Renu Pokharna

Archive for March, 2011|Monthly archive page

A platter of choices

In Bureaucratic Delays, Malnutrition, PDS, Red Tape, UID on March 28, 2011 at 6:11 am

One of the more charming aspects of being in India is the seeming obsession that everyone has with feeding people: the stewardess on Jet Airways seemed genuinely concerned that I did not finish my murg methiwala. In my half-an-hour at the Planning Commission at least four people asked me if I would like some tea; and the guy who cuts my hair was baffled, as always, by my refusal to take him up on his offer of a cold drink.

It is when it turns into public policy that this fixation with feeding starts to be a problem. I have nothing against the government guaranteeing a minimum standard of living for its citizens — quite the contrary. But why does that necessarily have to take the form of the government delivering food at people’s doorsteps? On current evidence, the Indian state has shown little aptitude for getting food to the right people. The government’s own Programme Evaluation Organisation’s recent report on the Targeted Public Distribution System tells us that 36 per cent of the grains intended for the poor somehow vanish along the way. Of this 20 per cent is just somehow lost in transit, while the other 16 per cent is given out against “ghost” BPL (Below Poverty Line) cards. Not all of the remaining 64 per cent of the grains reach the poor, either. This is because the BPL cards, which entitle one to be “targeted”, are only slightly more likely to end up in the hands of the non-poor. In 2007, a team from Harvard University and the University of Chicago surveyed 21 households in each of 173 villages in Raichur district in the state of Karnataka. In each of these households they collected the data used for BPL classification by the government and based on that data they constructed their own BPL list. They concluded that only 57 per cent of BPL card-holders would qualify if the official criteria were properly applied. This would imply that only slightly more than a third (57 per cent of 64 per cent) actually reach the eligible. The government’s own assessment is only slightly less negative: the same report that already came up puts the fraction reaching the eligible at 42 per cent.

 

One might be willing to overlook all of this waste, if at least all the poor got reached. In fact the government’s report claims that only 57 per cent of the poor have BPL cards, a number confirmed by an eight-village study in Rajasthan by Ritika Khera.

So why does the government insist on feeding everyone? And why are we discussing an expanded PDS under the new Right to Food (RTF) legislation? Why not give people money, so they can buy themselves the food?

One answer that we hear from the RTF supporters is that a lot of the problems will disappear if we stop trying to target. The BPL will all get cards, simply because everyone will get a card. Equally importantly, the middle classes will use their political capital to make the system work better — the ration shop owner will not be able to get away with saying that the food somehow didn’t show up.

I agree. But what does this have to do with the government doling out food? Wouldn’t the same apply to a universal cash transfer, which would relieve the government of the responsibility of moving millions of tonnes of grain around, storing them and fighting off a variety of potential intruders, both small and furry but also of the more biped variety?

Moreover, my sense is that the politically influential middle classes these days may be more willing to fight for their right to cash, than for some grain that is unlikely to be of the highest quality. This was already true when I was a child and we had universal PDS — a lot of households would either not pick up their grain or sell them to the poor — and now the middle classes are just much richer.

But don’t we want people to eat more? Isn’t South Asia the malnutrition capital of the world? Absolutely, but we know from the work of Angus Deaton and Jean Dreze (and many others) that this is not primarily because people cannot afford enough nutritious food. Even the children of families that are in the middle of the wealth distribution (based on the admittedly imprecise measures of wealth in the National Family Health Survey) have malnutrition rates that are twice what we find in sub-Saharan Africa. It has something to do with diet, with disease, micronutrients and, unfortunately, the fact that proper nutrition is not enough of a priority for families. For that reason dumping food in the hands of families who would rather have a cellphone may not get us very much further — if they don’t want the food, they will sell it. And in any case, we could presumably achieve the same goal by giving people food-stamps, which is cash that can only be spent on food (or food and education and healthcare).

The final argument against cash is the one that does worry me. Because everyone likes cash, wouldn’t the incentive to defraud the system be that much stronger? With a universal transfer, we avoid the targeting issues, but how about many more ghost BPL cards? This is where tying the whole thing to the UID makes a lot of sense: that would be an obvious way to avoid duplication. Unfortunately the supporters of the RTF don’t want that, for the most part it seems, because the UID will take time (though I have heard other, more purely ideological arguments) and they are in a hurry. Given how costly it is to undo a system (especially a system of subsidies) once it has been set up, this seems extraordinarily cavalier.

