Panel Discussion: Two years of Modi government

  • Blog Post Date 29 August, 2016
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Pranab Bardhan

University of California, Berkeley

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Parikshit Ghosh

Delhi School of Economics

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Pratap Bhanu Mehta

Centre for Policy Research

In a panel discussion organised to mark the 4th anniversary of Ideas for India, I4I Editor Parikshit Ghosh (Delhi School of Economics) moderates a discussion on 'Two years of Modi government' among Pranab Bardhan (University of California, Berkeley), Mihir Sharma (Bloomberg View) and Pratap Bhanu Mehta (Centre for Policy Research), encompassing issues related to policy and governance; corruption; manufacturing; social sector; and social and cultural issues.

Policy and Governance

Parikshit Ghosh (PG): Looking at the general direction in which things have been going in the last two years, do you see any major changes in policy and governance? Obviously there would be little changes here and there; there would be some continuity - but are there any course changes or major differences in the philosophy or approach in these matters?

Let me highlight one particular aspect of this. Before the election, there was a lot of debate and one thing which came out in the writing of a lot of people was a desire to see a more market-centric or market-friendly approach to policymaking. There was a sense that the UPA (United Progressive Alliance), in spite of the liberalisation of 1991 was sort of intellectually trapped in a more Statist, a more welfare-centric, a more regulatory approach to governance. To put it somewhat dramatically, some people were hoping for maybe a Reagan or Thatcher sort of revolution in India where there will be a greater receptiveness to markets, to business, to the price mechanism - as opposed to planning sort of solutions. As far as that view is concerned, do you see any confirmation or vindication that there has been a shift in government policy?

Pranab Bardhan (PB): In economic policy, there is much less change compared to the earlier regime. If you ask me about social and cultural policy and the democratic atmosphere in general India - I would have said there is a significant change for the negative. But for the moment, let me talk about the economy. Some people thought there would be a big change in this government as Mr. Modi (is perceived to be) a big harbinger of market reform. I don't know where that impression came. What Lenin used to talk about - at least this expression is attributed to Lenin - "useful idiots" - used to think that there would be big market reforms. If you look at Mr. Modi's years in Gujarat as chief minister, most of it shows that he was business-friendly but not necessarily market-friendly. In fact, if you follow Gujarat's development, Gujarat has had a very high rate of growth but if you look at what follows that development, there are a large number of capital subsidies to many of these groups like the Adanis, the Ambanis, Essar and so on. These are business-friendly measures, not necessarily market-friendly. Of course, there are some incremental market changes and in a way after he came to Delhi, I see incremental changes but not a big change. And I think he himself is quite open about it. In a recent interview with The Wall Street Journal, his economic philosophy - to the extent it comes out in that interview - is quite Statist. He wants the State to be very important and he in fact said - what kind of reforms are you talking about?

I would say many of the policies are continuation of the earlier regime but there have been incremental changes, for example, the bankruptcy code, more opening to FDI (Foreign Direct Investment), crop insurance in agriculture - and I could give you four or five other such policies, which are great changes but somewhat incremental.

The issue is - if you look at macroeconomic policy, which is what financial press most of the time talk about, think of a counterfactual. Suppose Mr. Modi did not come to power; UPA regime continued with Mr. Chidambaram as the Finance Minister; Mr. Raghuram Rajan continuing as the Governor of the Reserve Bank of India (RBI); the global situation continuing - bleak situation in terms of world markets and global slowdown, with the good fortune of the prices of oil and some other commodity going down; and the bad fortune of two drought years; and some of the other things remaining the same. Considering all this, I would have said the macroeconomic situation would not have been very different - given these constraints and given the counterfactual. So I don’t see a big change - neither in the macro economy, nor in the other policies.

However, there are some changes in the wrong direction - incremental, but still in the wrong direction. One is relating to environmental clearances. In the last two years, there have been a large number of, rather quiet, changes in environmental regulation, in green clearances - a great deal of relaxation has been going on. (In fact, I find the only journalist in India who is keeping a regular track of it is Mr. Nitin Sethi at Business Standard.) Some of these may be justified, but most of them are not. Also, the tribal rights on land (Forest Rights Act) have been quietly watered down, and in some cases, cancelled. In Chhattisgarh, for example, forests rights have been largely watered down in favour of a company, which is a joint enterprise between Adani Mines and a Rajasthan electric corporation group, etc. I could give you other examples, mainly derived from Nitin Sethi's account.

The other change in the wrong direction is potentially a much bigger thing, and that is in health. Toward the end of the UPA regime and in the beginning months of the new regime, there was quite a bit of talk of moving towards universal healthcare. Nobody is talking about that now. In fact, some NITI Aayog documents indicate that the government is going in the opposite direction - going more for the US-type subsidised private health insurance (although nothing has been implemented yet). In my judgement, this is wrong - it is a highly defective and prohibitively expensive healthcare system. I am not necessarily suggesting that we can follow fully, say the National Health Service in Britain or that in France. But we can look at a neighbouring country - Thailand. For more than 10 years now, they have had universal healthcare at a reasonable expense. I think we should have gone in that direction.

In fact, in the last budget, the subsidy per patient under the Rashtriya Swasthya Bima Yojna (RSBY) has been raised from Rs. 30,000 to about Rs. 100,000. Because the government has been giving a subsidy, one hears horror stories of the unnecessary hysterectomies being done on young women; sharp increase in the number of caesarean births and surgeries in general - not all of it, but some must be due to doctors trying to grab this Rs. 30,000, which will probably be increased to Rs. 100,000 very soon. So this, to me, is not the right way and this is one of the two examples I wanted to give about changes that are not in the right direction.

