Wednesday, October 9, 2013

In my last column, I ended by suggesting that India can either have a true Indian Spring, with its economy and society blossoming, or instead something that veers toward what has happened in Egypt. What are the factors that will determine where the country goes? First, I want to emphasise that the current economic debate (now and perhaps forever labelled as “Sen vs Bhagwati”) has tended to miss the interaction of economics and politics. Prescriptions are sometimes offered as if by wise philosophers or technocrats, with the only issue being a sorting out of the facts of the growth process, or agreeing on the relative weighting of the welfare of different segments of society. How does politics enter into the evaluation of different policy options?

The most obvious political process is the use of government transfers to buy votes. Empathy for the poor may matter for many of those involved in the intellectual debates, but a good first approximation to reality is that India’s politicians care most about getting re-elected. The policies that get implemented, in this case, are the ones that maximise the chance of winning the next election. India’s voters have to keep making it clear to politicians that subsidies and transfers are not going to be enough to secure their votes. There have been signs of this shift (rewarding performance over populism) in how Indians vote, and one has to hope this trend will continue.

But politics is also more complicated than that. Take Egypt, where democratic elections failed to lead to a stable, popular government, and the country is close to descending into chaos or repression. The winners of the election lost support not just, or even mainly, because they failed to deliver economic betterment. Instead, they were criticised for undermining the people’s recently-won freedoms. Basically, people want dignity and freedom as well as material improvement.

Economic reform in India has delivered an uneven mix of material and non-material benefits. For example, Dalit entrepreneurs seem to have gained on both fronts. Some of the middle classes have seen material gains, but erosion of their status and of traditional certainties. The upper crust of society has benefited disproportionately. And at the other extreme, many people in rural areas, especially in tribal regions, have seen their exploitation increase. This is a complicated story, with perhaps a couple of clear lessons. First, a majority of the population is frustrated with the corruption of, and exploitation by, those with political and economic power. Second, doling out money to win votes will not work as well as it used to, and will not stop the pot from boiling over. Social conflict in India will increase unless there is a quantum improvement in the quality of governance.

There is also another danger lurking. The growth-redistribution debate has only tangentially addressed India’s macroeconomic and financial sector policies. Here, the spectre of corruption also raises its head in the form of the government’s push to give new banking licences to powerful industrialists. But many of the problems have arisen from failure to execute the basics of macroeconomic management. The central government has not done a good job of managing its fiscal deficit, while the Reserve Bank of India (RBI) has gone backwards in managing inflation and the currency. RBI has failed to control inflation effectively, even as economic growth has not been protected. Government mismanagement of food and oil policies has contributed to the problem. Most recently, RBI’s attempts to control the exchange rate have ranged from pointless to damaging, undoing a longer-term program of creating a deeper and more robust financial system. The danger is that macroeconomic conditions will deteriorate rapidly, dealing a severe blow to the economy that will further increase social conflict.

RBI could have used earlier benign economic circumstances to push financial sector reforms that would have improved the functioning of a range of financial markets, improved financial access, and helped capital to flow to more productive uses. It did a little, but not enough, and the futile attempt to defend the rupee has undone some of the certainties of financial sector policy that should have been maintained. Confidence—a valuable commodity itself—has been eroded.

The incoming governor of RBI has a track record of speaking up for the right policies. Not long ago, he authored a vital report on financial sector reform, covering the issues from top (macroeconomic management) to bottom (financial access at the grassroots of the economy). He does not have to stand for re-election, and he does not have to rely on reappointment for his livelihood or prestige.

Raghuram Rajan has an opportunity to determine the nature of an Indian Spring, both through his immediate decisions on macroeconomic management, and through his shaping of financial sector reform over the next two or three years. What he says and does is what will matter much more for India than the shadings of the Sen-Bhagwati debate. He even has the potential to overcome the economic policy missteps of India’s politicians. Let us see what happens.

Can India grow faster again?

Financial Express, August 19, 2013

Can India grow faster again?

India’s slowdown is partly a result of its own policy missteps, and not just global conditions. These factors suggest that India can grow at 8% a year, even in the current economic climate.

India’s growth has slowed dramatically from the global boom years. What can it do to recover? Was the period before the financial crisis just a temporary, lucky window for India, now gone forever? The rich world is saddled with debt. An emerging market slowdown, partly a result of the industrialised countries’ own slowdown, and partly due to internal structural issues in China and elsewhere, is the latest shadow looming over India’s growth prospects. Is the gloom escapable?

