1. Here’s how Narendra Modi govt will restore sanity to the economy

Here’s how Narendra Modi govt will restore sanity to the economy

The lower-level bureaucracy will no longer be able to disregard awards that call upon the government to make payments for construction. The government should now look at stalled payments in all sectors

By: | Updated: September 7, 2016 7:20 AM
modi re 660 . In sector after sector, we have colonial era laws which have not been repealed, but over which layer, subsequent socialist-permit-licence-raj laws have been written and oddly enough, over this layer, several other business-unfriendly (based on hostility and suspicion for businesses) and so-called anti-corruption rules and regulations keep getting added all the time. (Reuters)

The current dispensation at the Centre has been steadily and soberly moving in a direction which is trying to undo the effects of years of economic mismanagement, bad laws, dysfunctional processes, so on and so forth. Mainstream conservative opinion frequently gets worked up about the lack of a big bang Reagan-Thatcher approach. While there might be a case for the big bang approach, it appears to me increasingly that the present government has got it right in its step-by-step action orientation. The reason I say this is because I believe the problem with the nature and the quality of state intervention in the Indian economy is best characterised as a “palimpsest” problem. A palimpsest is an old painting over which successive generations of artists paint layer upon layer. The Indian scene has similarities. In sector after sector, we have colonial era laws which have not been repealed, but over which layer, subsequent socialist-permit-licence-raj laws have been written and oddly enough, over this layer, several other business-unfriendly (based on hostility and suspicion for businesses) and so-called anti-corruption rules and regulations keep getting added all the time.

A classic example is in the area of government payments. Anyone who has done business with the Indian government knows full well that contractually due payments will never be made by any government agency or department on time. Delay is a given, leading one to the conclusion that the government of India has dispensed with the basic economic law regarding the time-value of money. Our culture apparently can conveniently forget the realities of both simple and compound interest! Apart from delay, it is also absolutely required (on account of the palimpsest of laws, rules and procedures) to raise objections and question the contractual validity of payments. Many of these objections are trivial—“signature not clear, forms not submitted in triplicate”, etc—but each trivial objection can result in months of delay as the objections will invariably be dealt with sequentially by multiple agencies rather than in parallel. The substantive objections also tend to be vague and arbitrary—“it is not possible at this stage to emphatically state that the contract has been fulfilled as some unforeseen and unforeseeable issues may arise”. (Please note that this argument can be made about any situation.) Or even better “it would be desirable for a special committee to examine whether contractual obligations have been fulfilled”. (Please note that this means a delay of several years.)

The next rule of our government is the rule of refusing to accept a verdict gracefully and indulging in endless and protracted appeals. Even when contracts provide for arbitration awards, with the hope of reducing litigation and speeding up timelines for economic activity, the Indian government has shown a grim determination to insist on unproductive delays. An arbitration award to make a payment is treated as a serious “loss of face” and as far as the government machinery is concerned it is not the end of a process, as originally envisaged in the contract. It is merely the beginning of an appeals process that can go on till the end of the Kali Yuga!

The resulting gridlock means that there is a multiplier choking effect across the economy. If I don’t get paid, then it seems reasonable to me that my vendors, my banks and, for that matter, my employees can also live with non-payment with every hope that Kali Yuga may end soon. There is not a single sector which deals with the government—construction, fertilisers, sugar, highways, power, etc—where you will not encounter endless hand-wringing about non-payments. Over time, this results in many companies and whole industries getting “sick”—at which point the government will come up with a “sick industry package”—which, mind you, may never have been needed if the payments paralysis had in the first place not been created. And irony of ironies, the sick industry package will also be drip-fed so slowly and agonisingly that the patient is doomed not to be cured. Incidentally, state governments are a darn sight worse than Delhi. Many states think it is quite in order not to pay employees on time—and as far as employee retirement benefits are concerned—they are not considered a matter of right at all. The retired employee is supposed to go from pillar to post for months and years on end, greasing palms of generations of government functionaries, as the earlier ones have been mysteriously transferred. If a mid-level state government employee finally gets her retirement benefits, one must treat that as a noteworthy miracle. One wonders on what basis does government expect loyal and diligent service if employees are treated in this manner?

Now, we can see that the big bang approach may not be the medicine our economy needs. Changing the laws/rules/regulations/procedures in detail is perhaps what this generation of reforms really involves. And here I believe this government has gotten it right. The increasing use of auctions and reverse auctions in the commercial interfaces of the government, the emphasis on direct benefits transfer to beneficiaries rather than the use of clumsy and counterproductive subsidies, the public commitment to prospective and not retrospective legislations—all of these augur well. They are boring details, they do not make headlines; but these changes will definitely, over time, restore sanity and sense to the economy. In the same vein, the government has made an important policy regarding “construction payments”. The lower lever bureaucracy will no longer be able to disregard awards that call upon the government to make payments. The endless appeals ploy will not be allowed to choke the country. I would urge the government to now go beyond the construction sector and look carefully at all delayed/blocked/disputed government payments to all sectors. We should be careful not to fall into the traps set by the accounting bureaucracy which in recent years has used delayed payments and spurious tax demands to window-dress fiscal deficit numbers each March. Greece has paid a great price by falling prey to the machinations of window-dressers both inside and outside their government. In fact a one-time clean-up of past shenanigans may actually go down well with even the ratings agencies. In any event, by pursuing financial and moral correctness, the government cannot go wrong. The recent actions of the government standing up to dysfunctional income tax officers and unreasonable gold traders shows that this government has the courage and the attention span to deal with details which have frequently wrecked good government intentions. Listening to the prime minister’s interview on TV and the finance minister’s interview in Mumbai, one’s optimism is reinforced. This is particularly the case because correcting the administrative process, unclogging payments and so on will not be portrayed by the chatterati as short-term vote-winners. The pursuit of dharma—which includes not oppressing citizens with payment delays and frivolous appeals—is the correct course for any sovereign. The payoff will be in India eventually “reforming its way” into a self-perpetuating higher growth cycle. We can only wish our government—and, of course, ourselves as a country—“good luck” in the months and years to come.

The author is a Mumbai-based entrepreneur

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