Pratab Bhanu Mehta (PBM): It is such a big question! To be honest, these discussions are very frustrating because you can do the 'glass half-empty';'my five favourite horror stories' ; 'my three steps forward'; etc.

So let me step back a bit and ask a couple of questions. First of all, I think we have to acknowledge two things - and if you want to advance economic discussion, it is worth talking about those. First is that this government did inherit an economy that was in far worse shape than we actually thought; the foundations were, in a sense, rotting. Institutional foundations in the economy - whether via crony capitalism, the structure of the banking system - were far worse than we thought and I think we were all complicit in actually not making it clear.

The second larger conceptual point is that I am actually not sure what the conceptual framework is - not just in government but outside government - that we bring to bear when we think about what is the right kind of reform to make. There was a narrative post 1991 - reform means getting the State out of things. That was, at best, a self-defeating narrative. It didn't ask the hard questions of where do you need to get the State in rather than where do you need to get the State out. The economists had a list of priority items that needed to be reformed. We spent so much political and intellectual capital on the land acquisition act; this government spent so much political capital and was defeated - completely beside the point to be honest. There is a lot more discussion around - should labour have been the big priority. I'm not actually convinced - based on what business says - that what the de facto practices of labour are is actually the highest priority. And I think what has happened to economic discussion in this country is that it has really become a debate about cutting down or raising up - there is no framework that we bring to bear to this.

So, one way of thinking about what this government is doing - and then you can judge it by its own light - I agree with Pranab that this government was not going to be market-friendly, I don't even know what that actually means; market-friendly also means doing a lot of the things with the State.

So you begin with one question, which is - what is going to make India competitive? What are the foundations of that? One pillar of that is energy. You could say the glass is half-full with this government. I think its achievements are being exaggerated. With coal auctions, it has set itself up for problems down the line. But you have to say, also, that there has been a lot of movement on energy. If they do nothing else but do a 24x7 power in seven years, it will be a huge achievement. So, energy is the first building block. Without energy, you don't have a future. The renewable energy target - with all its problems - is ambitious.

The second pillar is logistics. How can India hope to be a competitive economy if our logistic costs are even way higher than that of the Unites States? That is the infrastructure story where again you could say that the glass is probably half-full. The road stuff will start gaining momentum; the port stuff is beginning to actually happen.

The third pillar is human capital, where, to put it mildly, this government has been a walking disaster. But to be fair, we haven't had a government in India that has actually been anywhere remotely 'full marks'or even above the disaster level. In fact, the decimation that UPA did of higher education still needs to be acknowledged. Let us say that human capital is zero.

The fourth element is what you might call the broader institutional framework. And you can divide the institutions into different kinds of sovereign functions. The last election was fought on the theme of institutional regeneration. Corruption is a proxy also for institutional regeneration. And you can say that we have basically exacerbated all the bad tendencies that had been hardwired into our governance systems. If you see what is happening with the National Investigation Agency (NIA); what is happening with the Central Bureau of Investigation (CBI); what has happened with the Article 356 as the courts have pointed out - on all those basic foundational, institutional questions (again, these were all misused prior to this government) all that this government has done is that it has even more hardwired those institutional pathologies. Second manifestation of this was crony capitalism. Let me put it this way - I do think that the government does recognise (in fact that recognition has tied its hands) that a major scandal would be a political disaster. So to that extent, there is a change in at least a certain culture of presentation of the relationship between State and business. Some of that is probably genuine but the core question of the relationship between State and capital is still very much open in India, not just because the State has not fully got its act together but also because Indian big capital is not ready for a market-friendly system. In fact, I think, the State will probably be reformed far more than what Indian big capital is actually ready for. The final element of that institutional architecture was these big changes - cooperative federalism, decentralisation. Decentralisation has gone out of the window. The government came with a great deal of enthusiasm about cooperative federalism; 14th Finance Commission recommendations - but will there be a robust discussion of the 73rd Amendment, 74th Amendment?; will smart cities lead to genuine devolution of city government? All these big questions that were part of that institutional architecture are basically off the agenda.

The final thing on economic policy is that I do think this government was right in recognising that no country in the world has grown without an industrial policy. (US has an industrial policy; in the conventional readings of State versus market, we do not like to represent it as such.) Credit to it that it did bring that on the agenda; it did ask questions about how you can leverage defence expenditure for manufacturing capabilities. It has just not done a very convincing job of showing that it has the capabilities of actually executing a 21st century industrial policy.

Mihir Sharma (MS): Let me take a third tack and try and look very closely at exactly what the differences between this government and the last government could be. If you are going to ask yourself the question in the counterfactual manner it was posed - are we actually going off in a different direction than had been set over the past 10-15 years prior to Narendra Modi becoming the Prime Minister – it is a little difficult to make the case that we are. Let's give you the couple of directions that are perhaps new, economically speaking. The first is - as Pratap said - there is recognition, not just in this government but across the political class more broadly, that easy-to-understand and easy-to-demonstrate corruption is no longer politically advantageous. It can come back and hit you. Everyone from Narendra Modi to Sonia Gandhi to Lalu Prasad to Mamata Banerjee - it doesn't matter what their history is or what their proclivities may be - they' ll all have the same approach right now, because of the 2010-2014 period, to anything that smacks of corruption. So does this mean that we are moving in a direction that is substantively different from the one that we had earlier? I would argue not, because in fact, the underlying base for the corruption-free administration that we would like to imagine we now have, was already being put into place, whether because of the politics of 2010-2014, whether because of the Supreme Court judgement, or because of any number of other things. No government could have handed over natural resources the way that had been the case from 1990-2010. No government could have had completely non-transparent and unaudited expenditure of the sort we had in the Commonwealth Games. There would be a certain acceptance that that period of our political history and our political economy was over. So we were already in that direction. So I wouldn't argue that this is a substantively different direction.

