India has transformed dramatically in the last decade, growing four times to become a nearly $2 trillion economy. The new India now needs fresh rules and Budget 2012-13 should aid this transformation. Panellists who took part in Mint’s debate on how the budget will affect the policy structure and how far will that impact the country agreed that it’s time for this year’s budget to act as a catalyst. They concurred that a growing fiscal deficit did not augur well for the Indian economy and the budget should focus on outcomes to ensure better accountability and address the growing leakages in various social sector programmes.
Mr Chawla, your institution, the Competition Commission, is an example of this paradigm shift that is required. What has been your initial experience?
Chawla:The state has ceded a fair amount of economic and technical role to the regulatory bodies in the economic sphere. Telecom regulator and airport economic regulator have come into existence in last 10 years. The competition commission is another new body, which has been functioning for last three years or so. It’s a market regulator, which is supposed to ensure a level playing field, that there are no anti-competitor practices; it is supposed to approve the mergers and combinations among the corporate entities above a certain threshold. There are hardly any real experts who have operated in this area in the country, either within the system or outside in terms of legal professionals, so in that sense it’s writing on a clean slate. This is going to be a very important area of regulatory oversight over the next five to seven years.
One sector where we have seen a lot of changes is energy also because it is an area where India has perennially been in deficit. As the head of two energy entities, how have you adapted to this new economy, especially in a deficit sector like energy.
Butola: As far as oil marketing companies are concerned, I think the paradigm shift is that anyone can invest in refining and marketing business and the other shift is that competition has opened up in the sector. That means 100% FDI (foreign direct investment). Any foreign company can make investment in India, can set up marketing network and so on.
The paradigm shift is that, at some point of time India was importing not only crude oil but also petroleum products. Today the country has approximately 45 to 50 million tonnes surplus capacity and exporting to the markets as advanced as the US, Europe and some of the Asian countries. We have a competitive advantage in terms of further adding to our exports. The petroleum import bill last year was around $70 billion. This year it will be in the range of $90-$100 billion on net-to-net basis. Fortunately today, the GDP is so large that even a $100 billion import bill is not so significant.
Thakur: Things are still very worrisome. Let’s look at ground realities. We still have to supply bulk power to state electricity boards. The consumer will have to buy power from only SEBs (state electricity boards) and their successor companies and none of them is in the good financial health. But, the good thing is that banks have stopped bailing out the SEBs like giving working capital.
Today, people are saying, the annual loss of SEBs at national level is around Rs 75,000 crore. Now, SEBs generally buy and sell around 800 billion units of electricity in a year. If you raise the price of electricity at the consumer end by Rs 1, it gives Rs 80,000 crore of additional revenues. That will wipe out the annual loss.
Today, state after state is raising tariffs by 20-30%. Tamil Nadu is the latest, where the petition has been filed to raise the tariffs by 50%. Regulators must insist on reducing the losses of the state electricity board. They cannot go passing on the inefficiencies to the consumers.
In this new economy old challenges continue, making inclusion a parameter that has to be realized. Rama, should an entitlement regime be the answer?
Rama Baru: I think one of the greatest challenges for India has been while you had sustained high economic growth, if you look at health and education, they performed quite abysmally. Economic growth doesn’t seem to translate into human development outcomes.
You are also dealing with the sector, with weaknesses in public provisioning system, but also completely anarchic and unregulated private sector. So, what you are really finding is over time these boundaries have blurred and it is no longer a rich-poor divide.
Nobody is talking about this very large middle class. You cannot look at it as rich-poor divide anymore. Although, the government seems to do only that. A lot of the schemes for health are about targeting the below poverty line. So, if you are below poverty line, you are entitled to Rashtriya Swasthya Beema Yojana. If you are above the line, you are not. But, an episode of illness can push you down the poverty line. There is a great deal of evidence and I think the government has taken cognizance, but doesn’t seem to think or doesn’t rather move toward universalizing healthcare. So, I think, there is a serious challenge, which exists within the policy making circles of what kind of approach should you take ultimately to entitlements.
Rajiv, there is a cost to entitlements, especially if your delivery mechanism isn’t efficient enough and at a time when the fiscal deficit is under pressure. How do you think we need to do this?
Rajiv Kumar: It is going to be very difficult to create a whole series of entitlements without creating the capacities to actually achieve them. It is just not fiscally unsustainable but it is unsustainable in many other ways.
After having ceded ground to the private sector, there is very little being done to create a realm of trust between the public and private sector. I think this divide between the public and private sector will remain and until that continues to be so I am afraid we are not going to meet the aspirations of the economy.
Mukesh, you work with both Indian companies and multinational companies. I would like you to come into the need for trust to be built between the private sector and the government, a trust that has been broken in the last few years.
Mukesh Butani: We have to recognise that if we need to bring in the parallel economy into the tax net, we need to bring in reforms. Everybody is focusing on black money and Swiss accounts. But we have well oiled parallel economy which is working very well.
We talk about the tax to GDP ratio. Look at the tax collections in last 10 years. We are having a compounded growth rate of 18-22% in government’s tax revenues. So the question is not how much we collect but how we collect. That is where the trust factor comes in. We need to build greater level of trust. Other than being greeted by a samosa and a cup of tea, a large tax payer doesn’t get anything. Corporates complain that the number of tax notices that they have received has gone up drastically.
You have been working closely on the accountability issue and looked at the outcome of government spends. How do you think the whole budget can be reinvented?
Yamini: If the budget has to be reoriented, then it is critical that we even look at the outcomes of the budget. For that tracking of the outcomes is important. When the government came into power in 2009, there was talk of setting up of an independent evaluation office to track these outcomes. It has been three years and we are still in talks. If this budget will have to be about new India, then this budget would need to have a large allocation for that independent evaluation office to set that up.
When it comes to social sector programmes, we have spent a lot of time talking about more money being put into the system, the public private provisioning and cash transfers. But the fact of the matter is that our fundamentals, the basic government system and the ability to deliver are completely broken. Let’s take education. We have the right to education where we have built schools, hired teachers and achieved almost a universal enrolment rate in this country. But children come out of schools and 50% of standard V children can’t read a standard I textbook. What this means is that we need to create a delivery mechanism that goes beyond just construction of schools and enrolling children into school. So we really need to think of how to create a system that doesn’t function in the top down bureaucracy but actually starts from the point of delivery.
You have been very closely associated with telecom reforms in this country. It is one sector that has seen unprecedented growth and spread. But it is also one that has been in the middle of one of the worst scams in modern India. So what is the lesson here?
Rajat: If you look at telecom, the initial reform of creating an independent regulator was confounded with problems. You created a regulator as a knee jerk reaction after the Supreme Court said you cannot have private entry without an independent regulator.
The independence of the regulator was quickly challenged because the existing policy establishment did not agree with what the regulator was doing and therefore a new regulator was created who was seen as playing with what the policy establishment wanted. So an independent regulator has been difficult to create. That creates a governance deficit. If you are going to have private participation in markets which are inherently monopolistic or capital intensive, you cannot but have independent regulators. If you look at the World Bank’s “Doing business in India” report, in terms of giving permits and in terms of enforcing contracts, we are 181 out of 183 countries. That means the quality of our governance is the worst in the world. The political will to create an independent regulator is not there. So the Supreme Court in a landmark judgement on 2 February said all discretion will be taken away from the government and said all public resources have to be auctioned. Urban roads, railways, ports, civil aviation and roads in general—all these sectors, we are going to need independent regulatory expertise. We are going to need a regulator for real estate sector as well.
The second part of this panel discussion on panellists’ budget expectations will be carried on Thursday.
