- India Matters
- Aug 24 2016
Sheltering under the benign glow of Ashoka Pillar lions, the tribe of Government of India servants is the worst afflicted by the “us versus them” syndrome.
Tribes exist in India outside those provided for in Part X of the Constitution. The largest is the tribe of government servants — to be distinguished from the even the larger body of public servants.
Sheltering under the benign glow of the Ashoka Pillar lions, this tribe is the worst afflicted by the “us versus them” syndrome. The “Them” in this case being private entities, derisively called “box wallahs” during the colonial period. This is odd for an economy where the private sector contributes around two thirds of value added. How can we develop more empathy between the two “tribes”?
First, systematically bridging the chasm between government systems and private sector processes can help. Yes, private business works for profit whilst government works in public interest. But both work in the same economic environment. There is little reason then, for such a wide chasm in systems and processes.
One such chasm is the system of accounts used by the two. Government follows the cash based accounting system. The formal private sector uses accrual based accounting. In a cash system, the focus is on cash-in and cash-out. But the cost of future liabilities and potential receipts foregone tend to be overlooked. Government can afford to do this. It can print money or just raise taxes to bridge the deficit. But like in a Ponzy scheme, fiscal unsustainability catches up eventually ends the party although at huge economic cost. Government already disciplines itself with strict constraints on public deficits. We should not relax this constraint.
But it is also important to transparently cost our contingent liabilities and share these with citizens. We do not do this very well. As a result, even government managers lose sight of these because the eventual cost of adopting the business-as-usual approach is hidden. Similarly, the opportunity cost of indifferent asset management is largely ignored within government. Accrual accounting helps generate such future costs.
Factor in the cost of risk
Second, government routinely underestimates the cost of risk incurred from operations. For example, government cars or buildings are never insured against loss or damage. Project estimates never factor in risks like the cost of time overruns or cost creep, despite a long trend line of evidence to the contrary. The cost of failing to meet targets is left open ended.
Consider the case of nuclear power. Our strict liability law requires private suppliers to bear the risk of damage from contamination. But the real risk is borne by a publicly owned General Insurance Company and indirectly by the government. It is the same with public sector banks whose losses from massive bad loans in the past are now being borne by the government. Government must be more transparent whilst accepting risk. Accrual accounting unearths the data required for factoring in the risk of failure.
Government as a participant
Third, government is unused to be a mere participant in the commercial eco system. This derives from its sovereign mandate to be a rule maker and regulator. It also has sovereign functions. No one would want to replace the Indian army with private military contractors. Citizens prefer better policing to paying for private guards. No one wants unelected non-state entities to make our laws.
But modern governments have added on a host of non-core social and economic functions. Building “Chinese walls” between those who discharge sovereign functions — like formulating policy, proposing legislation and developing programmes — and others who implement programmes and projects can internalise private sector concerns into the government.
Government entities like the Indian Railways; defence production units; public research laboratories; drinking water utilities; irrigation departments; public works departments; public institutes of tertiary education and hospitals can be usefully extracted from government, into publicly owned corporations subject to all the regulatory requirements as the private sector.
Stepping out of the “confining glow” of government and becoming a public limited corporation, even if it is 100 percent owned by the government, changes the organisational culture. In the colonial days, financial relief to rehabilitate drought hit farmers was handed out by district collectors. Since the late 1970s, we have used public sector banks for this purpose. Today, crop insurance is the financial backstop for failed crops. This will incentivise even private banks to expand rural lending for profit. And farmers will not have the incentives they have today to exchange loan forgiveness for votes.
In the Union government alone, 66% of the 3 million civilian staff can be hived off to corporations. If this mammoth task seems undoable, look back to 2000, when the Department of Telecommunications (DOT) was restructured and 320,000 staff were hived off into the Bharat Sanchar Nigam Limited (BSNL) leaving the DOT with just around 3000 staff.
Copy paste the Telecom story
The Telecom grew unshackled once the government stopped thinking for the BSNL. The empowered regulator, Telecom Regulatory Authority of India, in sync with the government since 1999, developed a fiercely competitive market. Private providers cater to 90% of the market. Subscribers have increased from a paltry 0.3 per 100 to 88 per 100 population — pretty close already to China, which has 95 per 100 but at a per capita income five times higher than India. Indian telecom tariffs are a fraction of what they were in 1999 and are the lowest in the world. A telephone connection with a direct dialing facility, which was the preserve of business and the elite 15 years ago, is today in the pocket of the common man and has become a can’t-do-without tool for empowering women. Low cost, high quality wireless internet access is expected to double the 300 million users today by 2019.
The telecom grew because of deliberate, visionary steps to restructure the government and the telecom market for growth and efficiency. Application of these principles across all sectors can liberate the economy from the shackles of inherited, institutional constraints, including the “us versus them” chasm and squeeze out the fat in government.
The views expressed above belong to the author(s).