I think the other thing that we could claim was different was federalism. We saw a big devolution of financing to the states at the end of the 14th Finance Commission award. But once again, it is difficult to claim that this a new direction that has been put into place voluntarily by the new government. This is something that, first of all, responded to the new political direction of the country - politics in this country is now mainly done in the states. Secondly, it is a response to how policy can be efficiently implemented; centrally-sponsored schemes, it turns out, depended crucially on state government buy-in - so why not give them greater control of it. And finally it really wasn't something that this particular government had a choice over. It is very difficult to turn down or to refuse to accept the award of a finance commission. So in all ways, you have seen that we already were heading in a particular direction and the government continued to go down it - or not, as Pratap might argue.

So, what is it then that we expected would be the new direction, and are we right to feel disappointed? Well, now I think we have to examine very carefully (as Prof. Bardhan did) exactly what was expected of Mr. Modi and whether those expectations were justified. And yes, I think, he was expected to be a Thatcher by many people but a lot of those people hadn't bothered to actually read any of his speeches or examine very carefully what he had said and done in Gujarat, or in fact, what he was promising on the campaign trail. His promises were not very different from anything that had been promised by any government or any political party in the previous years. His only additional promise was that he would do it more efficiently, more cleanly, and more effectively. So in other words, even Narendra Modi was promising - Iam not going to vastly change the direction in which we are moving; I'm just going to get you there faster. Now whether or not he's getting us there faster is maybe something we could discuss in a subsequent question. But it is fundamentally unfair of us to have expected that he would completely change the way that government operates in this country or the way that the economy is structured in this country. That was not what he thought he was being elected to do; it was not what he had done in Gujarat; it was not what he was promising to do; and frankly under this State's organisation and given the current constraints, it is not something that he is capable of doing. Furthermore, it is not something that he is willing to do. I would argue that changing the way that the economy functions in this country needs us to first change the way that the State operates. And administrative reform is something that I always point out was the subject of the first big speech of Manmohan Singh in 2004 and then they did nothing about it. So, at least they understood it was important. I don't think Mr. Modi even understands it is important. I think if he understood it was important to change the way that administration happens; to reduce the salience of the tenured civil service to bring other people in; to change the way that files move (something as simple as that) - then he would have done it. But I don't think he believes that that is the problem.

PBM: You don't think files moving on Twitter is a big change?!

MS: Well I'll admit that that's a change! So I do not think essentially that he believes that this is worthwhile to do; I don't think he thinks it's a priority - he's never talked about it. He just tells the civil servants to work harder. And I really don't think the problem is that the civil servants are not working hard enough. It is the structure that they operate in that is the problem and unless you change that or want to change that, I don't think we are really going to ever go in a different direction.


PG: In the publicity surrounding the completion of two years - the fact that there have not been major corruption scandals in the centre has been given a lot of play. As Mihir said, one of the things that have changed in India in the last several years is that corruption has become a salient political issue which it wasn't 20 years back. One of the reasons perhaps, of the UPA's demise is linked to beating its image on the corruption scandals. We have the emergence of the Aam Aadmi Party pretty much on that plank. So, I want your views on which direction we are moving on the corruption front.

Let me highlight a couple of specific points. I think, in my personal view at least, thinking on corruption is a little too individual-centric sometimes - put honest people on top and that will solve the problem. All of you have written extensively on this issue and one thing which many of you point out (Pranab in his very well cited paper, and others), is that corruption is often created by systemic flaws. We have a system which is opaque; which gives a lot of discretion to government officials - and that is a big part of the problem. So unless those things are changed, not much change can happen. The other thing is the credibility of institutions especially surrounding the judiciary, law enforcement, police, CBI. (Pratap has already touched upon that.) So we need systemic changes - more rule-bound and more transparent processes, and we need relevant institutions to be made more credible. On those two things, in which direction are we headed?

PB: Yes, there have been no big scandals like the ones we had in 2010-2014 at the central level. Even though at the state level, to me, Vyapam in Madhya Pradesh is a big enough scam. In fact, some people have even mysteriously died, connected with the Vyapam scam. I don't yet know of the UPA scandals - how many people died. The other good thing is that, people would tell you, the coal auctions, for example, are much cleaner, and so on - but it doesn't impress me that much because it is not a structural reform. Coal India's monopoly remains and the auction process leaves much to be desired - but it is cleaner than before. Investigations are going on even now on the huge amounts of under-invoicing of coal imports and power plants by several corporate houses including the Adanis and the Ambanis. Investigations are going on, allegations have been made - I am not saying that anything has yet been proved. Similarly - this is for an earlier period - a lot of people are suspecting things in connection to the Krishna Godavari basin gas reserve as well.

My related point is that you cannot talk about corruption going down significantly when the structural reasons for corruption continue - and I would say a major structural reason for corruption in India has to do with electoral finances. As long as there is no significant reform in election finances, the major structural reason for corruption will continue. In fact, the 2014 national election has been the most expensive election fought in India's history. There are different estimates - The Economist magazine estimated that Mr. Modi's party spent on advertisements (print and other electronic media) something amounting to US$1 billion. Several political scientists have told me that in their rough estimate, this is a severe underestimate. Whatever the estimate, there is no doubt that unprecedentedly large amounts in India's electoral history have been spent in the 2014 election. Why am I bringing this up in this context? Do you think that the money that is largely probably paid by the corporate sector is for charity? If not, when is the payback - has the payback process started? If you ask me, I don't know. But if you ask me to guess, yes, the payback process has started in the form - as usually these paybacks happen - of very quiet relaxation of rules of various kinds. And I have already given you examples of relaxation of environmental rules. Recently, we've also heard that Rs. 200 crore fines for environment damages in connection with Mr. Adani’s Mundra Port have been waived off. (At least that is what the allegation is; the government has just recently denied it; those who had alleged have counter-replied - so I don't know where it will end). There are other forms of regulation relaxations going on, which I would suspect are part of the payback process. These are done very quietly - you don't hear about them all the time.

