Common Economic Model

India soon after independence chose a mixed economy model, where both Public and Private sectors had their own roles. However, the Indian Economy in the first few decades was predominantly a socialist economy with strong push for Public Sector Organizations. The Private Sector activities were restricted. On top of this, in later years with the License Permit Raj, only selected businesses benefitted. The public sector became more of a job creation machine without much care about productivity, profitability or competitiveness. This was later followed by liberalization from 1991 onwards which has been affected by allegations of crony capitalism. At the same time welfare aspect of socialism has degenerated to populism.

A time has come to re-evaluate our choices. Not only should we reposition capitalism to take advantage of free markets and define the role of Public Sector organizations, but also we should look at new possibilities a more socially networked and globalized world provides. The NGO’s and Social Businesses have become increasingly important in the Economy. They will play a key role going forward. We need to not only achieve growth, create employment, remove poverty but also unleash entrepreneurial energy, innovation and productivity to compete in the globalized world.

 Despite setbacks such as 2G Scam, among all the sectors, telecom is a success story in India. It has created value to both rich and poor and served as an infrastructure for other sectors to grow.  IT sector also has grown generating both employment and growth. The IT Sector has created wealth for both employers and employees and transmitted benefits to larger sections of society.  Going forward IT sector will play a greater role through E-Commerce and E-Governance.  Automotive is another sector which was more of a market to start-with and slowly becoming a factory for the developing world. The Government has experimented with PPP models with varying degree of success. Creation of companies like BSNL out of Telecom Department and removing monopolies in aviation sector has also helped.  In addition, we have opportunities to re-look at range of sectors spanning Agriculture, Manufacturing and Services.

 At this stage it is imperative that India should evolve a common economic model that works well and then apply it to sector after sector.  A strategic outlook by all the players can benefit the nation.

 Advantage of Common Economic Model is that we should not have to work a new model for every sector. Evolve and standardize one and apply it like a cookie cutter.  To take an example, while India has made enormous advances in Telecom using competition and region-wide licensing, the quality of roads in India are abysmal and need frequent rework.  So it begs the question why similar model cannot be applied in Roads sector. Here large regions can be given to Infrastructure Service Providers who manage not only high ways, but all the inner and rural roads in the region.  Basically infrastructure services such as Electricity, Roads and Water should be managed at a larger scale, thus giving economies of scales and enforcement of quality and standards.

Our people’s representatives should be involved in managing social concerns, representing public opinion than be in contract loop at ward levels. There could be multiple Infrastructure Service Providers from both Private and Public Sector.

Again for large projects where the contractor primarily takes most of the money either from Government or Public Sector Banks leading to “Riskless Capitalism”, the Government should look at contracts of the type of Managed Services where Contractor primarily provides people, technology and services, and the capital is managed by the Government itself. This is assuming the Government agencies follow the audit regime properly.

Also, is it not better to have a public sector in Food management which competes with private sector, in place of Food Corporation of India. May be we can scale-up existing Public Sector  Company to not only store but also sell and intervene with market to stabilize the prices. The same time market can be opened up to both private and Foreign Players. Even entities like Costco in US, which allow bulk buying by ordinary households who become members, can reduce incentives to hoarding.

In agriculture, the Government intervenes pretty much everywhere – subsidizing power, fertilizer, pesticide, seeds, insurance and interest rates and ensuring MSPs. On top of this agricultural income is not taxable. In spite of this many farmers find it difficult to manage the risks involved and get into distress. Is it not better for Government to encourage contract farming where a PSU leases land and labour from farmers on a franchise model? A Public Sector entity can do all the investment and risk management. The same model can be extended to both private sector entities as well. In addition we can have specialized agriculture zones (SAZs) where we use best of breed practices for agriculture that can employee large number of people. If countries like Australia and Israel take agriculture seriously why not India?  These institutional mechanisms can de-risk all farmers that need assistance and rich farmers can then look at things like exports and come into income tax bracket. Some of the above may be already happening, but that needs to be scaled-up and made main-stream.

The Government departments themselves can benefit more if they outsource functions to professional organizations. Passport Seva Kendras have made a lot of difference in speedy provision of passports. This will require a bit of business process reengineering.

 In summary a common economic model should have place for:

Public Sector Participation

Public Sector Companies should seek their own competitive differentiation, set benchmarks for fair treatment of employees and good governance practices. The interest in a given case may be as a strategic investor, financial investor or as a social investor. Each institution should find its own theme and differentiation, compete aggressively without compromising values. Public Sector presence in critical sectors can help in avoiding cartelization among private players and counter inflated costs, with competitive proposals. However, Government should choose the sectors for participation and extent of participation wisely. Ideally sectors that impact infrastructure (both hard road and railways and soft such as health and education), employment, poverty alleviation and strategic sectors should be looked at.  Government should exit the sectors where free market is operating optimally without cartelization. Government may selectively retain its presence as a counter to “contract-kickback” culture.

