The space for success

NGOs are delivering much-needed social services in Bangladesh. We could learn a lot from them

Policy Track | S. Narayan

As the waters drain from the plains of Bihar and Bengal, the rivers in Bangladesh have been rising, and more than half of its 60 districts are under water. Dhaka television shows army top brass distributing 40 tonnes of foodgrain and another 1,000 bags of relief material. But the submerged are in millions; more than 30,000 admitted for intestinal diseases and there’s severe shortage of drinking water and food. Commodity prices have shot through the roof; 1kg of dal is 70 taka, the poorest quality rice 20 taka—up by 35% in the last four months.

The government, with hardly 10 advisers, has neither the reach nor the experience in governance for disaster relief; the army is trying its best, but does not have the support of the political parties, who have not got into flood relief. The politicians are upset at the actions taken by the government to bring the corrupt to justice, including several from the two main coalitions, and don’t wish to cooperate. Businessmen, wary of threats of action for economic offences, have either gone away, or are being discreet. NGOs are active in relief, but do not have adequate relief materials.

Dhaka itself, protected by its embankments, is a rich city. Traffic is chaotic, as expensive cars and SUVs jostle for space among posh apartment complexes where each apartment is worth at least a quarter million dollars. There is so much money in Dhaka that one has to rub one’s eyes and look at the misery and the television set to realize it is the same country. The ordinary urban people one talks to complain about the money made by the privileged few in the last decade. They feel squeezed between the urban rich and the rural poor.

Economic growth has touched this country very selectively. The GDP figures speak of a continued growth of 5% or more for several years now, but income disparities, measured by Gini coefficients, have risen sharply, and per capita incomes of the lowest 20% have barely risen in the last decade.

The above does not necessarily lead to a positive comparison with India. In every social development indicator, Bangladesh is ahead. Access to sanitation as well as drinking water in rural areas is far greater. Life expectancy at birth as well as infant mortality figures are better than in India. Population growth is under greater control. Most importantly, data on underweight children and prenatal and postnatal anaemia show that there has been deterioration in India (NFHS III) and improvements in Bangladesh. By all accounts, there is greater outreach of health, education and nutrition in Bangladesh than in India.

These successes are due to the programmes of the several NGOs that are very active in Bangladesh. The story of the microfinance groups, Grameen Bank and Yunus, is well documented, but there are several others that are equally active. Among the more prominent is the Bangladesh Rural Advancement Committee (Brac). This is different from Grameen in that its banking activities are only one aspect of its interventions. It runs more than 14,000 schools, primarily for girls, where a curriculum of non-formal education re-educates dropouts for a period of up to 30 months, and brings them back into mainstream schools. It has also revived traditional village crafts and markets these products in urban areas. It provides inputs to make these products more suitable for the urban consumer. The revenues go back into its initiatives. There are other major NGOs, such as Proshika, and several more, that work in the areas of health care and education. The important aspect of the interventions is that the state has allowed them a free hand to provide these services. As Yunus admits, the state has created the space for NGOs to provide these services, or perhaps, the state has yielded its duties to these organizations. There is a department of the government that provides coordination, ensures that there are not too many overlaps, and that NGOs with a good track record are able to expand their services.

In India, we continue to look at such interventions with suspicion. There is now a bill to regulate microfinance institutions that would regulate self-help groups. The banking sector would like to mainstream these groups into the organized sector, for they see a successful business model. The attempts are to regulate and to bring the NGOs into accountability to the government, rather than providing them space to operate.

Perhaps there is still an opportunity to look at alternative models. Decentralized governance is not necessarily the only way to deliver public services. And public participation is not through panchayati raj alone. Self-help and microfinance groups, public-private partnerships, as well as NGOs are alternatives. NGOs are delivering much-needed social services in Bangladesh. It seems we could learn a lot from them.

What gains, and for whom?