Third thing I would mention - there is a historical reason why you would not see a repetition of what happened in 2010-2014 apart from the factors Mihir mentioned about how things have changed, people's awareness of the political consequences, etc. There is also a global change. A part of the corruption was related to the mining mafia - the Bellary brothers and so on. The BJP (Bharatiya Janata Party) ministers were connected with the mining mafia. Now, even if you wanted to make money, there is no scope because the international mining prices have crashed. So, there is much less money to be made globally, because of China and other reasons. So the fact that mining mafia is not operating as much is not because we have suddenly become more honest but because the international price situation is different.

The last issue that I would mention (that both Pratap and Mihir have already referred to) - is crony capitalism. I don't think that anybody thinks crony capitalism which was in the UPA period has diminished in the current period. Now, crony capitalism is one way of indicating corruption - corruption by other means. So, if you think crony capitalism has not declined, then you have to believe that some corruption related to it may not have declined. (I'll come back to the institutional issue later and link up with what Pratap said about institutional pathologies.)

PBM: I agree with a lot of what has been said. I will quickly make two points on corruption. Corruption is a complicated debate – different levels, different structures. One point I think is worth talking about - apart from all the things that Pranab said – is that we do seem to be stuck very deeply in a transition dilemma. There was an old rule, old system - whatever its rules were, with a certain amount of discretion built in, a certain amount of protection against prosecution, various other things; and lots of individual actors had adapted to that system. Politically, in 2004 corruption became a salient issue. There is some sense that at least you have to show that you are transitioning to some other system. Now, the transition problem conceptually turns out to be the hardest problem. Let's say the banking system - one example of being at least partially brought to its knees by corruption. The fear of being seen to be favouring one party over another reduces your ability to cut deals that actually might be good for the economy, which can jumpstart stalled projects.

Real estate is one sector in India that is in deep crisis. You can't think of getting the economy growing unless you actually fix that sector. Again, you have this dilemma - you have these incredible sunk costs with big companies; you have these half-built projects. Do you salvage them by giving them concessions or not? Or do you say, well, that's politically too hard and let's try to jumpstart the real estate industry some other way. I think the honest truth is that there is a real institutional dilemma there that we haven't resolved partly because (this is kind of the silver lining of the story) the kinds of things you could easily do to resolve them, even if there were no corruption involved, would be very hard to sell politically. In every single regulatory concession now, by definition, there must be a corruption story. How are you going to clean up these sectors? To my mind, in the short run, that is a question we need to focus on analytically (apart from the one big elephant in the room which is the electoral finance issue and then these individual cases - is there corruption, is there not). We are actually in a climate where any regulatory change is susceptible or hostage to exactly that discourse on corruption. And frankly, it has actually cut down the government's room for manoeuvre in ways in which it has not been able to bring us out of that quagmire. I don't think cleaning up real estate is going to be easy and this government has not shown any imagination. What I am trying to say is that the corruption issue aside, the problem of a transition regime is something I don't think we have come to terms with. And to my mind that is analytically the more interesting problem, apart from the design of particular institutions.

MS: Three short points - one is to repeat what Prof. Bardhan said, that if people are giving politicians money, they expect things in return. If people are spending enormous amounts of money to buy the front page of my newspaper, I am fairly certain they're getting their money from somewhere and there is some quid pro quo involved. So, that's the basal thing - you just have to accept that that is the sort of world we live in.

The second point is we are only two years in and I would like to point out that there is a slight category error here. When Prof. Bardhan talked about the corruption scandals of 2010-2014, he is actually wrong because there were no corruption scandals in 2010-2014; the scandals were then, the corruption was earlier on. UPA-II was probably as clean as this government - it was UPA-I that was the problem (up to 2010!). We are two years in and I want you think back to 2006 and try to remember if you knew of any big corruption scandal happening in the government. You didn't - but they were all on. Now, these things take ages to come out because they are difficult to pin down; you have to let them play out; there are arguments that have been made back and forth. How did they come out under UPA-II? I think you had a bunch of pleasant circumstances - you had a bureaucrat who was happy to leak stories about politicians; you had politicians who were happy to leak stories about other politicians. You had some independent forces within the government that were willing to take on corruption in other parts of the government. You have to ask yourself whether those circumstances will be repeated under Narendra Modi. It is entirely possible that you can have the corruption you had in 2005 and 2006 without the anti-corruption period of 2011-2012, if you do not in fact have the same transitory circumstances of transparency that we had in those periods. We haven’t institutionalised that transparency. We don't even have a lokpal yet. So where are the future/current corruption scandals going to emerge from? We have to try and intuit them from exactly the process that Pratap is describing. The reason that there is in fact a cloud over so many of these regulatory decisions is because there is no external or independent authority that can go to these and declare that this one is okay and this one may not be. In the absence of that, you will continue to have this sort of regulatory inertia.