Domestic Private Sector Participation

Domestic private players are important to grow the market. They should be encouraged to develop great brands, best practices in corporate governance with strong focus on innovation and quality. In fact presence of strong Corporate Sector in India, should be looked as a source of national strength.

FDI

There should be open markets for Foreign Companies as long as they are subject to same set of laws, regulations and do not present a strategic risk to India. Irrespective of how a foreign company enters India, it is a matter of time that it serves both export and domestic markets.  This may lead to gain in competencies, competitive spirit and new business models originating from India. The new players will also help build the eco-system better. The Government instead of having a sector-wise black and white position, can calibrate the entry of players, the same way talent-deficit countries calibrate the entry of labour as per their need.

Small and Medium enterprises, Start-ups and distribution channels

They are vital to increase employment and expand eco-system. The way IT sector used accreditation, similar exercises can be done in other sectors to establish standards.

 -Social Businesses

These are “For-Profit” businesses taking up socially relevant businesses such as renewable energy, energy out of waste and financial inclusion.

 –NGOs and Trusts

We should have NGO’s playing role only in selected sectors such as education, health and social service. Businesses should not be masquerading as trusts. The NGO’s and trusts should align with National Missions and National priorities, with the Government playing the role of a catalyst.

 A question may arise as to we have always had mixed economy with nearly all of the above players and what is new here.

  • For the starters, we need to transform as many Government Departments as Service Provider Organizations. We need to stick with philosophy of players from both private and public sector players providing service, even when there are set-backs here and there.
  • We need to pretty much open up all sectors for public, private and foreign players.
  • We need to narrow the gap between Private and Public Sector Companies using same norms of Governance and zeal for productivity, innovation and competitive differentiation.
  • We need to overcome the divide between domestic and Foreign Investment as long as the players are subject to same regulation and approvals, as long as they do not pose any risk to national and economic security of the nation. Further simplify rules for Foreign Investment and stop round tripping of black money masquerading as foreign investment.
  • Quality-First Approach: Lot of Government spend happens through contracts and the contracts are awarded to lowest bidder. Instead we should fix the value of the project and grant it to somebody who can deliver the highest quality for a reasonable price. Even with auctions, there are more innovative approaches such as Generalized Second Price auctions.
  • Encourage Ethical Companies and Manage Moral Hazards

Evaluate and choose bidders as per credentials. Vendors that outwit Government in conspiracy with Government Officials or otherwise should be given negative scores which will put them at a disadvantage.

  • A strong regulator, audit regime and access to information.

Any terms for bids should be pre-approved by CAG or standardized so that they are not tweaked with malicious intent. All large entities (public or private) should be subject to CAG audits, and be forced to reveal information that may impact public interest under RTI. All whistle-blowers should be protected.

  • There should be Right to Justice to individuals, employees and citizens through Ombudsman mechanism.
  • Ensuring Competition: Encourage branding, Standards and Business Model Innovation

With branding, standards and business model innovation, all businesses big or small, private or public sector can compete.

  • Apply Market Access Fees where it makes sense. This makes sure that Government gets good revenue up-front for market opportunity shared. Generally income tax and other taxes can be evaded
  • Make in India and Make for World: Focus on making products keeping both unique local needs and global quality standards.
  • Environment and Social Concerns: Environment is a key as well as society is an important stake-holder. Many PPP models are floated where public who has to bear the costs of service are completely out of the loop.

The above model ensures greater competition as well as spread of economic gains across the larger eco-system.

In a nut-shell, it is important to have a common economic model for the speedy progress of country

It is also hoped that the proposed economic model will help us achieve a balance between multiple dilemmas:

  • Growth Focus vs. Distribution Focus
  • Focusing on Poverty through Safety Nets vs. Reducing Inequality
  • Top-down vs. Bottom Up approach
  • Effectiveness of trickle-down theory
  • Cost of growth on environment
  • Kind of Growth Model and its effect on Quantity/Quality of Employment
  • Rural/Urban priorities
  • Strategic Priorities towards powerful India vs. meeting basic needs
  • Anomalies across sectors – agriculture, manufacturing and services, corporate vs. small businesses
  • Welfare vs. Participation
  • Quotas vs. Social Mobility
  • Fiscal Consolidation Welfare Outlays
  • Public vs. Private Sector

Driving a common economic model across sectors will require wide participation of people. Social movements are needed that can spread information, capture policy inputs and understand behavioural analysis techniques. We need a national consensus to promote a common economic model which is in nation’s interest.


 

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