There are possibilities for hope. Much as I dislike the idea of Indian exceptionalism, in this case it may be warranted to some extent. Most importantly, India is by far the poorest of the BRIC group, and probably one of the poorest of the more amorphous “emerging market” designation. That means it has more room to grow. It is quite far from having to worry about any so-called “middle-income trap,” that might be an issue for China and Brazil. Secondly, India’s demographics give it an opportunity that does not have to be sabotaged by a global slowdown. Thirdly, India’s slowdown is partly a result of its own policy missteps, and not just global conditions. These factors suggest to me that India can grow at 8% a year, even in the current economic climate. How can this be achieved?

The need to create productive employment at a very large scale is obvious. This is more complicated than just giving away money for rural make-work programmes—that is just a transfer scheme for redistribution-cum-income insurance. India needs to create more new businesses and allow existing ones to expand more easily, and in employment-friendly ways. Clearly, labour market reform is needed, and it is not as difficult as it is made out to be. The core problem is political acceptability, and a grandfathering scheme, where existing employees are protected, but new ones in new firms, or certain classes of old ones, are allowed to be employed under more flexible conditions.

Next, the focus of new business creation should be in second and third tier cities and towns. These are best placed to absorb rural labour most efficiently and flexibly. To make this work, strengthening urban infrastructure at this level is critical—this means empowering urban local governments, increasing their capacity and incentives to raise revenues and build and manage new infrastructure. It also needs continued development of rural roads.

Another way in which India is somewhat different is in its geography. This geography actually makes it easier to develop internal supply chain networks, again provided that the internal infrastructure is in place. Currently, a wholesale review of India’s transportation sector is under way—hopefully its recommendations will be the basis for reform, not just in physical infrastructure for internal movement of goods, but also in the institutional infrastructure of regulation and taxation that often inhibits the development of internal production networks.
India also needs to think about patterns of production. Japan certainly grew by becoming an exporting powerhouse after World War 2, but it also produced for its domestic market. Durable goods industries making appliances and cars for domestic consumers were crucial to Japan’s inclusive growth. India is poorer, bigger and more heterogeneous than Japan. On the other hand, technology has made it easier to set up new industries (smaller-scale factories, for example), to manage production, and even to innovate inside a technology frontier that has itself been pushed out at an incredible rate. The key to inclusive growth is domestic production of consumer goods that are affordable to large numbers of Indian consumers—not just watches and bicycles, but mobile phones, kitchen appliances, energy generating devices and more.

This last point suggests that the idea of Track 1 and Track 2 reforms, so clearly articulated recently by economists Jagdish Bhagwati and Arvind Panagariya, may be dominated by a reform agenda that integrates the need for growth with inclusion, and goes beyond mere redistribution or trickle down.

To support the growth path outlined above, there are three crucial areas where the national government needs to focus, beyond basic health and literacy. First is a large-scale, effective set of vocational training programs: there has been much talk on this front and little achievement. The private sector probably needs to be incentivised to make something happen quickly. Second, the government needs to fix the mess in electric power generation—this is well-documented as a prime constraint on growth. My earlier calculation suggested over a percentage point of growth is lost each year.

Third, and most difficult, the national government needs to overcome its own corruption and inefficiency by devolving responsibility and authority to the states, and from there down to cities. Old fears of national disintegration are no longer valid. Political power at the centre can be just as well sustained through sustained economic betterment, as opposed to short term handouts. Political parties at the national level need to understand that this is possible. A future Indian spring can be a true blossoming, or it can be like the Arab one so far.

The great rights debate

Financial Express, August 7, 2013

The great rights debate

India’s Food Security Bill has intensified a larger debate on where the country should be headed, with respect to questions of the rights of citizens. Naturally I want to weigh in as well. There are several issues, which to my mind are getting combined in ways that reduce the clarity of our thinking.

First, there is the grand philosophical challenge of what rights are and which ones, at some abstract level, we want to protect and promote in our society. For example, the United States Declaration of Independence called out (though not exclusively) the rights to life, liberty and the pursuit of happiness.

Second, there is the question of how to translate any abstract right into practical rules for society. In the US, the right to liberty was amplified and spelled out in their constitution’s “Bill of Rights,” to include freedom of speech. How that gets put into practice (for example, it is not a right to shout “fire” in a crowded theatre if there is no fire) depends on societal norms, laws, and the interpretation and enforcement of those laws.

