India’s Big Government Page 2

  And Air India is not the only such dinosaur that the government continues to patronise. One of the companies that the government continues to own is Hindustan Photo Films. Of course, the company doesn’t make photo films anymore, but in 2014-2015, it had losses of Rs. 2,164 crore. The question is: Why would a government in this day and age continue to own a photo film company? This is discussed in detail in Chapter 2.

  Hence, over the years, the government has tried to do many things on its own without having the wherewithal to do so. As Kaushik Basu, a former Chief Economist of the World Bank and a former Chief Economic Adviser to the Ministry of Finance in India, writes in An Economist in the Real World—The Art of Policymaking in India:4

  One mistake early Indian policymakers made was to try to micromanage the economy. While it is true that the government needs to attend to a range of policies, from shipping to the quality of education in villages, to managing the nation’s international economic relations, it is imperative to realise that it is not feasible for the government to attend to all the varied and layered needs of society with equal diligence.

  As Basu further adds: “An intelligent government recognises that no matter what kind of society it aims to build [emphasis original], it is hopeless to try to deliver it all by itself.”5

  The best example for this is the huge number of Central Public Sector Enterprises (CPSEs) that were set up between the 1950s and the 1970s to make almost everything, from steel to bread. In 1951, India had just five CPSEs. So, this is not something we inherited from the British when they left India in 1947. Over the years, many of these firms have ended up being terribly inefficient. Those which continue to do well are largely in areas in which the government has a monopoly. This is discussed in detail in Chapters 1 and 2.

  This inefficiency has hurt the Indian economy over the years, and it continues to do so. The accumulated losses of the CPSEs stand at more than Rs. 1 lakh crore. The accumulated losses of the state electricity boards stand at close to Rs. 4 lakh crore.

  Other than the CPSEs, the government continues to own 27 Public Sector Banks (PSBs). This has cost the government a lot of money over the years. Between 2009-2010 and the time of writing the introduction to this book (November 2016), the government had invested close to Rs. 1,25,000 crore in these banks to recapitalise them. The banks are thus huge money guzzlers. Estimates suggest that the recapitalisation of these banks would need close to Rs. 10 lakh crore by 2019, when the new Basel III norms come into effect. Where is the government going to get this money from? This is discussed in detail in Chapter 11. This chapter is slightly more technical than the other chapters in the book, and so, dear reader, if you find it a tad too technical for your taste, you can give it a skip. It won’t make much of a difference to the overall message of the book. At the same time, I suggest that you do give a shot at reading it.

  Of course, all this money could have gone towards other things. And more than the money, it diverts attention from other, more important issues that need to be handled. As Vijay Joshi writes in India’s Long Road—The Search for Prosperity: “The Indian state is too much of a jack of all trades…. Unfortunately, the Indian state has shown itself unequal to the challenge of discharging core tasks. This is partly because it has taken on too much that is outside its proper domain.”6 Over the years, very little attention has been paid to important areas like education, healthcare, law and order, trade policy, physical infrastructure, the railways, and so on.

  Another excellent example of the government trying to do everything are the Industrial Training Institutes, or the ITIs in short. Until a few years ago, the government had dominated the low-end training space through the 8,500 ITIs spread all across the country. The price of attending these courses was very low. But they really did not solve India’s low-skills problem in any way.

  Many ITIs do not offer courses on acquiring skills like plumbing, which are very much in demand. Over and above this, they insist on educational qualifications which are really not required. Take the case of the states of Uttar Pradesh and Maharashtra, two of the larger states. If you want to get into a carpentry course in an ITI in these states, you need to have passed Class VIII, with science having been one of your subjects.7 Why is this even a requirement? Whatever science is required in these cases is bare-bones enough to be taught at the beginning of the carpentry course itself.

  Thankfully, the realisation has sunk in that the government cannot skill everyone who is looking for a job. In recent years, the National Skill Development Corporation has started partnering with private enterprises to offer training courses. This is indeed a good development, which is discussed in detail in Chapter 5.

  What else is Big Government? It is the government trying to come up with ambitious solutions without taking into account its own implementation capabilities or even that of the system as a whole. Or, to put it simplistically, that perfect is the enemy of good is not something that Indian governments understand.

  Take the case of the Right to Education, which became a legal right from April 1, 2010 onwards. The idea behind this is to offer free and compulsory education to children between the ages of six and 14. A very noble thought indeed! But this comes with other requirements, like schools having adequate physical infrastructure like, say, a playground. Over and above this, the Right to Education Act makes it compulsory for teachers to complete the syllabus without really addressing the required learning outcomes.

  The result is that the learning outcomes of students have been falling drastically over the years. An estimate suggests that, over the period of ten years up to 2015, 10 crore children completed primary school without the ability to do some basic reading or even mathematics.8 This is discussed in detail in Chapter 3. A similar sort of mess can be seen in the ambitiously launched Mahatma Gandhi National Rural Employment Guarantee Scheme. This is discussed in detail in Chapter 13.