SEZ concessions and the costs of land acquisition will be borne by the public— through higher subsidies or levies

Policy Track | S. Narayan

Three inter-related policy issues that have been in the news recently have significant implications for citizens and taxpayers. First, a group of ministers has recommended that the government can acquire up to 30% of the land needed for Special Economic Zones (SEZs) on behalf of promoters. The government’s earlier stand, in the wake of the Nandigram incidents, was that it should not acquire more than 10% of the land, and that SEZ approvals would only be granted after the developer had aggregated at least 80% of the land required. Second, it has now reiterated its commitment to legislation for a new relief and rehabilitation policy, a draft for which has been in public domain for nearly a year. Third, a report on the contentious issues of tariff subsidies in SEZs submitted to the finance ministry by the research organization Icrier (Institute for Research in International Economic Relations), seems to refute earlier arguments by the National Institute for Public Finance and Policy (NIPFP) about significant revenue losses.

The entire emotional debate on SEZs over the past year was on the acquisition of agricultural land, and the plight of those dispossessed. West Bengal’s agitations were as much about inadequate compensation, as about denial of livelihoods. Maharashtra and Haryana, too, saw such agitations. As a result, the government backtracked, and withdrew from its acquisition efforts. This, naturally, doesn’t suit the developers, as only awards under the Land Acquisition Act of 1894 (yes 1894!) can grant undisputed title. They have been lobbying hard for a rethink, as several projects are held up. Now that the GoM has been persuaded, there will be compulsory acquisition again. To deal with widespread criticism, the government plans to go ahead with its relief and rehabilitation (R&R) policy.

For all its strong words and rhetoric, it is a curious document. It defines the bad guys (those who want projects) and the sad guys (the landowner, labourer, and his kith and kin) in detail. It spells the need for a commissioner for R&R to take care of the latter and threaten the former. The clauses breathe brimstone and fire on development projects, and the need to take care of those affected. This can’t be done by anyone except the government, which is to decide what is good or bad R&R.

Two serious flaws in the draft are striking. First, those dispossessed of land by private developers, have to be given government land—an indirect subsidy for the developers. If that is not available, private land will be compulsorily acquired to rehabilitate them. For those dispossessed by such acquisition, the same process again. The outcome will be much more compulsory land acquisition, not less. Besides, the draft nowhere defines what measures of ‘relief’ or rehabilitation are adequate and leaves this to a group of officials. This implies incentive for rent seeking, by the officials and on behalf of the developers, to the detriment of the dispossessed.

So much for the aam admi.

The finance minister has criticized tariff concessions under the SEZ Act, while the commerce minister has insisted that indirect gains through jobs, exports and eventual growth would mean net revenue gains, not losses. The finance ministry’s views were supported by a report of NIPFP, which quantified revenue losses at around Rs1 trillion. A recent Icrier report, however, argues that these are overstated, that exports are already eligible for duty drawbacks even on the value additions, and that, on balance, taking direct and indirect taxes together; there would be no significant revenue loss. This is a shot in the arm for those who want more of these tariff-free islands.

The debates on tariff concessions have all been about the goods and services created in the SEZ, their exports and local sales. Export processing zones already exist, and duty drawbacks have been part of policy for several years. But little has been said about the developer’s role. He gets duty-free import of raw material, steel, cement, equipment, power plants, fuel, etc., and then sells or leases the facility to ‘units’ that would engage in the actual creation of goods and services. The pricing of the infrastructure—sheds, power, water, et al., is in the hands of the developer, a clear case of monopoly pricing. And the units must bear the costs—that’s how these concessions distort markets and prices within the zones. Regulations here are weak, with much discretion in the hands of the development commissioners. The real exploiters of the concessions are the developers, not the units.

Such concessions and the costs of acquisition will be borne by us, whether through higher government subsidies or levies. A pity that policymaking is so skewed towards those with access that, in spite of all good intentions, the short end of the stick is with the general public. You and me.