Finally, corruption changes over time and economies change as what companies expect changes. The great corruption scandal of the early 1990s was about how many votes Narasimha Rao manage to buy. There was actually cash involved that just turned to the question of how much money you could fit into VIP suitcases. That was a very specific economy. What is the corruption economy of the mid-2000s? It depended upon the ability of the State to hand out natural resources. That is a very specific point in an economy’s development where the control of natural resources and the misallocation of it becomes an issue. We may have a different economy now than we had 10 years ago in large part. And now it comes down to - what are the minor regulatory changes; which particular band of spectrum is being opened up to full auction, which is not. In these coal mine auctions that were so delightfully transparent, why were certain mines closed off to steel bidders and left only to power bidders? Why were certain other mines given to steel bidders and not to power bidders? Why were certain other mines kept out of the auction altogether? These are the questions that you have to then begin to ask in a completely different environment. And these are qualitatively tougher questions than dealing with large suitcases of cash, or - oh my god, this mine used to be ours, now it's somebody else's'. But this does not mean there isn't an equivalent amount of money to be made and it does not mean there isn't an equivalent amount of discretion being applied. So, once again you have to apply a completely different lens to the morning headlines in order to figure out where corruption might be happening. And I think we haven’t quite got to that mental state yet, which is why we are feeling a little overconfident about it at the moment.

PB: I just want to mention some numbers, which I think I saw only last week. These are opinions not of academics or politicians but of business people in India. One, last week a new report has come out for many countries called Global Fraud Report 2015-16, which is organised by The Economist Intelligence Unit in collaboration with a consultancy group. They had an earlier survey in 2013-14 in which, in India, 69% of companies reported they have been subject to fraud and corruption. That number for 2015-16 is 80%. So, at least that group thinks they are more victims of this. It does not mention which sectors, but if you ask me, it's probably more in the real estate sector. The other survey that I want to report is a survey of industries by NCAER (National Council of Applied Economic Research), which came out a week or two back. They asked business people what they think is the major constraint on business today. Number one is corruption; 80% of the companies report corruption to be the major constraint they face. So, yes you don't hear of scandals but at the ground level (not to speak of common people facing usual bureaucratic corruption) business people are facing corruption.

PG: All of you mentioned campaign finance and that's really the elephant in the room. And in some sense the most harmful form of corruption is not straightforward bribery but the long-term nexus between the big capital and government decision-makers. So, what is the solution? Normatively speaking, what should we do? Because public funding of electoral finances is difficult even in rich countries like the US and given our shortage of government revenues and pressing needs like health and education, is there any practical way of trying to get at this root cause?

The other question is: my sense is that some of the corruption that has happened in the last 10 years, especially in the UPA period, related to sort of strategy changes. There was a big push in infrastructure and mining and there was a serious deficit of public funds. So we went in for models like PPP (Public Private Partnership) and so on, and we didn't have the institutional structure to handle that very well and that's where the floodwaters of corruption started coming in. So, one way to keep corruption down is to be very risk averse - not to try new models, new approaches; not to put stress on the existing institutions. But is that the way to go? Maybe we should take a little more risk on the corruption front.

PB: Yes, election funds reform is a very complicated issue. There are no easy solutions. I can only refer you to some good work that is being done by E. Sridharan and recently Sridharan and Milan Vaishnav wrote a joint paper suggesting several things on what to do about election finance. One immediate thing - which I can tell you will be objected to by all political parties - is that the political partie's funding should be independently audited. At the moment they have some audits but like most audits you essentially hire your own auditor and the auditor does whatever you want.

Secondly, one of the reasons why the UPA-II regime got involved in all these big scandals was because they cooked their own goose - they brought the Right to Information (RTI) Act. Recently, the Information Commissioner said that the RTI Act applies to all public entities, so it should be applied to political parties. Without exception, all political parties said no, we are not subject to RTI Act. So, forget about big reform. We have an act which applies to public entities and if political parties are not public entities, I don't know what they are. So bring political parties under the RTI Act; and secondly, give them independent effective auditing. That will be a big step if you can make them agree to it.

PBM: Two quick thoughts - one, of course there is no syllable and as we know in the evolution of campaign finance across the world, no one has found a perfect solution but lots of other things have to change for actually a viable election finance system even to be possible. The nexus runs both ways. It's not just that people need money for elections therefore they'll generate black money. It also runs the other way round, which is you actually have an economic structure which does require cash transactions of various kinds which in turn will also generate surplus money, which needs to be loaned in some way and through political influence. So the question is how much of a grip do we actually have on financial transparency across sectors of the economy.

Forget political parties for a minute. (I actually, do not believe that political parties should come under RTI. They should come under auditing but what the RTI would do to the structure of the political parties is a different thing.) Can you clean up the real estate sector? Can you use whatever de-duplication it is? You have a broken tax system; you have very few direct income tax payers – how can you even talk of transparency at that mega scale when the preconditions across vast sectors of the economy don't exist? You have to systematically build those building blocks where you are then in a position to say that look, the first objective of a good campaign finance system is that instead of the emphasis being on capping, which is what we have tried but is not going to work, at least shift the paradigm to transparency. But the pre-conditions of that were simply not in place. If you have an economy that runs on cash, it doesn't matter what transparency rules you put in place. So, I think we have to begin indirectly at lots of different places for that precondition to exist.

The second thing, which to my mind is the most important thing in the corruption story (the big stuff will kind of sort itself out oddly enough - the infrastructure, etc.) is what is happening in the local elections. One of the things that is very clear is that at the level of state politics, it is very hard to argue that even that consciousness of - we want clean politics's exists - take West Bengal, Haryana or even Gujarat (BJP). Across the board, it is very hard to argue that those governments are bending over backwards to project an image at least of being corruption free. But the real surprise in this was the decentralisation story. Panchayat elections are now not just the most severely contested, but the most heavily invested (Rs.75 lakh to a crore per election in some panchayats). Why is it that the one mechanism (decentralisation) that we thought would have an impact on corruption of a certain kind, is not working - and that's the level of government we need to focus on in the corruption story.

