There is a quiet in the corridors of government, and people in the know attribute it to ministries getting down to serious work. There is evidence of cleaning up in several ministries, with changes in the higher echelons of bureaucracy and a revamp of the personal staff of some ministers. The Budget is only a couple of weeks away, and the big companies are making effective use of the media to lobby their requests for tax breaks and tariff reductions. There has been a very good article by Narayana Murthy of Infosys that recommends downplaying the Budget into a revenue-balancing exercise and focusing on deliverables and programmes.
The Prime Minister has made it clear that he wants growth back to double digits, and the good news is that inflation is also falling. There is sufficient liquidity in the system, and there are investors willing to back the equity markets. The poor monsoon is cause for worry, but many financial firms are upgrading India’s 2009 growth prospects.
Financial investment firms upgraded prospects for China as well, based on the financial stimulus packages announced by that government. China has just announced $20 billion loan assistance to Russia, clearly indicating its financial superiority. It is interesting to compare the policy approach for stimulus used by China with that in India. The approach followed has been to focus on a massive infrastructure investment programme of half a trillion dollars. Interestingly, less than 40% of this is from the Chinese central budget—the local governments have been asked to find the balance and to implement the programmes. Banks have been asked to lend to provincial governments for this purpose, and liquidity infusion into the economy is through credit for infrastructure projects. There is, thus, an incentive for provincial governments to take up and implement long-needed projects, and the financial wherewithal to do it. Implementation is monitored through a simple incentive—governors who do well will be rewarded in the party hierarchy; others will not. Among the more important programmes is environment—cleaning waterways, urban waste management and water supply.
Let us compare this with the policy pronouncements made in the President’s address and in the Prime Minister’s letter to his cabinet colleagues. The focus is on “inclusive growth” that would be achieved by extension of the National Rural Employment Guarantee (NREG) programme, an Act to mandate food security—an extension of the NREG programme to urban areas, and liquidity infusion is through bank lending for the private sector and directed lending for agriculture. In short, while increases in liquidity are being targeted in China for the construction of infrastructure and the provision of improved services to citizens, in India it is being used for social welfare programmes and assisting the private sector. We could have done what China is doing, as we have a huge publicly owned banking system, and a federal structure that can reach to state governments and all major cities. Just imagine the benefits if the government had announced a major infrastructure programme in every major town over a one-million population, and left it to the local bodies to implement it, within technical and quality parameters laid down nationally—we would have our cities cleaned up and liveable in five years!
In the rural sector as well, something different is possible rather than granting agricultural loans and writing them off, leaving the farmer no better off. In investment terms, when banks give an agricultural loan, they are “long” on the crop— volume and prices, until the crop is ready. This is a financial risk taken by banks without adequate cover, given the volatility of crop yields and prices and the vagaries of the monsoon. This is the real subprime that hits bank balance sheets and government finances year after year. It should be easy to provide instruments in the markets where this risk could be mitigated by a vibrant spot and futures market of products. If agricultural produce could be stored and quality tested, then the receipts become marketable, with assured delivery at the end of the contract. From this, it is easy to develop futures and options that will mitigate risk. In effect, the bank lending for agriculture can continue, and the market would mitigate the risks of this lending through price and volume discovery that is transparent. Farmers would be benefited through a clear price for their products, middlemen would disappear, bank risk would be mitigated, and government interventions avoided. All that is needed is to create state-specific exchanges where such transactions can take place under the state regulators (under the Agricultural Produce Marketing Committee Act), and encourage farmers to participate.
It is important to think of new approaches. The pattern of programmes outlined by the government is a revisit of the rural development and poverty alleviation programmes of the past several decades, without any attempt to learn from their failures or think in terms of the new, young, urbanizing population of today. The needs of the people, as well as their aspirations, have changed and perhaps we should use the new tools at our disposal in the financial and services sectors to deliver what the citizen expects.
S. Narayan is a former finance secretary and economic adviser to the prime minister. We welcome your comments at email@example.com