Third, there is the issue of the motivations and objectives of those who are pushing for amplifications or extensions of rights in India, including influential people in and outside government.

Let’s not worry too much about the third issue, since the first two are central. Of course, if the current approach to rights is wrong, understanding why it went wrong will be important for changing the process and for selecting new decision makers who can do a better job. Looking at the United Nations Universal Declaration of Human Rights, one can see that we have, in principle, agreed to an expansive set of rights, of varying character and tenor (the right to life versus the right to marry, for example), some of which are derivative of others, and some of which may conflict at times with others. It is also clear that practice in India falls woefully short of many of the ideals laid out in this document.

So, with respect to the first issue, of what rights are, and which ones are desirable, as a first approximation, we have reasonable answers, the result of considerable global intellectual effort and historical experience. The real focus, then, should be on implementation. Of course, everyone falls short of ideals in practice, so the question is how we can do better. The economist’s way of thinking is very useful here—one should establish where we are relative to a “rights frontier,” how to move closer to the frontier, and where we should be on the frontier. The latter involves tradeoffs—should we spend more on subsidised food or on access to clean water? On public health centres in villages or on subsidised health insurance? On better and more equal treatment in the justice system or on maternal and neonatal health?

Of course, we would like to do all these things, but at some level choices have to be made, and one problem with India’s government decision making processes is that they do not support good spending choices in general. How to fix that was the subject of my last column. There is a second level problem once choices have been made. If we want to promote the right to health and well-being (as articulated in the UN Declaration) by focusing on food (rather than housing or medical care), then, is translating that objective into “the right to rice at two rupees a kilo, delivered through the Public Distribution System” the best way to do it? What is surprising is that this question has not been properly addressed by many policy makers and policy advisers. This is disheartening.

Of course, it can be counterproductive to criticise without offering a better alternative. So here is my suggestion, one I have made before. Focus above all on the health and well-being of two years in the life-cycle of every citizen, from conception to their first birthday. Put marginal public resources for the broad right to health and well-being entirely into this targeted group. This includes an integrated approach to food and nutrition, health care, and information and education. This will also have a big impact on gender issues and the rights of women, though in indirect and long-run ways. It is universal and easily targeted at the same time.

For complicated reasons, India does terribly on the interval (-1, +1) in its citizens’ lives. That alone would suggest that the bang for the buck would be highest here. Indian society has too many problems to fix all at once with the resources available. Getting this one piece of our lives right would be an excellent place to start. It will make a lot of other rights easier to attain over the longer run. Articulating citizens’ rights is a good thing. Using resources intelligently to achieve these rights effectively is also good, and ultimately where the proof of the pudding lies.

Making government work

Financial Express, July 26, 2013

Making government work

India’s government works very well in some ways (functioning democracy, stability, responsiveness, and so on) but is maddeningly inept in others (improving provision of basic public services, ranging from health and education to water and electricity supplies). Lant Pritchett, formerly of the World Bank, and now at Harvard’s Kennedy School of Government, has coined a new term for this situation. He calls India a “flailing” state: “a nation-state in which the head, that is the elite institutions at the national (and in some states) level remain sound and functional but … this head is no longer reliably connected via nerves and sinews to its own limbs. In many parts of India in many sectors, the everyday actions of the field level agents of the state—policemen, engineers, teachers, health workers—are increasingly beyond the control of the administration at the national or state level.” It may be debatable whether the deterioration is in absolute terms, or relative to expectations and aspirations, but the question is what can be done to change this situation.

Pritchett’s solution to the problem that so many have identified, and which he has so picturesquely named, is unclear. He suggests that India’s “administrative modernism” is out of step with the country’s politics and society. He argues that political competition focuses on loyalty to identity groups, rather than provision of effective public services. He suggests that India will eventually muddle through with incremental reforms and learning by doing. Here I would like to offer some different perspectives on the problem and the possible solutions.

Ultimately, as Pritchett and others have recognised, a major issue is that of weak accountability of government employees. Accountability can be internal, within an organisation (for example, to one’s boss), or external, such as to citizens as voters. There are a variety of ways in which accountability can be improved. Several years ago, OP Agarwal and TV Somanathan, themselves senior bureaucrats, suggested some structural changes for decision-making within central ministries, including letting more policy implementation be managed below the top level, providing better career incentives for performance by elite bureaucrats, and broadening the input of expertise into policy-making.