The writer is Ford Foundation International Professor of Economics and director, Abdul Latif Jameel Poverty Action Lab, MIT express@expressindia.com

 

Indian Express, 28 Mar 2011

Taming Leviathan

In Bureaucratic Delays, Civil Services Reforms, Macroeconomic Policy, Microeconomic Policy, Poverty Eradication, Red Tape on March 22, 2011 at 6:38 am

THE argument sounds familiar. The disruptive reforms that have so changed the private sector should now be let loose on the public sector. The relationship between government and civil society has been that between master and servant; instead, it should be a partnership, with the state creating the right environment for companies and charities to do more of its work. The conclusion: “We are in a transition from a big state to a small state, and from a small society to a big society.”

A Republican presidential candidate in America? David Cameron rallying Britain’s Tories? Neither: the speaker is supposedly China’s most highly regarded bureaucrat. Last year Ma Hong won the country’s national award for government innovation—a great coup for her department, which is trying to get more non-governmental organisations (NGOs) to take over parts of welfare, health and education services in the city of Shenzhen, just across the border from Hong Kong.

The award partly reflects the whirl of activity that is Ms Ma. She has dismantled most of the controls on local NGOs: rather than be sponsored by some government department, all they have to do is register with her. She began in 2004 with industrial associations, but has extended the net to include independent charities. Almost 4,000 “social groups” are now registered—nearly double the number in 2002, when they were all tied to the state.

Over the past five years Ms Ma has paid out 400m yuan ($57m) to the NGOs for social work, mainly to do with the elderly. The groups are evaluated by third parties on things like their corporate governance: the higher their rating, the more money she trusts them with. She provides training in social work and tax advice. She would like donations to more NGOs to be tax-deductible, as in the West.

Ms Ma has studied what works elsewhere. In Hong Kong, where she trained in 2005, some 90% of social work is done by NGOs, paid for by the state. Like many Chinese bureaucrats, she also admires Singapore—especially its balance between easy registration for NGOs and stern punishment if they underperform. She wants her social groups to become the engines of Chinese society “just as private companies are in the economy”.

Even allowing for Ms Ma’s dynamism, there was, as so often in China, a message implied in her award. The country’s rulers are acutely aware that their government does not serve ordinary Chinese well. Back in 2007 the five-yearly Congress of the Communist Party embraced “scientific development” to create “a harmonious society”. Shenzhen is supposed to be the showcase for a new public sector, just as it showed the rest of the country how to embrace capitalism 30 years ago. The city has classified some 280 government functions as “social” ones, which means they can be contracted out to Ms Ma’s NGOs.

It is not hard to poke holes in China’s version of the Big Society, as we shall see later in this special report. But there is plainly a drive to make government work a little more like the private sector. “Just as a human has two legs, China has a very long economic one and a very short social one,” observes Ms Ma. “They should be of equal length.”

Many Western politicians feel the same way about their own bloated and inefficient governments. The immediate problem is the financial crisis: governments have had to spend furiously, both to prop up their banks and ward off a depression. With the average gross debt burden in OECD countries just over 100% of GDP and sovereign-debt markets fearful of another Greece or Ireland, every government, even America’s, is under pressure to produce a credible plan to shrink its deficit.

What is government for?

Costly though it has been, the financial crisis has merely brought forward a fiscal reckoning. In most of the rich world ageing populations have been driving up the cost of public health care and state pensions. Emerging countries that are becoming richer, such as China and India, are now wondering what sort of state they need to meet their citizens’ demands for better schools, health care and infrastructure.

Indeed, the fiery argument about capitalism prompted by the credit crunch has obscured a nascent, and much broader, debate about the nature of government. The future of the state is likely to dominate politics for the next decade at least. How can government be made more efficient? What should it do and not do? To whom should it answer? Ms Ma is one voice in this, but so are the anti-tax tea-party activists in America, French workers protesting against later retirement and British parents trying to set up independent schools with state money.

This special report’s central argument is that Leviathan can be made far more efficient. The state has woefully lagged behind the private sector. Catching up is not just a case of nuts-and-bolts productivity improvements but of liberal principle: too often an institution that, at least in a democracy, was supposed to be the people’s servant has become their master.

But nobody should expect that to be easy. The vested interests opposing change are huge: the state’s growth has been encouraged by the right as well as the left, by favour-seeking companies as well as public-sector unions, by voters as well as bureaucrats. Indeed, given the pressures for ever larger government, many reformers feel they will have to work hard just to keep it at its present size.

