutions. It’s happening in Greece, Italy, Spain…. In our case, if we say, let the GDP grow and the trickle-down will somehow create the jobs, if you are not measuring how many jobs are being created, and whether those emerging from our educational and vocational systems are finding the jobs they want, it won’t do. You’ve got to keep matching growth of opportunities with the emphasis on training and educating people. Employment opportunities come from growth of enterprises. The major part, the sustainable part, will come from engagement of people in productive enterprises. To grow in productive enterprises you need investment, so again I come back to square one. The fundamental problems need to be addressed first. 

How do we fix the manufacturing sector?

Well, this is giving us clues. The manufacturing sector in India today is almost entirely private, except for the small number of public sector firms. And we don’t need any more public sector firms. So the private sector people need to be investing. There are three keys here. One is the business regulation environment in the country in which I include the decision-making environment. That has to be fixed. This goes back to our institutional reform agenda in the states and the Centre.

The second is the approach towards human resources. In manufacturing, which is different from infrastructure, people are engaged as a productive resource. if we treat them as a nuisance and as a cost,  then what we would be demanding is, keep the wages down, don’t impose a minimum wage requirement, don’t impose any guarantees of employment. Whereas human beings in an enterprise are the only appreciating asset, the only asset which is capable of improving its capability. They are the key. Once they are motivated they can improve the capability of other assets as well. The discourse in the country today is too weighted towards giving more flexibility to large employers so that they can dispense with workers, pay them less. We should be like Germany or Japan or South Korea, which have very strong manufacturing sectors. In Japan and Germany’s cases, very high wages. Japan and Germany are expensive currencies but they compete. Why? Because the quality of their enterprises is very high. And this quality is based on engagement of people. Japan and Germany have lifelong employment. They have unions and in Germany they are very strong. By law you must have one, you must consult the union and have it on your board also. An American or Englishman would say unions are bad. But they are not able to compete with Germany.  So we’ve got to change our paradigm of thinking about the human asset in management.

Third is our duty regimes. We have thrown everything completely open. We are not growing manufacturing because we have made the duties on manufactured goods so low, why would anyone invest in manufacturing here when he can import it on zero duty? 

 Do you think cash transfers are being done in haste?

I have two points to make about that. First, it is a very limited solution. There are some things that people need to buy in kind. If I want health, giving me cash if there are no doctors or a clinic is not going to improve my health. For the bigger problems of the country like education and health, cash transfer is not going to be the solution. You can say that beneficiaries should be given cash so that, for example, they can choose the schools they wish to go to, but there better be schools. There are three things required if you want the benefit system to function. First, the supply side has to function. Second, the beneficiaries must be correctly identified. Third, I give cash rather than kind. So it’s probably the third of three things. It’s the easiest to do in a sense and that is why you can do it in haste.

In a free-flowing discussion with Hardnews, Arun Maira says the economy has yo-yoed between ‘Bollyworld’ and ‘falling apart’ because of lack of political will to initiate administrative reforms. Excerpts 
Sadiq Naqvi Delhi

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