Securing our farms’ future

Not only are our nutrition, public health standards falling, we are also moving into a food deficit territory

Policy Track | S. Narayan

Weeks ago, I wrote about the rising prices of crude oil, slowing down of exports and the likely increases in the price of wheat. It is little satisfaction to see these events happening. The worry I had expressed then, that the proponents of capital account convertibility, free exchange rates and an open financial architecture were missing the heavy dependence on manufactured consumption goods, energy and food imports that this economy is hurtling towards, is now even more relevant.
On food security, a recent paper of the International Food Policy Research Institute raises concerns. It looks at two dimensions of food insecurity: the inability to access both sufficient food and nutritious food. The food energy deficiency prevalence is 51% in South Asia and 57% in sub-Saharan Africa. But, with the numbers far bigger, the problem is greater in South Asia.
As the paper points out, the number of underweight children under five, low birth weight children as well as underweight women are far greater in South Asia as a percentage than even in sub-Saharan Africa. The recent National Family Health Survey (NFHS 3) confirmed an increase in the percentage of underweight women and children in India over the last decade. The study also points to interfamily deficiencies and says that girl children and women suffer greater insecurity.

Some of this is known (perhaps not that we are comparable with sub-Saharan Africa). The added worry, as shown in a recent Economic and Political Weekly article, is that cereal production per capita is declining, and that the period of agricultural growth seems to be over. Those who argue that the share of agriculture declining to below 20% means we are more “developed”), should be worried that India has emerged as a large importer of wheat and that this can disrupt the future markets in wheat, as our demand accounts for more than 26% of all wheat traded in the current year. We are also a major importer of pulses and of oil seeds.

Finally, the commissioners appointed by the Supreme Court have reported that the Public Distribution System is just not working.

In short, not only have we worsened our nutritional and public health standards over the last decade, we have also moved into a food deficit territory over the last five years. We are unable to deliver food to BPL (below poverty line) families. Media photographers, printing pictures of the houses and SUVs of the newly rich farmers who have just sold off their fertile land for real estate, should remember this means less food for them in the future.

There is a similar story in energy, but that is for another column.

Sadly, there is little evidence of any policy intervention. The agriculture ministry is busy defending the price it paid for wheat imports, even when the issue is not about the tender process, but about what other countries were paying at the time. There is still time to correct matters.

The finance minister has rightly been talking about supply-side constraints driving food price inflation. In order to deal with this, three steps are necessary. First, raising production and supply of cereals requires a relook at the support prices for farmers, ensuring supply of fertilizer and seed inputs at reasonable prices, and technology and other support for increasing farm productivity. Sounds familiar? Then why is it that these very basics are not happening? A recent advertisement by the ministry of fertilizers made the shortages and distribution bottlenecks apparent. The past decade has introduced no new seed for paddy or rice that can be called a breakthrough. Clearly, we have the institutions and the infrastructure, but these have gone to sleep. Can one see any agricultural extension worker fromthe government in any village? Surely a little determination can make them work again.

Second, pushing rural credit mindlessly is only aggravating indebtedness. If we can pay horrendously high prices for imported wheat, we should pay our farmers comparable rates. Inter-state barriers to movement of farm goods need to be removed, and markets for these made free. Again, much talked about, but little done.

Finally, can we ensure industrialization does not take away fertile agricultural land? Take the marginal lands in Tamil Nadu, Gujarat, Maharashtra, not the fertile lands of Haryana. Instead, it is possible to bring the farmers of Haryana into the mainstream and add to their earning capacity by integrating them with food processing and value addition activities that produce goods for the urban table.

None of this is rocket science, or newly discovered solutions. The longer we don’t do the needful, the closer the danger of food insecurity. Let us focus the next five years on agriculture, not the stock markets or mergers and acquisitions.