MS: Pratap is absolutely right that we have to attack many things simultaneously. I’ll give you a slightly optimistic spin on it. What are the reasons that political parties normally give for their inability to have a transparent system? They say we have lots of small donors and we can’t possibly keep track of them. I would argue that over the past five years and in the coming five years, our economy will change so much in terms of its ability to track small transfers even to the degree of Rs. 20-25 that that will no longer be a tenable argument. So they may find something else but at any rate that argument which has been their primary one for an inability to properly disclose their sources of financing - that, oh you know, 90% is Rs. 20 donations from eastern Uttar Pradesh (UP)) - that argument will go. That’s one hopeful thing.

The second hopeful thing is that election spending is not entirely used just to prop up the Delhi media. A lot of it is direct transfers, in fact, to individuals who have a deep distrust in the possibility of their politician ever giving them anything else for five years. You expect that this is the point at which you cash in - you get your Rs. 1,000; you get your Rs. 1,500; you get your Rs. 2,000 - because you may not get that much else from your politician, but at least you got this cash in hand. Now, if you are an optimist about the way that the welfare system is changing in this country, which to an extent I believe I am, then you will have to assume that at some point people will say okay, you are capable of transferring this money to me in other ways and at other times. It is not just now at election time when I need it in cash. If that understanding among the electorate changes the pressure to spend during an election on politicians will go down. And let me assure you that nobody in this country is more pro election finance reform than the politicians. They don't like having to spend money on elections and they don't like asking people for money. They desperately want it. So the moment that the preconditions are in place for a better system, you’d be surprised by how swiftly there is a political consensus around it.


PG: I think most people will agree that in spite of the transition we made in 1991, and the high growth rates of the last 2-3 decades, one major shortcoming has been that we missed the bus on manufacturing. So our growth strategy has been very different from China's - it is reliant more on skilled exports, rather than having seen a massive boom in manufacturing. There are persistence problems - for example, the informality in the manufacturing sector, the lack of job growth, and so on. The ‘Make in India's programme of the current government obviously tries to take that square on and address it, along with its associated things. People have talked about all kinds of bottlenecks that are holding us back - skills, infrastructure, the legal system (enforcement of contracts), the ease of doing business (that we have too much red tape and bureaucracy).

One can't accuse this government of not paying attention to this problem because it has been one of the most visible and vocal aspect of its campaigns. But is it doing well? Is the gamut of policies, which is trying to create a manufacturing boom in India, working? Arvind Subramanian wrote an article recently in the Indian Express saying that wages are rising in China and it has all these other problems. So, we are maybe at a crossroads where we can pick up on, let's say, the textiles industry - that's the one he pointed out. So is the government proceeding wisely and intelligently on this front?

PB: One of the big promises of Mr. Modi was to create jobs, and this persuaded a large number of young people in Bihar ad UP. Unfortunately, so far, the job creation story does not look very promising. (Recently, the Institute of Human Development brought out the - India Employment Report's, which has some new numbers on the current employment situation.)

China has been vacating space for quite some time now - not just in the last two years - and that space is already being taken up by two of our neighbouring countries - Bangladesh (in garments) and Vietnam. We are behind both of these countries in taking up that space.

It is a good thing that jobs is the primary objective of the Modi government. It should have taken it up two years back but it is better late than never. I think last month, the Cabinet approved a textile policy, but of course, I should tell you that the implementation of that textile policy is now in the capable hands of Ms. Smriti Irani! I am sure things will improve somewhat but whether we will succeed in creating jobs - I am not that hopeful. Also, this is not a situation in which the world market is expanding; the world market in labour-intensive goods is not very good. So, I approve of the attempts that are being made. I approve, by the way, of the ease of doing business that Modi government takes seriously. But again there are contradictions.

On the one hand, yes, ease of doing business is being attempted but everybody knows all major decisions are today made in the PMO (Prime Minister’s Office). So, there has been a lot of (not to talk about decentralisation as Pratap and Mihir talked about) centralisation of decisions in the PMO. Does it ease business? I would say, in some cases it makes it more difficult because if everything chokes up in the PMO, decisions take longer. With a lot of fanfare, the government said that our (World Bank) ranking in the ease of doing business has improved. How much has it improved? We were number 134 and now we are 130. Mr. Modi, in one of his rallies, got a little carried away and he said we are now the best.

I also approve of the skills initiative that the government has taken but unfortunately as of now, it has not produced a great deal. The number that I saw recently for our highly hyped skills programme is at most about five million workers. That is much better than what it was before, but just compare with the numbers of similar skills programme China has now – it is more like 100 million. So, you can get some idea of the scale problem. But it is a step in the right direction.

The other thing which is important for job creation and ‘Make in India’ is of course infrastructure. Again, the government is trying but there are several problems. I think the road sector is doing reasonably well but I am not sure about the electricity sector. Indian needs major electricity reform, which was tried in the 2003 Electricity Reform Act - to this day it is largely unimplemented or not fully implemented. One of the good things Mr. Modi he did in Gujarat was electricity reform but he has not succeeded in reproducing that outside Gujarat, in a large part of India. There is a new programme called UDAY (Ujwal DISCOM Assurance Yojana) - it is supposed to be a financial restructuring of our electricity distribution companies. But if you ask me what it is, it is kicking the can down the road. Essentially, many of the huge debts of the distribution companies are now state government bonds. So, you can imagine what would happen down the road when the state governments would be saddled with these huge debts. This is not what electricity reform should be.