The suggested changes can, in fact, be thought of as embodying two fundamental principles, those of decentralisation and competition. Decentralisation allows for better matching of skills and tasks, at least when training is appropriately provided. Competition provides incentives, sometimes pecuniary, but sometimes non-pecuniary, for better effort. The interesting idea here is that relatively small structural changes at the very top may have significant impacts—the decentralisation envisaged is modest, just pushing some decisions one or two levels down the hierarchy. The competition envisaged is also modest—slightly more in the way of performance expectations and appraisals, plus potential and actual competition from outsiders to the bureaucracy.

Such micro reforms can, of course, be copied at the level of each state government, and would need to be. A second set of reforms, which are much more macro in nature, apply the principles of decentralisation and competition at a different scale. I would suggest that India’s so-called flailing state is very much a result of over-centralisation with respect to the different tiers of government. I would argue that more expenditure authority needs to be pushed down to the level of state governments, and from there to local governments, particularly city and town governments. Currently, the states appear to have considerable responsibilities for expenditure, and there is a view that they have failed to meet these responsibilities, necessitating more central government control through transfers with strings attached. I would argue that state governments instead need to be given more autonomy, and that more revenue authority needs to be delegated to state governments, who must then delegate further to local governments. Decentralisation is essential for creating effective external accountability, which in turn will drive internal accountability.

Of course there are issues of inequity, of corruption, and of capacity. However, each of these can be addressed directly. None of these problems is solely associated with decentralisation, and none of them should stand as a necessary difficulty of decentralisation. The initial evidence from India’s massive local government reform supports the idea that accountability and effectiveness can increase with decentralisation, even as mechanisms are needed to deal with the adverse consequences mentioned. And this has happened without giving local governments even a semblance of appropriate revenue authority.

The two suggestions for government reforms presented here—decentralisation and competition within top-level government organisations, and across tiers of government—illustrate the problem with Pritchett’s metaphor. There is not just one brain that controls nerves, sinews and limbs. Government is made of individuals with skills that can be better utilised, and that can be improved. Democratic governments ultimately serve at the pleasure of citizens, and government workers need to make that connection more explicitly. A focus on these possibilities can make government work better more rapidly than the pessimists might believe.

A reform success story for India

Financial Express, July 1, 2013

A reform success story for India

We are used to highlighting the shortcomings of economic reform in India, both in process and outcomes. These shortcomings are particularly apparent now, when the economy is struggling on several fronts: growth, inflation, and the external balance. In this context, it is good to revisit an ongoing success story of Indian economic reform: its tax system. In the last two decades, India has made tremendous strides in terms of reforming income taxes and consumption taxes. These reforms have included improvements in tax policy as well as in administration. The former has helped the latter: rationalising tax policy has made tax administration easier to conduct effectively, but there have been direct improvements as well in the technology of tax administration.

Better tax policy has meant cutting inefficiently high rates, whether in the income tax structure, or in areas such as import tariffs. In the case of consumption taxes, it has meant replacing a complicated tangle of sales taxes and duties, often piled on each other, with a simpler, more transparent value added tax (VAT). As the VAT nomenclature implies, this avoids the problem of taxes being applied to quantities that already include other taxes—a cascading effect that can create unintentionally high rates, and multiple inefficiencies. Better tax administration has been built on the foundation of new information technology systems, which support mechanisms such as deducting income taxes at source for those who pay them, and tracking of purchases and sales required for VAT credits along the value chain.

The goods and services tax (GST), which is inching toward implementation, represents an important new step in the process of Indian tax reform. The sooner it is put in place, the better for the economy. In particular, there is some reason for thinking that the GST will give the central as well as state governments a firmer, broader revenue base, which is less subject to political distortions than is the income tax: the GST is a VAT, better coordinated than the present system, and applied more broadly and consistently. A key institution in the process of introducing the GST, as it was earlier for introducing the VAT and for managing state sales tax incentives, is the Empowered Committee of State Finance Ministers (EC). This EC met in May, and then, on June 7, its chairmen met with representatives of industry associations and consulting firms, where an EC paper formed the basis for discussion. This discussion paper is a model of clarity, and illustrates how this complicated process of introducing a major overhaul of the tax system is proceeding. There are several facets of the process worth noting.