So this State won’t wither

It is the appropriation of state resources by a few that subnational movements are fighting against

Policy Track | S. Narayan

An article by Selig Harrison in the International Herald Tribune, reprinted in other papers, has captured attention here in Singapore. It foresees a gloomy future for Pakistan, suggesting that the country could eventually break up along ethnic lines. There is also much discussion about the unilateral declaration of independence by Kosovo and Putin’s strong reaction to it. And then, there is Spielberg’s protest against the purported involvement of China in the Darfur conflict. Across the world, subnational entities are claiming their right for nationhood and statehood, facing repression resulting in violent upheavals. The last quarter of a century has seen a lot of this—Russia and the Central Asian Republics; Czechs and Slovaks, Macedonia, Croatia, Serbia and Bosnia. The European menace now seems ready to spread elsewhere, to South-East Asia, East Timor and other countries.

The interesting, and perhaps worrying, part is that after creating a separate nation based on their cultural identity, these new, quite small, nation states seem to have done quite well for themselves. Most of the Central Asian republics are prospering, so are the Czechs and Slovaks, as well as several of the other countries mentioned above. Their GDP per capita has grown substantially, and human development index improvements have been more rapid than in India. There seems to be some strength to the argument that small states are better governed and able to take better advantage of their resources.

Could such trends emerge in India? What would be the consequences?

Recent and continuing events in Maharashtra indicate that though a political ploy, there is some support for the anti-north Indian sentiment. It is also now clear that there is sympathy for the Sri Lankan Tamils, even the most violent fractions of it, in Tamil Nadu. We saw the anti-Bihari sentiment in Assam. There is the Telengana movement in Andhra Pradesh. Of these, perhaps the Assam and Maharashtra sentiments are driven more by competition for economic development; the Tamil Nadu one is truly an ethnic sentiment.

Apart from these, there are also sub-national movements based on deep-rooted caste differences. There is an attempt to enlarge the footprint of the BSP across India; there have been earlier attempts to unite Yadavs of the country, and so on. A number of caste-based political parties are springing up and jockeying for position in coalitions that can be formed to rule, both in the states and at the Centre. Finally, there is the divide between the secular and the non-secular parties—itself an attempt to divide the citizens.

Running through all these fissures is the gap between the poor and the non-poor, expressing itself in violence and extremism in states with Naxalite activity.

Some broad observations are possible. First, this country has lived with differences for several thousand years, and its cultural identity, habits and regional influences, have coalesced into a national identity that is not easy to dissolve. Most movements mentioned here have been put together by groups seeking political power within the democratic framework. They recognize that this is an era of coalition politics, and that even small groups would have leverage in the coalition beyond their actual voting percentages. It is understandable that with the largest political parties unable to grow the democracy into a two-party system, other participants, based on different ideology or caste groupings, would emerge. Still, it has to be recognized that the political process is the path to economic influence, and the reservations, patronage and rent-seeking are likely to be the motivation for these small parties to survive and prosper.

Perhaps this should be the cause for worry. The so-called subnational entities, unlike in other parts of the world, do not have (except a very few) a clearly defined region or geography to claim nationhood or statehood. But there is certainly a claim on public offices, public finance, public patronage, and indeed the spoils of office that these groups are strongly fighting for. It is this approach to appropriation of state resources by a few that the extremists are fighting against, and they are gaining ground.

It is important to recognize fissiparous tendencies and find solutions. At the individual level, there are opportunities for all. One has only to look at the growing middle class, the young and the affluent. It is important to provide the same access to everyone, so that there is no need to seek niches to grow in. So one goes back to the importance of inclusive growth, of higher educational attainments, better access to skills and technology and the host of economic actions that are necessary to bring prosperity to the entire nation. If there are opportunities for growth and affluence for all, across the entire country, there would be pride in nationhood. One has only to look at the multicultural US to recognize this. The urgency for removing regional disparities, for improving the lot of agriculture, for providing opportunities for the poor and the backward, is thus no longer just an economic agenda —it is necessary if we are to keep the nation together after a decade.