PBM: The critical thing of getting it onto the state governments’ balance sheets is then borrowing limits kick in and if that can be enforced, then this is a huge reform.

PB: Ideally, yes. But I can write down the scenario a few years from now. What is happening to the public banks now? The restructuring is essentially recapitalisation - wilful defaulters of the loans. Suppose UP defaults and says we cannot pay back the state banks; and because UP has so many MPs (Members of Parliament), no central government – whether UPA or Modi government - would be able to do something about it.

PBM: But that is an unfair standard because that logic applies whenever there is a big sovereign State - it can undo anything. All I am saying is that this is a work-in-progress and it should be presented as such. Because by that logic, ex-ante whether you have FRBM (Fiscal Responsibility and Budget Management Act, 2003) or anything else - the sovereign government could change it.

MS: But Pratap, it is not presented as a work-in-progress. If it were presented as a work-in-progress, I think very few people would object. It is presented as a solution, which is why people look at it after a while and say – wait, it is not a solution because already 10 out of 26 states are arguing that they need their cap on borrowing lifted. At some point, one of them is going to be politically powerful enough or pivotal enough for that to happen and then it is going to change for everyone. So, it is a work-in-progress but it is not presented as such - and they stopped working on the structural change.

PBM: But in the electricity sector, one thing which is changing, which I think makes it somewhat more plausible, is that electricity is going to be electorally one of the most important issues. That has changed. One of the signs of progress is that you have more state governments beginning to recognise that they need to deliver on whatever the yardstick is - 24x7 or six hours a day or whatever - and it is in their interest to begin to create the pre-conditions, where that actually begins to look like a credible promise. So, all I am saying is that for something as difficult as this, I don’t think the summary judgement can be that look, ex-ante none of this would work out - maybe not. But it is for the first time that a lot of these elements are in place - if you get it on state government's budget sheets and the RBI's hard borrowing constraint kicks in that is a huge shift in discourse. That is very different from 2003.

PB: This is not the forum to discuss the technical details but I would like to refer you to a recent article in the EPW (Economic & Political Weekly) on UDAY by an energy ministry ex-bureaucrat. It is a detailed analysis of the problems of UDAY.

PBM: Just two quick things on manufacturing. One is that all of this stuff that we are talking about - energy, infrastructure, logistics - is a part of the manufacturing story. Again, to be fair to the government, and as a community - economists, political scientists, sociologists - we need to ask ourselves harder questions. We have assumed up till now that there is a bunch of things that make sense to do for their own intrinsic reasons. You need to educate people, you need to have ease of doing business, you need to cut energy costs, etc. But the fact of the matter is we may be looking at a world where the answers to the job questions are not as obvious as most of us make them out to be. It is a question every country is debating, including China, by the way. We don’t know in a sector like textiles, what the automation story is going to be. It is not clear to me that if robots can operate on patients, they can't actually cut shirts. So, the question is - what framework do we have for saying what skills we need that are tomorrow's skills. Should we be talking about the - Skill India's stuff in the way that we are (and some of it may be useful) or should we be taking a more imaginative leap? One of the good things about Indian private capital is that we are one of the few counties in the world where the big manufacturing guys are also the big IT guys (Tatas, Mahindras, etc that the future of manufacturing 15-20 years down the line? My sense is that the rest of the world is beginning to ask those questions, including China, and again I fear a little bit and I don’t think it is just the government's fault; it is all of us. We may be a little bit late and we are still trying to answer yesterday’s question about jobs, not tomorrow's question.

MS: This is a very common thing that people say - why is Narendra Modi going on talking about ‘Make in India's when everybody else knows that robots are going to be or 3D printers are going to be printing out our tables next week (just to caricature this). My simple point about this is two-fold. First, we are so small a manufacturing force right now and we have such a small share of world trade - we are so far behind; we still are in yesterday, so maybe we should still be talking about yesterday's questions. The rest of the world is day after tomorrow as compared to us. That is just the situation we are in. We have to keep on focussing on manufacturing because we de-industrialised too soon. We don't have a large enough manufacturing sector.

Also, I would claim manufacturing is inherently important. It is not just important because it provides jobs but also because of the nature of the jobs that it provides. It provides a way for people to work on assembly lines together regardless of their social background. It allows you to make a living for yourself in a way that is not necessarily dependent upon the network you carry with you to the city from your village or the network that you can build up in your neighbourhood. The economy that we have right now is old-fashioned in the sense that it reinforces those very networks that - modern's manufacturing economies tended to dilute. So a lot of our problems that we look at now as being social problems are actually a product of the fact that we have an economy that has also not moved into the manufacturing age.

Next, let us even suppose that it is true that by the time we can put into place a manufacturing sector, we no longer live in a world where large-scale, export-oriented manufacturing is a credible source of growth, which is I think what underlies a lot of the concerns that are expressed about a manufacturing focus (or of jobs). I would make the claim that exactly what many of us argue for as the prerequisites for a sensible and functional manufacturing sector, namely, openness to the world, solid infrastructure, flexibility of a certain number of input markets, more deregulation - these would not only help you develop a manufacturing sector if the manufacturing sector is what provides growth in jobs, but would also allow your economy to adapt quickly to that unknowable future in which the source of growth and jobs is something else. So, the question is irrelevant. It doesn't matter if manufacturing is the future because what you need to do in order to get the manufacturing sector going is precisely what will help you adapt to whatever the future may be.

PBM: The place where it mattes is human capital. And that is where we seem to be making big bets - whether that human capital is going to be adaptive or not. I agree with absolutely everything you said.