Government has always tended to expand (see table 1), and people have always fretted about it. In 1888 a French economist, Pierre Paul Leroy-Beaulieu, calculated that a share of 12-13% of GDP (just above the Western average then) was the sustainable limit for a modern state. By 1960 sprawling welfare states had pushed the average in the rich world to 28% (see chart 2), enough to convince Friedrich Hayek that “the deliberately organised forces of society [ie, government regulation]” might “destroy those spontaneous forces which have made advance possible.” Yet the next quarter-century saw another surge, pushed mainly by transfer payments and subsidies ostensibly aimed at the poor but often of most benefit to the middle classes.

This sparked a counterblast to halt Leviathan, led by Ronald Reagan and Margaret Thatcher. By the 1990s many people thought that global capitalism would stop the state’s advance. This was the decade, after all, when Bill Clinton and other leaders declared the end of big government; when left-wingers claimed (inaccurately) that half the world’s biggest economies were multinational firms; when the emerging world was embracing the Washington consensus of deregulation: and when industrial policy mainly meant hanging on to golden shares in privatised companies. A special report in this newspaper, published in 1997, examined the then fashionable idea that the state was withering away. Its author, Clive Crook, now at the Financial Times, argued that it was not.

He has been proved right several times over. In continental Europe, where the state’s share of the economy was already pretty big, it has not risen that much. However, in America a Republican, George Bush, pushed up spending more than any president since Lyndon Johnson. In Britain New Labour became even less parsimonious: the state’s share of GDP rose from under 37% in 2000 to 44% in 2007; with the British economy struggling, it then jumped to 51% in 2010.

Share of GDP is not the only way to measure state power. “Big governance” can be just as costly to an economy as big government. Some 1,000 pages of federal regulations were added each year Mr Bush was in office. A quarter of a million Americans have jobs devising and implementing federal rules. The European Union has also produced a thicket of red tape. Some are prompted by the left (diversity, health and safety), others by the right (closed-circuit cameras, the war on drugs).

Or look at the state’s role in business. In the 1990s privatisation seemed to have settled that argument. Now state capitalism has returned, sometimes accidentally (several banks have become government-controlled) but often intentionally. Many of the new industrial champions of the emerging world are state-owned, and industrial policy is no longer a rude expression even in Anglo-Saxon countries.

There is a belief in boardrooms and among America’s tax-cutting right that a monstrous, ever-growing state is the creature of make-work bureaucrats and leftist politicians, and sometimes that is true. But often the beast is responding to popular demand. Globalisation, for instance, has increased many people’s reliance on the state: greater job insecurity among the middle classes has increased the calls for bigger safety nets, and the greater inequality that comes with bigger markets has made voters keener on redistribution. Or look at the threat of terrorism, to which the knee-jerk response on America’s right was to build up the government in Washington. As Stephen Walt, a professor at Harvard, puts it, “when September 11th happened, nobody rang Bill Gates or the Open Society Institute.”

The next battle

The recent advance of government is once again prompting a fightback. The Republicans’ victory in the 2010 mid-term elections was hailed as a return to small-government conservatism. Bruised rather than reinforced by his huge health-care reform, Mr Obama is limping back to the centre, suddenly promising businesspeople that he will rein in regulation. In Britain Mr Cameron’s government is pushing ahead with reforms that will slim some departments by a fifth. And even in big government’s continental European core, private-sector workers are reacting with fury to the perks their public-sector cousins enjoy at their expense. The German Language Society’s word of the year for 2010 was Wutbürger (irate citizen).

This sparked a counterblast to halt Leviathan, led by Ronald Reagan and Margaret Thatcher. By the 1990s many people thought that global capitalism would stop the state’s advance. This was the decade, after all, when Bill Clinton and other leaders declared the end of big government; when left-wingers claimed (inaccurately) that half the world’s biggest economies were multinational firms; when the emerging world was embracing the Washington consensus of deregulation: and when industrial policy mainly meant hanging on to golden shares in privatised companies. A special report in this newspaper, published in 1997, examined the then fashionable idea that the state was withering away. Its author, Clive Crook, now at the Financial Times, argued that it was not.