Technical policy formulation: There is a clear understanding of the technical issues involved in introducing the GST, including changes in revenue receipts at different levels of government, trade-offs involved in specifying tax bases in different ways (based on turnover levels), and mechanisms for administration (especially across different levels of government). One might expect this clarity, given the time it has taken to get where we are, but time has not been a guarantee of quality in other cases of policy formulation. There is also a clear use of technical inputs from the main national source of such expertise, the National Institute for Public Finance and Policy.

Political management: There is a clear understanding of the constitutional issues involved in introducing the GST, of course, but also a polite and pragmatic statement of the needs of the states in terms of some protection against revenue uncertainties that might come with the reform. In this context, the national government appears to have been somewhat lax in its political management of a complex Centre-state issue—the compensation being requested by the states seems to be quite small relative to central tax receipts, or even as a percentage of the fiscal deficit.

Institutional innovation: The creation of a GST Network (GSTN), which will be a non-profit company with ownership shares of the Centre, states, National Securities Depository Limited, and three selected financial institutions. The GSTN will provide a common IT infrastructure to support the introduction and implementation of the GST. As the EC discussion paper elucidates, issues of monitoring and control versus costs of compliance, can all be dealt with effectively with a combination of the right policy framework and a solid information infrastructure.

One hopes that the EC discussion paper, which distils many years of discussion and analysis, marks the end of the process of agreeing on the details of the GST, and the beginning of efforts to make it happen. The GST will be a major milestone in Indian economic reform. Tax reform has not been perfect. There is much left to do. For example, the GST, in coordinating taxes on the same bases (in this case, business sales) may provide a model for reform of the income tax system, allowing States along with the Centre to tax personal incomes. The GST use of information infrastructure might point the way to methods for strengthening property tax systems across India’s creaking, bursting cities, as well as other aspects of local tax systems. Tax reform is important, and it is very much alive in India.

India’s China puzzle

Financial Express, May 31, 2013

India’s China puzzle

The recent visit to India by China’s new Premier, Li Keqiang, led to a statement of cooperation covering a wide array of topics, and was followed by much sceptical analysis in the Indian media. Aside from history (the harkening back to the 1954 Panchsheel Treaty seems particularly ironic), the recent Chinese actions in Ladakh made the Chinese premier’s goal of trust-building somewhat more difficult to accept on the Indian side. An extreme pessimistic position is that China is engaging in diplomacy that will allow it to pursue its long-term strategic goals, by making promises to India of good things to come from cooperation. The Chinese leader’s visit certainly did seem to come across as a charm offensive, with one Indian academic describing him as “exuding warmth.” The rhetoric of the two population giants cooperating for peace and stability and for economic development is certainly appealing. On the other hand, strategic analyst Brahma Chellaney has termed China’s approach as coercive diplomacy, strengthening its hand on border issues with its incursion, while appearing to be magnanimous in its official diplomacy.

India has no choice but to talk with China. Their geographic proximity and the range of issues where their interests intersect make that imperative. The problem is that the deck is stacked against India in many dimensions: whether it is China’s economic advantage, its military prowess, or its geographic position (particularly with respect to trans-boundary rivers). Cooperation may lead to mutual gains, but how those gains are divided depends on the relative bargaining strengths of the two parties. On almost every dimension, India is in a weak bargaining position. In some cases, as in the boundary dispute, China can almost completely call the shots. India has to change the game it plays.

In analyses of the Chinese premier’s visit, it was certainly well-recognised that China wishes to counter India’s attempts at economic or strategic closeness to the United States, and also, to some extent, to Japan. But it is precisely ties such as these that will give India some leverage in its dealings with China. Indeed, there is a long list of Asian countries with which India should be pursuing closer economic or strategic relations. In dealings with these countries, India has an advantage over China, which has a trust deficit with many of its neighbours, not only with India.

I outlined a strategy for India in two columns last year (August 14 and 22, 2012) that emphasised broader engagement with other countries as alternatives to China, as well as a concerted effort on the domestic front, in areas such as infrastructure. In the joint communiqué this time around, the Indian side encouraged Chinese investment for infrastructure development. But relying too much on the Chinese for India’s critical needs in this sector will be a mistake, precisely because it fails to reduce the asymmetries in bargaining power between the two nations, even if there are mutual gains from cooperation. Increasing India’s economic strength will take time, and physical infrastructure is not the only area in which India is weak relative to China: health and education also stand out as sectors where India lags more than it should. Fixing all of these areas will take time.