  If that is the state of Indian education, how does a programme like Make in India take off? Even jobs like those of a plumber, mason or carpenter demand some ability to read and to do some basic maths. Jobs in manufacturing also require some basic educational skillsets, as do jobs in various services.

  Given this, the Right to Education looks towards a perfect outcome and, in the process, has ended up spoiling what used to be a good enough or decent outcome. In fact, many private schools with low fees, which cannot afford to have the physical infrastructure that the Right to Education Act calls for, have been shutting down. And this is not a good sign.

  The solution is to focus on learning, and that is something which has traditionally been missing from the education policy of the government. The implementation of the Right to Education has only made it worse.

  Another great example of perfect being the enemy of good are India’s labour laws. Estimates suggest that India has around 200 labour laws (if one takes into account those passed by the central government as well as the state governments). The idea behind each and every labour law is to protect the labour force employed by businesses. It is to ensure that they don’t get a raw deal, and the inherent fairness that should be a part of any democratic system is thus expected to be maintained. Noble intentions indeed!

  But the negative consequences of this are now huge. The labour laws have become so complicated that an average Indian firm starts off small and continues to remain small. An average Indian firm employs around 2.2 individuals.9 Also, many of these enterprises are run by reluctant entrepreneurs (a term coined by the economists Abhijit Banerjee and Esther Duflo). These people would happily take on a regular job if it were available. They become entrepreneurs because they do not have a choice. This is discussed in detail in Chapters 4 and 7.

  Jobs are created in a country when small firms grow bigger. In India, this is clearly not the case. Small firms continue to remain small. Given this, what happens to the close to one million (10 lakh) Indians who are entering the workforce every month? Where are the jobs for these individuals? And if there are not enough jo
bs for them, what happens to our so-called demographic dividend, which is something that we have been hearing about for the last ten years? This is discussed in detail in Chapter 4.

  These are not easy questions to answer. But things can be turned around if Big Government in these areas is overturned.

  And what else constitutes Big Government? It is the government meddling in markets with the intention of helping the poor and downtrodden, but ending up with unintended consequences which it had of course not bargained for. The Indian state is an intrusive one, and that ends up hurting the overall economy.

  Take the case of the rice and wheat that is distributed to the poor through the Public Distribution System (PDS) to meet the requirements of the Right to Food Security Act. This rice and wheat is procured from farmers. The government procures these foodgrains through the Food Corporation of India (FCI) and other state procurement agencies.

  The government buys as much rice and wheat as the farmers bring to it. This has led to a situation wherein there is a huge overstocking of rice and wheat with the government. Until a few years ago, this pushed up the prices of rice and wheat in the open market. At the same time, tonnes of rice and wheat were rotting in the godowns of the FCI. Furthermore, the assured procurement of rice and wheat has led to a situation where farmers are not growing enough pulses or oilseeds.

  Hence, the prices of some pulses have even crossed Rs. 200 per kg in the recent past. This is the unintended consequence that the government hadn’t bargained for. It doesn’t help that, over the years, with increasing income levels, dietary patterns have changed and people are eating more protein-based food. Pulses are an excellent source of protein. Hence, their demand has gone up, but their supply hasn’t kept pace, despite the government importing a huge quantity every year.

  What is the solution? The government has started buying pulses as well, just like it buys rice and wheat. The hope is that assured procurement will now encourage farmers to grow pulses as well, just like it had encouraged them to grow rice and wheat in the past. And once the farmers start growing more pulses, the prices will stabilise. The question is: What will be the unintended consequence of this? That time alone will tell, but there definitely will be one! This is discussed in detail in Chapter 12.

  What else is Big Government? It is the government offering the same product at different prices in order to make the lives of those at the bottom of the pyramid better and, in the process, violating the basic economic principle of one product-one price.

  Take the case of rice, wheat, kerosene and sugar, which are distributed through the PDS at a subsidised price (which is very low in comparison to the market price of these products). A huge chunk of this is siphoned off and sold in the black market. Hence, it does not reach those it is intended for. In the process, the government also ends up spending much more money than it would have if there were no leakages. The same stands true for urea as well, which is sold at a 75 per cent subsidised price. A huge chunk is smuggled into neighbouring countries and, at the same time, is also sold in the black market for other industrial uses. In Punjab and Haryana, it is used to whiten milk.

  The way to get around this is to use information technology and banking infrastructure in order to make cash transfers, which allows people to buy things at their normal market prices. The infrastructure which would allow the government to deliver on this is still being built. Hopefully, after a few experiments, the government should be in a position to have it implemented throughout the length and breadth of the country. This is discussed in detail in Chapter 12.

  For something like this to happen, Big Government needs to distinguish between delivering a product and producing it.10 This is best explained by a conversation I had with a senior editor of a digital publication. This gentleman justified the government owning a company called HLL Lifecare, which produces condoms, among other things, on the pretext that the government needs to distribute Nirodh condoms to the citizens of this country.