He has been proved right several times over. In continental Europe, where the state’s share of the economy was already pretty big, it has not risen that much. However, in America a Republican, George Bush, pushed up spending more than any president since Lyndon Johnson. In Britain New Labour became even less parsimonious: the state’s share of GDP rose from under 37% in 2000 to 44% in 2007; with the British economy struggling, it then jumped to 51% in 2010.

Share of GDP is not the only way to measure state power. “Big governance” can be just as costly to an economy as big government. Some 1,000 pages of federal regulations were added each year Mr Bush was in office. A quarter of a million Americans have jobs devising and implementing federal rules. The European Union has also produced a thicket of red tape. Some are prompted by the left (diversity, health and safety), others by the right (closed-circuit cameras, the war on drugs).

Or look at the state’s role in business. In the 1990s privatisation seemed to have settled that argument. Now state capitalism has returned, sometimes accidentally (several banks have become government-controlled) but often intentionally. Many of the new industrial champions of the emerging world are state-owned, and industrial policy is no longer a rude expression even in Anglo-Saxon countries.

There is a belief in boardrooms and among America’s tax-cutting right that a monstrous, ever-growing state is the creature of make-work bureaucrats and leftist politicians, and sometimes that is true. But often the beast is responding to popular demand. Globalisation, for instance, has increased many people’s reliance on the state: greater job insecurity among the middle classes has increased the calls for bigger safety nets, and the greater inequality that comes with bigger markets has made voters keener on redistribution. Or look at the threat of terrorism, to which the knee-jerk response on America’s right was to build up the government in Washington. As Stephen Walt, a professor at Harvard, puts it, “when September 11th happened, nobody rang Bill Gates or the Open Society Institute.”

The next battle

The recent advance of government is once again prompting a fightback. The Republicans’ victory in the 2010 mid-term elections was hailed as a return to small-government conservatism. Bruised rather than reinforced by his huge health-care reform, Mr Obama is limping back to the centre, suddenly promising businesspeople that he will rein in regulation. In Britain Mr Cameron’s government is pushing ahead with reforms that will slim some departments by a fifth. And even in big government’s continental European core, private-sector workers are reacting with fury to the perks their public-sector cousins enjoy at their expense. The German Language Society’s word of the year for 2010 was Wutbürger (irate citizen).

But will this fury stop Leviathan’s advance? Some scepticism is in order. None of the continental European government-slashers is really trying to change the structure of the state. Mr Cameron’s attempt offers a better chance of genuine radicalism, though even his savagery will take back the size of Britain’s state only to its level in 2008. The tea-party Republicans seem to be all milk and no caffeine: their first budget proposal did not touch defence or the three great entitlement programmes, Medicare, Medicaid and Social Security. Like the apocryphal sign at a tea-party rally last year, warning government to keep its “hands off my Medicare”, they are refusing to confront reality.

Nor is it just spineless politicians who are at fault. A lot of economic theorists have predicted an ever larger state since Adolph Wagner linked its growth to industrialisation in the 19th century. The Baumol cost effect is often cited. In the 1960s William Baumol and William Bowen used the example of classical music to show that some activities are not susceptible to improvements in labour productivity. You still need the same number of musicians to play a Beethoven symphony as you did in the 19th century, even though real wages for musicians have risen since then. Larry Summers, Mr Obama’s main economic adviser till the end of 2010, argues that the goods governments buy, especially health care and education, have proved much more resistant to productivity enhancements than the rest of the economy. Since the 1970s real wages in America have risen tenfold if you measure them against the cost of televisions; set against the cost of health care, they have gone down.

Mr Summers expects that trend to continue. An ageing population will need ever more health services provided by the state. Better education means longer school years, smaller classes and more after-school activities, all of which cost more. Greater inequality will mean greater redistribution. In Italy and France cash social transfers alone take up 19% of GDP. The pressure to spend more is continuous, Mr Summers points out, whereas things that reduce the size of government tend to produce one-off savings: the end of the cold war, for instance, took a slice out of defence spending, but that was it.

Mr Summers has a lot of history on his side. This special report takes a more optimistic view. To start with, it is not inevitable that spending will keep on going up. Countries such as Canada and Sweden have reduced public spending when they had to. Moreover, some governments are massively more efficient than others, and there are huge gains to be achieved merely by bad governments copying what good governments do—such as planning ahead, backing winners and rewarding people for doing the right thing. With a smaller central core and much more competition for the provision of services, most governments could do the same for much less.