MS: Yes, I think that if there is a big bet there, there is also a big bet that everybody is making. Recently, I was in China and I was attending a thing where they were trying to re-train steel workers. It was fascinating. But I think it would work. These people had been steel workers for only 10 years of their life - I want you to imagine how quickly China has been moving through this. They came, they became steel workers and now they are told they are not going to be steel workers anymore and they are preparing for another set of jobs. So, maybe that is the future and we have to be ready for it.

Social Sector

PG: One of the things that UPA did and which has been building up over the years is - redistributive's programmes (programmes directed at the poor) - two of the major schemes of the UPA, the MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) and the food subsidy programme would fall in that category. There is a pervasive sense that the delivery mechanisms are broken; that it is all a mess. There are a huge number of complex schemes, massive leakages, massive corruption, massive inclusion and exclusion errors, and so on. So we need to clean it up. Even if one agrees with the principle underlying these programmes, we need more clean and efficient ways of redistributing money and having poverty removal programmes. So, we have seen some movements in that direction – the Direct Benefit Transfer (DBT) scheme which has been brought in for LPG (liquefied petroleum gas); there has been a push towards financial inclusion - the Jan Dhan Yojana (which has to be an integral component of it); and there is a general movement towards cash transfers, which to many people are the solution. Pranab has recently written about the idea of having something like the universal basic income in the context of India; it has been talked about for western countries. Abhijit Banerjee goes further than Pranab and says that let us get rid of these complex leaky schemes and replace them by something clean like universal basic income. So, looking at it overall - two questions: how do you see the government approaching this? Are they headed in the right direction? And normatively speaking, what are the things that we should do?

PB: In the social sector, I would say that the government is continuing some of the UPA programmes. Even the Jan Dhan, which is a signature programme of this government, if you think about around 2009 when the UPA government decided to transfer many of the MNREGA payments through bank accounts - suddenly a huge number of bank accounts were created. But of course, in the Jan Dhan, it has gone much further. Similarly, the signature sanitation campaign Swachh Bharat is a continuation of the UPA Nirmal Bharat. But what I think the government should focus on in Swachh Bharat is - why is it that almost half of the millions of toilets built under Nirmal Bharat have not been used. There are different explanations about water supply; who will clean those toilets - Hindu cultural taboos will not allow many people to do that; and so on. So, I think without examining why those programmes did not work and to continue building another million toilets is not the right way to go - but the programme are in the right direction. Similarly, it is heartening to see that the BJP is now taking credit for MNREGA; Mr. Modi had called it a sign of monumental failure earlier.

On the leakages issue, over time things are improving but there is still a huge amount of leakages. Based on all the evidence that I see, over time leakages are going down (it started in the earlier period and is continuing even now); even though they are still substantial particularly in MNREGA, and even in the food security programme. (I am less of an enthusiast of the Public Distribution System (PDS) compared to MNREGA, but even there I understand the leakages are going down.)

You also asked the question about basic income. I don’t want to spend too much time on it because I have written on it. In fact, I4I is going to bring out a series on this. So let me just say for those of you who are not familiar with basic income - this is an idea which has been around for 200 years at least in the west. I, along with others, feel that it is probably more applicable to poor countries than in rich countries because we can afford it to a large extent. If politically we have the courage to cut down on some of the regressive subsidies, subsidies which at the moment go to the richer people and to the middle class people in India - then it is possible to fund a fairly significant amount of basic income. It means that everybody, rich or the poor are going to get a certain amount of income. As per my back-of-the-envelope calculations, it is financially feasible to give each citizen of India Rs. 10,000 every year; that means if you are a family of four, then Rs. 40,000. Of course, politically it will be quite difficult but all I am saying is that it is possible.

I don't think it is a panacea and I don't think it should replace some of the other programmes in health, education, MNREGA - but some highly dysfunctional programmes should be replaced. Normatively, it is a desirable scheme but it is also financially feasible. Is it politically feasible or not? I think it is; at least some steps can be taken towards it.

PBM: It is a complicated subject. Much has been said that I agree with. I will just put out something which we need to think about and it is a generalisation of the point Pranab just made - which is that we talk a lot about the social sector and one of the failures of Indian policy discussion has been that we understand market failures (some of them at least); we understand some of the State failures but we don't understand social failures, and the incredible cost to social policy of those social failures. Pardon the language, but a country in which you think the State needs to teach people how to shit and dispose of their garbage, it is not clear that that is just an engineering problem. Engineering can help, but it is not clear that it is just policy intervention. And I think the good thing about Mr. Modi when he started was that he put it on the political agenda with the kind of conviction that had not been done before – it has to do with the complicated sociology of India. But I don't think there has not been a follow-up on that discussion of social failure. Essentially what we are saying is that effectively the State has to bear the cost of a lot of things which it would not have to, if the nature of our social relationships had been different. I think that capacity in the Indian society to mediate conflict around those kinds of social relationships is going to be the single most important question and has been for a long time. And that is a question we need an analytical handle on. The State is doing what it does because that’s what we know how to measure, that's what we know how to talk about (go build toilets) - but what is the social structure and the set of social relationships in which that is embedded? I think if we are honest with ourselves that needs to be a much more self-conscious political question. I'm not sure what agencies will do it; what kind of social movements in other contexts have addressed that question of social failure. But it is a question which needs to be put on the agenda.

PG: Let me ask a quick follow-up question to you, Pratap. You mentioned social failure - that is clearly a big part of some of the problems we have talked about and some that the government is focussed on. To give two specific examples - one is the open defecation issue and the other is the gender issue (skewed gender ratio). Shouldn’t we give this government and the Prime Minister in particular some credit on that front? Our paradigm has been this Statist and market sort of approach. So there has been some sort of didactic effort if you will. The speech from the Red Fort where he talk

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