  While the government can choose to distribute condoms through its healthcare centres throughout the country, there is no reason that it should be producing them as well.11 It can simply buy them over the counter from private companies, which anyway do a much better job of producing condoms than the government ever can.

  Along similar lines, if the government wants to distribute rice and wheat, among other things, there is no reason why it should go around acquiring this rice and wheat and then selling it at a very cheap price through the PDS. It would be far simpler for the government to hand over an adequate amount of cash to its citizens, who can then buy rice and wheat from the open market at the market price. This would ensure that the rice and wheat would reach those it is intended for, which is definitely not the case the way things are currently.

  And what else is Big Government? It is the government having too many regulations in areas where it has hopes of redistribution by taking money from the rich and paying it to the poor. Take the case of the income tax scenario in India. In 1970-1971, the highest marginal rate of tax was 97.75 per cent. The idea, of course, was to tax people who earned beyond a certain amount and to use that money to do good things for the poor.

  What it did instead was lead to a situation wherein people who were supposed to pay income tax simply did not. The black economy, where people carried out transactions in cash, thrived. The highest marginal rate of income tax has come down to 30 per cent since then. Nevertheless, the black economy continues to thrive, given that the income tax system continues to remain complicated and that the reputation of the Income Tax Department is not the best one going around.

  The thriving black economy essentially leads to the government not earning as much revenue as it should. The black money that is generated finds its way into real estate and gold. In fact, real estate is the number one conduit for black money in the country. It has led to a situation where real estate prices have gone through the roof all across the country, making homes unaffordable. This is discussed in detail in Chapter 9.

  In a country like India, this leads to the misallocation of capital. It also puts a question mark on missions like ‘Housing for All by 2022’. Furthermore, real estate and construction can be a huge job generator, given that they can generate low-skill jobs, which is where India’s comparative advantage lies. But, for that to happen, the housing sector needs to be revived. For the housing sector to be revived, it is essential that the amount of black money going into it comes down.

  The real estate sector has forward and backward linkages with 250 ancillary industries.12 This basically means that when the real estate sector does well, many other sectors, right from steel and cement to furnishings, paints, etc., do well. The multiplier effect is huge.

  The real estate sector has now been in the doldrums for more than five years. The simple reason for this lies in the fact that most Indian real estate is unaffordable. For this anomaly to be corrected, the nexus between politicians and builders needs to end. The system of electoral financing needs to evolve and move away from the way it currently is. And this is easier said than done.

  In fact, many of these areas of Big Government lead to the government not earning as much revenue as it could. This leads to a situation wherein the government has to fudge data in order to meet its fiscal deficit target every year. The fiscal deficit is the difference between what a government earns and what it spends during the course of a particular year. This is discussed in detail in Chapter 10.

  One area where Big Government has made a huge mess is in the area of land acquisition. In this area, the government, working through the district collector, had almost unparalleled powers under the Land Acquisition Act of 1894 (which lasted until 2013).

  In fact, the government could acquire land almost overnight, from anyone and at a very low price, and then declare it to be for a public purpose. In 1984, the Act was amended, and the government was allowed to acquire land for even companies. After this, land was acquired under the guise of public purpose for ash
rams, swimming pools, golf courses, colonies, and even compressor factories.

  There were many cases wherein governments acquired land cheaply from farmers and then sold it to private companies at much higher prices. Of course, this couldn’t have gone on ad infinitum, and protests soon broke out across large parts of the country. Protests in parts of West Bengal at Singur and Nandigram turned extremely violent.

  All this finally led to the passage of a new Land Acquisition Act in 2013. This Act, given that it plugs the loopholes of the 1894 Act, has brought the entire land acquisition process to a standstill.

  Companies like to acquire land through the government for many reasons. A big reason lies in the fact that land titles in India are not clear. This is again an impact of Big Government. While the government was concentrating on things it shouldn’t have been doing, it did not concentrate on things that it should have been doing.

  The Rajasthan government has recently made some progress in coming up with a foolproof system on the land title front. Hopefully, other states will follow suit soon.

  Then there is the issue of Change in Land Usage (CLU). Agricultural land beyond a certain size cannot be owned, as per the land ceiling regulations. This limit varies from state to state. What this does is that it limits the way a company can go about buying land that it needs for a particular project. A corporation wanting to set up a project cannot buy land beyond a certain size. Furthermore, it is not possible to buy the land and then appeal to the state government for a change in land usage. In order to get a change in land usage clearance (say, from agricultural to industrial), a company needs to acquire land beforehand, and this is not possible given that agricultural land beyond a certain size cannot be owned.13 So, this is a bit of a chicken-and-an-egg situation, something which is an outcome of Big Government again. This is discussed in detail in Chapter 8.

  On the flip side, the farmer who owns the land and wants to sell it and is looking for a buyer is also not granted a change in land usage clearance.14 Hence, private companies looking for land for reasonably big projects end up approaching the state government. Actually, the entire system the way it is structured is rigged in favour of politicians who are in positions to be able to grant CLU permissions.