S. Narayan is a former finance secretary and economic adviser to the prime minister.

Under the election shadow

The Budget meets important concerns halfway, while making tantalizing promises for the future

Policy Track | S. Narayan

Some announcements in the Budget are in line with media and analysts’ expectations. At the macro level, it is heartening that the fiscal as well as the revenue deficit targets for 2007-08 are being met. The 2.5% fiscal deficit target for 2008-09 as well as the reduction of revenue deficit to 1% continue the path towards fiscal consolidation. For the first time, however, there is recognition that the off-budget subsidies, such as oil, food and fertilizer bonds, constitute “real liabilities” and need to reflect in government accounting. Finance minister P. Chidambaram’s statement that he would request the 13th Finance Commission to revise the road map for fiscal consolidation is a bit worrying, signifying that the growth flexibilities he has had in the past are eroding and that he needs to be careful about his expenditure.

Actually, he has. The growth in the gross budgetary support is only 16.4%—a low figure if one considers the 19% increase granted between 2002 and 2004, the even higher growth in budgets before that period and the even higher increases after 2004. Allocation of only Rs10,000 crore under plan ‘B’ for plan capital also indicates there won’t be much more money for the 11th Plan available during the year. This must be disappointing to the Planning Commission. Still, focus on controlling inflation and on growth speaks of prudent management.

There are several positives. Most important are the indirect tax initiatives. Keeping the peak rates of customs duties in an era of an appreciating rupee is sound judgement. Excise duty reductions as well as targeted decreases in two-wheelers, paper, pharmaceuticals, etc., are intended to strengthen the growth sectors in Indian manufacturing. There seems to be a message here. Corporate tax rate changes affect companies, owners and shareholders—indirect tax cuts help industry to grow, and the choice of the latter is an attempt to spur growth.

At the same time, the personal income-tax concessions are measured, welcome and not overboard.

The big news is in agriculture. The waiver of loans for small and marginal farmers, at an announced cost of Rs60,000 crore, is an important relief and makes the sector viable again. The investments in irrigation, food security, agricultural production and productivity as well as fresh infusion of capital are likely to give fresh growth impetus in this sector. The worry is that there is no clarity about where this money is to come from. If the government is to reimburse the banks over three years, as has been clarified, then there would be a budgetary burden as well as a burden on the banking sector.

The focus on education and health was also anticipated. However, the investments proposed in secondary education are fairly modest, and the major increase is happening in midday meal schemes—a consumption expenditure rather than investment. It is interesting that there is repeated mention about schemes for SC/ST and for minorities—indicating a real concern for these vote banks. That perhaps accounts for the announcement about a large number of fairly small schemes, carefully distributed over the geography of those states that are definitely going for elections this year, and those that are important allies of the United Progressive Alliance.

Such minutiae are hallmarks of state budgets, not the government of India’s budget, and the shadow of the election is obviously looming large.

There is, however, a sense of disappointment. There is no mention of infrastructure. The Budget does not address any of the issues raised in the Economic Survey tabled only the previous day. The survey points out the crying need for reforms—there is little in the Budget speech, not even lip service to the recommendations made therein. There is little comment on the unfinished agenda in banking, financial markets and insurance. There is no information on how the pressure of capital inflows would be managed, though there is a threatening mention of “short-term measures”. It had been expected that there would be a sovereign wealth fund created, which would help Indian investments overseas—but this hasn’t been announced.

Important concerns have been met halfway, tentatively. There is crying need for upgrading skills—the suggestion is to form a new entity whose role and task is uncertain. Irrigation is a great initiative—but with inadequate funds provided. Climate change concerns are voiced—and left to a permanent body to be constituted in the future. Corporate bond markets are important, but there is no finality about how this is to be achieved. Short-term capital gains are to be taxed more and the securities transaction tax is to be treated as an expenditure, not as a part of tax paid—an additional burden.

It’s fairly clear that elections are not far away, and it is now possible to speculate that they could be sooner, rather than later. The Budget leaves the opportunity to carry forward the promises in the new government, while making tantalizing promises for the future.