One area where the financial resources needed are relatively small (although there may be other, non-financial hurdles) is that of India’s foreign policy institutions, in particular the Indian Foreign Service. If India is to pursue a strategy of global engagement, in which China is just one of many partners—its influence counterbalanced by networks of foreign ties—the size of the IFS and its quality will need to increase. It is well-recognised that the IFS is small relative to India’s size, even allowing for the country’s relative poverty. Brazil and China have larger numbers of diplomatic personnel, and even tiny Singapore has almost as many professional diplomatic personnel (as opposed to support staff) as India.

There are many areas of improvement needed, besides adequate numbers: a 2009 article by Daniel Markey in Asia Policy makes a telling and unfavourable comparison of India’s training of its diplomats with the case of China. Markey also highlights the relative strength of China’s foreign policy think tanks. And the comparison of universities across the two countries only emphasises India’s weakness.

The puzzle for India is that it cannot avoid China, but it is currently ill-equipped to engage with its neighbour in a manner that protects and enhances its own interests. To deal with China, India needs a strategy of broader economic and strategic engagement, but it also needs the means to design and implement that global engagement. To accomplish that, India needs to invest very specifically in the human and organisational capital required for that task. This is not a trivial task, but it does not require the scale of resources directly needed for domestic economic growth. The challenge will be to overcome institutional inertia, but raising the size and status of, and support for, India’s diplomatic corps should be easier than the broader reform of the bureaucracy that is also needed.

Wednesday, September 4, 2013

Managing India’s manufacturing

Financial Express, May 27, 2013

Managing India’s manufacturing

In my last column, I suggested that the quality of management may be a critical stumbling block to increasing the size of India’s manufacturing sector. The clues I gave last time came from studies supported by the National Manufacturing Competitiveness Council. But there is still more evidence, from different academic studies. For example, Nicholas Bloom and John van Reenen, in a study published in 2010, found that Indian firms with strong management practices are comparable to the best US firms on this dimension. However, there is a thick tail of badly-run (by their measure of management practices) Indian firms, which often neglect basic tasks such as collecting and analysing data, setting clear performance targets, and linking pay to performance.

In another study, Bloom and different set of co-authors performed a controlled experiment with a sample of Indian textile firms, and found that the treatment firms improved productivity by 17% over the control group, by implementing specific improvements in operations. The focus was mostly on the basics of operations, such as the organisation of the factory floor, how parts were stored or moved around, how inventories were logged and stored, how machinery was maintained, and so on. In the experiment, the advice came from high-priced consultants (whose services were paid for by the researchers), but the improvements were not rocket science, and did not seem to require expertise at the level of a modern business school graduate. Finally, in a study I did last year with Shruti Sharma, looking at the productivity effects of investments in information technology in Indian manufacturing plants, we found results consistent with the hypothesis that the quality of management mattered for determining these impacts.

Ultimately, the pressure to remove inefficiencies in manufacturing has to come from competition: last week I noted that inefficient firms still made high profits, and that also seemed to be the case with the sample of textile firms studied by Bloom and his co-authors. But this does not foreclose the possibility that removing constraints on management quality will make things better. Certainly, if and when regulatory and business environment constraints on Indian manufacturing get relaxed, the availability of appropriately skilled management will be critical.

How is this availability to be achieved? India has certainly expanded graduate management education very rapidly. However, there are problems of quality in many of the new institutions. Even in the best management schools in India, the focus is very much on fast tracks to success, typically through focusing on finance or marketing or general management. Just as in the United States, classic roll-up-your-sleeves, shop-floor management is quite neglected in India. However, for the US, the issues are different: focusing on finance and marketing has taken away from high-end innovation. This is why many Silicon Valley firms still shy away from hiring MBAs, and prefer to train their managers with customized in-house courses. Such courses are difficult for smaller firms to afford, though, and will not provide the large-scale solution that India needs.

Indian manufacturing, if my reading of the evidence is right, needs basic managerial training, and lots of it – not just for fast-track executives, but for every level from factory supervisors on up. The implication is that not all of this training has to be in the form of MBA degrees or equivalents. Indeed, short certificate courses are probably best suited for many of the skill gaps that lead to basic inefficiencies on the shop floor. Given the shortage of faculty, the solution is going to have to include development of online materials that can be accessed by large numbers.

One can envisage this effort originating at the level of individual industries, since manufacturing processes can be quite specific to the nature of the product. Of course, there are many management techniques that are more generic, such as basic accounting or inventory tracking. The Indian information technology industry is well known for training its workers, most of whom are skilled professionals, and for using global standards of certification. In their case, they were able to generate the cash flow needed for internally supporting such efforts, but some kind of tax credits may be a good idea for manufacturing.

