Narendra Modi?s resounding success in Gujarat proves the point that voters care for good governance and a dedicated leader trying his best to weed out corruption. We have many totally honest leaders like the prime minister, chief ministers of West Bengal and Orissa, but they have not tried enough to push for good governance. It is high time good governance is given a national priority.
Governance or institutional security is an important component of economic security. An economy with high transaction costs is not efficient, and lack of efficiency means erosion of competitiveness. High transaction costs are not just a production issue; it?s a distribution issue as well. Poor governance will result in the poor management of crucial policy interventions in poverty reduction and social development.
In comparison with other major emerging and industrialised economies, India scores poorly in institutional security. A few indicators illustrate this point. It takes four years to enforce a contract in India, more than three times that of China and more than twice that of Brazil. Transparent and efficient enforcement of contracts is a key ingredient of institutional support to economic activity and efficient transfer of goods and services. In terms of property registration, an essential element of the business environment, India?s performance is poor. It takes 50 days to register a property as compared to less than 30 days in China, and less than 10 days in the United States and Thailand. Average cost of a business start-up is over 60 percent of per capita income, much higher than any of the comparator countries.
Transport and electricity costs due to poor regulatory environment are transaction costs to all sectors that use these inputs. India has the highest cost of electricity among major industrialised and emerging economies ($0.8 per kwh for industry as against $0.1 kwh in China), result of the highest transmission and distribution losses in the world, or in other words a quarter of the gross electricity output. Transport costs are very high in India. It accounts for 25% of total import costs as against only 10% in comparator countries. This does not augur well for India?s competitiveness. Besides poor infrastructure, the problem squarely lies with the regulatory environment for roads where the state governments issue the operator licences; control the routes, time of operation and the fees. These arrangements are easily susceptible to rent seeking.
High transaction costs are a distribution issue as well. Institutional inefficiencies, corruption, lack of accountability and the general lack of awareness on citizenship rights, all combine to create an extremely poor government services delivery system in India. Former prime minister Rajiv Gandhi was right when he observed that only 15 paise of every rupee spent by the government reaches the person for whom this spending is intended. The 2004 World Development Report mentions that more than 25% of India?s primary school teachers and 43% of primary healthcare workers are absent on any given day!
These arguments illustrate the frail state of governance in India, highlighting that the rationale for increasing social sector spending is somewhat misplaced, and greater priority need to be given to increasing the efficiency of current programmes or budgets before new items are put on the agenda of an inefficient system. They also indicate the need for a massive overhaul and improvement of India?s institutional structure.
The prime minister and the finance minister are fully aware of these problems, and have recently echoed some of these sentiments while commenting on the inefficient delivery of the subsidy schemes and the PDS?s failure to reach the poor respectively. Perhaps they should make a last-ditch effort at improving governance in 2008. Hopefully the Left will support them in this effort. This is a lasting legacy the present UPA government can leave behind.
The author is principal advisor, CII. These are his personal views