S. Narayan is a former finance secretary and economic adviser to the prime minister.

Beyond today’s politics

If public policy is for the few and by the few, it would only alienate the citizenry, sooner rather than later

Policy Track | S. Narayan

I can well imagine how excitement and expectations today would overshadow concerns about economic issues, but the real world of goods and services, of markets and trade, will go on independent of the blips of politics. The last couple of weeks have been particularly interesting, and a lesson on how differently similar problems are being handled in the US, UK and here.

The concerns over the likely implosion of the two massive mortgage security institutions in the US—Fannie Mae and Freddie Mac—are an example. These are government-supported institutions (GSEs), which buy mortgages from banks using debt raised in the market at lower interest rates. Once the underlying mortgages get distressed, so does the business model. These two institutions account for a significant proportion of the mortgage debt outstanding in the US, and a collapse would ripple through the entire financial market. In the wake of the likely implosion of a California-based bank, the Fed and the treasury have moved swiftly to find a solution. Fannie Mae and Freddie Mac will have access to federal funds in the form of debt, equity and guarantees, but existing shareholders would have to take the brunt of lower values. There have been academic debates on two counts—first, concern over state intervention in a country where markets are traditionally left to determine winners and losers; and second, the moral hazard of choosing new equity over the older shareholders, arguing that this would reduce future risk taking by investors. But markets and the public have broadly welcomed the moves.

Note that in an unusual situation, the treasury and the Fed have not been averse to finding new solutions, in fact pragmatic ones over theoretical, and the treasury secretary is winning applause as a problem solver. At the same time, the Fed chairman is open about his concerns and has presented a grim picture of inflation and economic slowdown.

So, pragmatism and transparency, and an attempt to ensure swift action to protect the masses of investors and customers. In short, less economists, more doers.

Similarly, in the UK, there is transparency over the Bank of England’s letters to the chancellor saying that they would have to live with the inflationary pressures, as any monetary tightening would slow growth further. There is also the promise that banks and institutions in distress would be supported.

Let’s compare this with events here. First, there is an assertion in the media, and in public, by policymakers, ministers, etc., that there is nothing to worry about. It has been said that inflation will decline by itself; the economy would continue to grow; food prices would be higher; and people would have difficulties making ends meet, but everything is fine. And in any case, the problems are due to causes beyond our control and, hence, there is nothing much to do. One has only to watch the TV to see this message repeatedly coming across from the government.

It is possible to argue that in the face of declining growth in industrial production, lower capex investments, and slowing infrastructure development, pragmatic answers are possible. For example, and there could be other ideas as well, focused support to investment and industry as well as emphasis on rapid infrastructure development could ensure that we do not get into a downturn. It is better to react early than too late. Further, if it is clear that higher oil prices are here to stay, is it not important to know the strategies for dealing with the future? In terms of problem solving, the Reserve Bank of India (RBI) has also been a hesitant conservative. Depreciation of the rupee has certainly added to inflationary pressures, but RBI has not sought to deploy its reserves to stem this, and reduce the burden of the market stabilization scheme bonds.

The other, more significant departure is the concern over individuals, over shareholders, rather than public at large. The windfall tax controversy is a case in point. Windfall gains are associated with lotteries, where a risky investment is made with a low chance of success. How would unexpected increases in oil prices constitute windfall gains? If there have been aberrations in policy, these need to be addressed, and a wakeful media needs to question how these aberrations happened, but to raise this to the level of a national debate is surely a waste of resources in itself.

This brings me to the final thought. Everywhere I have gone, I can actually see the benefits of government activity for citizens. In Cambodia, I recently saw a large public lake being upgraded into a leisure spot, where the buzz among citizens was about the benefit from tourist inflows. Why are there very few public projects in India that people relate to, where they can see direct benefits? The Delhi Metro, of course, is an exception. If public policy is for the few and by the few, it would only alienate the citizenry, sooner rather than later.

S. Narayan is a former finance secretary and economic adviser to the prime minister.