One hopeful example is the Munjal Global Manufacturing Institute, at the Indian School of Business’s Mohali (Punjab) campus. This is being developed in collaboration with the Massachusetts Institute of Technology, and will probably be aimed at the high end of the market, but it may provide a role model for mid-market offerings. The key is for industry to be involved in shaping the curriculum and working with faculty (preferably including ex-managers), so that the connection to shop floor challenges remains strong.

Programs that pull in experienced manufacturing managers from around the world to share their knowledge will also be more valuable. Of course, creating and delivering such programs has its own management challenges and constraints, but a start has to be made, otherwise national policy goals will remain pipe dreams.

Indian Manufacturing: Getting to 25 Percent

Financial Express, May 16, 2013

Indian Manufacturing: Getting to 25 Percent

India’s manufacturing sector has played an unusual role in the national growth experience, compared to many other developing countries. In 1950-51, manufacturing was about 9% of GDP. By 1979-80, this ratio came very close to 15%, but thereafter has barely increased. In this context, the National Manufacturing Policy’s (NMP) goal of increasing manufacturing’s share to 25% by 2022 is ambitious indeed.

One of the motivations for focusing on manufacturing growth is, of course, its potential to generate employment for the unskilled or semi-skilled. South Korea provides a striking example, having increased the manufacturing sector’s share of employment from 1.5% in 1960 to 26.9% in 1990. The NMP states, in fact, that “over the next decade, India has to create gainful employment opportunities for a large section of its population, with varying degrees of skills and qualifications. This will entail creation of 220 million jobs by 2025 in order to reap the demographic dividend.”

Recent assessments about achieving this goal are pessimistic. The Economist magazine titles its article on the subject with “What a waste: How India is throwing away the world’s biggest economic opportunity.” This article goes on to list the well-known case for reforms in labour markets, infrastructure, education and governance, and there is no need to go over them here. With respect to manufacturing, it is also helpful to understand the state of play at the ground level.

In 2002, Pankaj Chandra and Trilochan Sastry summarised the findings of the previous year’s National Manufacturing Survey (NMS), which focused on the organised manufacturing sector, representing less than 1% of the country’s firms at the time, but employing 19% of its industrial workers and contributing almost 75% of gross value added. They concluded, “Manufacturing strategy of most firms is still not addressing certain fundamental issues of competition: need to change product mix rapidly, need to introduce new products based on indigenous R&D, need to use process innovation and quality improvement process to reduce cost of operations and consequently price of product.” They also noted the lack of spending on R&D, and the relatively small numbers of employees with advanced degrees, as well as pervasive supply chain weaknesses.

In 2009, Pankaj Chandra analysed the next NMS, which was conducted in 2007. Supply chain management remained a key weakness in the later survey, and investments in R&D remained low, despite perceptible benefits to innovation. The firms surveyed indicated a focus on quality, and of trying to achieve that through process improvement, but large scale and low cost were not major goals of the surveyed managers. Chandra’s report also argued that management weaknesses contributed to lack of innovation, as well as to inefficiencies in plant location and supply chains.

My own reading of the evidence presented suggested that there was under-investment in both physical and human capital, reflecting high financial costs as well as an unfriendly policy environment. At the same time, Indian manufacturing firms were able to make strong profits in this period, despite their inefficiencies, suggesting a lack of adequate competition in manufacturing. In other words, a lack of competitiveness was partly traceable to a lack of competition.

A 2010 joint study by the National Manufacturing Competitiveness Council (NMCC) and the National Association of Software and Services Companies (NASSCOM) focused more specifically on information technology use, but it made several similar points as the two NMS studies, with newer survey data to back them up. It concluded, “ICT adoption levels in manufacturing firms were primarily influenced by their management team. More than three-fourth of the companies especially in the micro and small firms category are strongly influenced by the owner/management team for their ICT investments.”

All of these analyses point to a somewhat neglected aspect of the deficiencies of Indian manufacturing, namely the lack of adequate specific human capital in management. The NMCC-NASSCOM report focuses on increasing IT adoption in Indian manufacturing, but its general recommendations for a systemic approach are more generally applicable. The key is broad participation from many parts of the business ecosystem. The report emphasizes the potential role that can be played by national and local industry associations in developing best-practice business process re-engineering guidelines to cope with the organisational changes that are often needed to benefit from investment in innovations. Human capital development to overcome lack of appropriate skills can be addressed through improving the quality of government provided training programs, and tax incentives for firms to spend on this training. In fact, the latter approach of incentivising the private sector might be the most efficient.

