MODIfying India


  • Business
  • Saturday, 14 Mar 2015

Modi pays homage in front of a World War I memorial at India Gate, New Delhi recently. Much will depend on his leadership to drive through reforms that were previously stalled for various reasons. – AP

Prime Minister Modi has vision and mission for India to catch upwith China in economic development.

THE three population giants in Asia – China, India and Indonesia – have now in place three leaders who are deeply committed to reforms – namely Xi Jinping, Narendra Modi and Jokowi.

What is remarkable is that all three leaders share a common background and experience in governing cities or provinces away from the central government. They represent a new generation of leaders that understand the importance of bottom-up and decentralised development. Large countries like China, India and Indonesia all face the common problems of large population and dispersed geography, with different parts of the country at different stages of development, diverse cultures, languages/dialects and historical outlook. Hence, centralisation may add to national cohesion, but may also slow down the ability of different regions and cities to experiment and innovate to become new growth poles and agents of change.

All three countries have histories of strong central governments, but the Chinese experience has shown that competition between provinces and cities have helped the growth process, but also created new problems. Both China and India since 1949 and 1947 respectively have very strong planning background, but one of the first acts of Prime Minister Modi was to dismantle the Indian Planning Commission (established since 1950). In its place, Modi set up the National Institution for Transforming India (NITI Aayog), which will include chief ministers from the various states to reflect the shifting power balance between the centre and the states.

China coordinates national development through a powerful National Development and Reform Commission (NDRC), which ensures that the five year plans (and annual budgets) at every level of government, from county to province, are consistent with its Five-Year Plans. Both China and India are in their current 12th Five-Year Plan (2011-2015 and 2012-2017 respectively). China’s 13th Five Year Plan (2016-2020) will put in place many of President Xi’s fulfilment of the China Dream.

Although India’s GDP and per capita income, at US$1.9 trillion and US$1,499 respectively, are roughly one quarter that of China, the speed of Indian GDP growth has been rising, whereas that of China is slowing. With much more favourable demographics and benefiting from abundant cheap labour and opening up, some analysts think that India’s growth rate will exceed that of China sometime before 2020.

Modi clearly has a vision and mission for India to catch up with China in almost every aspect of economic development.

Much will depend on his leadership to drive through reforms that were previously stalled for various reasons, one being the formidable Indian bureaucracy – what some pundits call “the licence Raj”. The Indian bureaucracy is so famous for licensing everything that one cynic suggested that the IT industry could not have succeeded if the civil servants had understood what it was all about. At the heart of the centralisation-decentralisation debate is the extent to which local governments have revenues and powers to decide on their own where and how to deploy resources to best “fit” their own development targets.

The Indian government inherited its civil service structure from the British after 89 years of colonial rule, but some interesting institutional innovations deserve closer examination for adaptation in other developing countries facing similar problems of fiscal management. One such institutional innovation is the Finance Commission, an independent commission of experts to advise the government (including the provincial governments) on how to raise revenue and share that revenue. The commission’s term of office is five years, chaired by an acknowledged authoritative chairman.

It may be serendipity, but clearly the stars are aligned for Indian development, because the 14th Finance Commission (2011-2014) was chaired by Dr Venu Reddy, former governor of the Reserve Bank of India, who not only had the reputation of helping India avoid the global financial crisis of 2007-2009, but also vast experience having been top civil servant at the Ministry of Finance, and also at the provincial level.

His report coincided with Modi’s vision of developing India from the bottom-up. Because India had low tax revenues owing to low tax rates, its ability to spend on development and infrastructure is currently less than one third that of China.

The 14th Finance Commission recommended new ways to raise state and local government revenue, either through municipal bonds, increasing tax rates (on professions, property and mining), and/or imposing tax on new sectors (vacant land, betterment and entertainment).

The new Indian 2015-2016 budget adopted many of the commission’s recommendations, aiming to increase government revenue and infrastructure expenditure. For example, like Singapore, India will also impose an additional 2% surcharge on the ultra rich. Furthermore, more taxes will be imposed on the mining sector and public utilities. China’s mining tax on iron ore was 80% (2012), while India’s was a mere 10% (2009).

In a sweeping move to improve the efficiency of public utilities, it was proposed to meter 100% all water and electricity usage, to cut down subsidies and recover full costs of public utilities.

Furthermore, in a break with the Finance Commission’s past inclinations that favoured central government control of revenue, the commission recommended that the states should have 42% share of central government tax. Previously, the states only had 30% share or less, until it was increased to 32% by the 13th Finance Commission.

As an institutional innovation, the Finance Commission model has four clear advantages for the management of large government bureaucracies. First, it is professional and meritocratic. Even though political views and opinions of the members cannot be avoided, by and large the chairman and members are professional experts well-known for their expertise and independent approach. Second, the workings of the commission are transparent. By consulting different levels of government, academics, think-tank experts, civil society and even students, whose views are on record and published, the commission is able to improve the social debate on some complicated and controversial issues that deserve more open discussion, without the debate being politicised.

Such transparency improves the quality of discourse and academic standards, because the university and professional communities are able to access more information and knowledge about how the government works and provide good feedback on the complex issues involved.

Third, the process of the commission’s work improves accountability and the rule of law in due process. The government (and the politicians) know that they will get the best professional and scientific advice they can get, properly consulted with good feedback on the different options available, including valuable domestic and international experience. It helps the rule of law, because when future tax or policies are implemented and disputed, the courts will have public records of the policy debate and the thinking behind such tax rules or regulations.

Fourth and perhaps from the political process the most valuable option, there is deniability. The government does not have to accept all the recommendations of the commission. It has the option of choosing what it feels is politically acceptable and implementable. All it has to do is to explain why it made a particular choice of policy direction.

A relatively closed-door debate over the various issues means that if the policies turn out to be faulty, the government cannot deny that it alone made the decision. Whereas if the policy was a recommendation from a commission of independent experts, the government can say that it was done with the best available advice and information.

There is no doubt that the competition for growth and development between China, India and Indonesia will drive innovation and new avenues of change to Asia. The Asian region has much to learn from each other’s strengths, experience and also mistakes. Asian institutional innovation, many of which were borrowed from elsewhere, has helped innovation and growth across the board, to the benefit of all.

Andrew Sheng writes on global issues from Asian perspectives.

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