The bottom line is that creating employment requires having enough people with the skills to manage employees in situations of competition and innovation. There are many larger issues of economic reform, across the board, which affect productivity and employment. Indian managers operate in a difficult environment. It is a long haul to change that environment, but a more immediate impact may come from promoting managerial skill development.

India's Security: Food, Water and Energy

Financial Express, May 14, 2013

India's Security: Food, Water and Energy

The conventional notion of national security refers to a country’s capability to defend itself against, or to deter, military aggression. The central idea of security, though, is protection against downside risk, and that concept applies to a range of variables, though all of them ultimately feed into material well-being. In the modern world, risks come not just from deliberate attacks, but also from withdrawal of access (e.g., to goods, resources or technology) and simply from the forces of nature.

What is the state of India’s security in this broader perspective? This is the right question to ask, rather than the more headline-grabbing one of India’s superpower status. A report from the London School of Economics a year ago asked the question “India: The Next Superpower?” seemingly as a straw man to criticise all that is wrong with India internally. Recently, The Economist magazine cautioned that India is about to become the world’s fourth military power, but lacks a plan to live up to this status. These are useful but fragmentary inputs into the question of India’s security.

A better starting point is the perspective provided by Professor Upmanu Lall of Columbia University. For several years now, he has been explaining the water-energy-food nexus, and its implications for material security. Essentially, without an integrated and focused approach to water, energy and food security, India will face severe challenges in the near future. While the links between these three things are common across the globe, India’s situation is especially dangerous, for two reasons—one beyond the country’s control, the other very much a function of policy failures.

The first reason for India’s exceptional security challenge in water, energy and food is a relative lack of natural endowments in water and energy resources. Per capita water availability in India is much lower than in other large, populous countries. Its ability to generate energy from domestic fossil fuels is also relatively poor. On the other hand, India has addressed its past food security problems by relying on water and energy-intensive agricultural techniques to increase yields. In regions such as Punjab, these techniques are leading to ecological disaster, which will destroy food security.

The problem is not so much with the techniques, as with completely irrational and destructive pricing of water and electricity: an enormous and avoidable policy failure. Free electricity to farmers has led to excessive groundwater depletion, bringing underground aquifers close to irreversible collapse. The water that is pumped is also not priced, being treated as a free good by farmers. The problem is not just in Punjab. Professor Lall has been describing similar problems in states such as Gujarat and Andhra Pradesh, with different cropping patterns and different participation in the central government’s food procurement system. Hence, while foodgrain procurement policy is partly to blame, and is particularly a problem in Punjab, the deeper problem is an almost complete lack of attention to the provision of sensible incentives for the use of water and electricity. Areas in Gujarat are depleting groundwater unsustainably to grow vegetables and dairy fodder, for example.

Of course, there is more to India’s energy security than the wasting of scarce electricity for excessive groundwater pumping. Development of renewable energy sources, as a way of cutting down on problematic fossil fuels, is an area where India is lagging, relative to where it needs to be. And the management and development of fossil fuel resources for energy production in India is also well known to be inefficient. Food security policy, too, has other dimensions, including deficiencies in pricing, infrastructure, and marketing.

Still, there is something particularly striking about policies that threaten to simultaneously destroy food and water security, while making a significant dent in energy security. I have not been able to find a clear discussion of these security issues at the national policy level, where it belongs. Professor Lall’s voice comes from a base in American academia, and he is well positioned to discuss, as he has in public forums, the potential technological and institutional solutions that might emerge from the US or other developed countries, for more efficient agricultural water use, in particular. But there has to be a receptive situation in India for such solutions to be evaluated, adapted and implemented.

India’s policymakers are certainly right to worry about its global status, military security, macroeconomic stability, and so on. A country the size of India is going to matter more as it continues on its economic growth path. But it is easy to lose sight of problems that are accumulating in multiple locations, mostly in barely visible ways, as a result of decades of poorly chosen policies. The biggest threat to India’s security may be the looming problems in water availability and food production, and the associated drain on energy resources, from current policies. Ignoring this threat will not just risk India’s possible superpower status, but its very being.