Most of this special report will focus on that overdue reorganisation. A second set of reforms, for which there is still less political appetite at the moment, would retarget government spending—especially adjusting social transfers (a category that in America’s national accounts rose from 8% of GDP in 1970 to 16% in 2009). Benefits that have become middle-class boondoggles should be redirected at the poor.

Not all of history is on the pessimists’ side. Fifty years ago companies seemed to be getting bigger and bigger. Business has since changed shape dramatically. The state can catch up by doing many of the same things business did to transform itself, not least bringing in competition and rethinking what it should do itself and what it should contract out to others. And the state, too, has changed shape in the past. In 19th century Britain, for instance, liberal reformers dismantled the patronage state of rotten boroughs and bought offices, building up a professional civil service. Government got leaner and much more efficient. It can surely do so again.

Second, even if Mr Summers is right that the state is unlikely to shrink, there is still a vast amount of work to be done to make it deliver more for the same money and become much more accountable. The ramifications are huge—for people, the economy and society.

Reasons to change

On a personal level, the state matters because it has a big impact on people’s lives. As Geoff Mulgan observes in his excellent book on the state, “Good and Bad Power”, the quality of the state you live in will do more to determine your well-being than natural resources, culture or religion. In the surveys that measure people’s happiness, decent government is as important as education, income and health (all of which are themselves dependent on government).

To business, government can make an enormous difference. Most obviously, if the state accounts for half the economy then improving any part of that will create better conditions for growth. Even if government were to cost the same but produce more (better-educated workers, decent health care, roads without holes, simpler regulation), the effect on private-sector productivity would be electric.

For society, the debate about the state matters because liberalism is on trial. “The challenge of Western democracy is always presented as one to do with transparency and accountability,” reflects Tony Blair, who served as Britain’s prime minister for ten years. “In fact it is really a challenge of efficacy. Our politicians on the whole are not corrupt. But they are not delivering the services people want. The emerging world is deciding what sort of government it wants. It looks at us and sees a system that costs a lot and does not deliver enough.” Another prominent Western politician goes further, seeing government as an increasing problem for the West too. “If it carries on as it is, eventually our own voters may also be more tempted by ‘something that makes the trains run on time’.”

A host of books have recently been singing the praises of China’s authoritarian approach. This special report will look at that model, but it will focus on the rich world, where most of the problems and solutions are to be found. No place better illustrates the troubles of the public sector than California, the American state that has become synonymous with private-sector ingenuity.

 

The Economist, 17 Mar 2011

Putting Business before Sentiment: India’s Latest Investment Rush

In Gujarat on March 4, 2011 at 6:55 am

The visit of Chinese President Hu Jintao to the United States in January produced business deals worth US$45 billion and the promise of a half-million jobs. U.S. President Barack Obama used that scorecard to make Americans feel less intimidated by China’s economic might. But investment commitments were 10 times as large earlier in January at a four-day “Vibrant Gujarat” road show in Gujarat’s capital city of Gandhinagar.

Similar events that month in Maharashtra and Punjab and a central government event for overseas Indians produced a fraction of those investment deals. Though Gujarat still nurses scars from bloody communal riots in 2002, its attractive investment climate scored when compared with the sentimental draw associated with non-resident Indians (NRIs) investing in their homeland. India Knowledge@Wharton talks to economic development experts to understand what drives such deals.

Gujarat’s example may offer a lesson in strategic positioning, business planning and execution. At Vibrant Gujarat, the state showcased its infrastructure readiness such as construction-ready land lots, an eager government administration, and power and water. It displayed its wares at 33 events and exhibitions over four days before 1,400 delegations from 101 countries, striking 3,000 memoranda of understanding (MoUs) besides winning commitments totaling US$450 billion that promise 5.2 million jobs.

The noteworthy domestic investors included the Anil Dhirubhai Ambani Group, which committed to invest up to Rs. 50,000 crore (US$11 billion) in gas-based and coal-based power plants in the state over the next five years; the Tata Group, which pledged Rs. 30,000 crore (US$6.7 billion) and 50,000 jobs in housing, automobiles and rural distribution networks; and Anand Mahindra of the Mahindra & Mahindra Group, who offered to invest Rs. 3,000 crore (US$670 million) in hospitality and real estate, calculating that the multiplier effect would create 100,000 jobs.

Not all these investment commitments are likely to achieve their promise, according to Shaktisinh Gohil, Opposition leader in Gujarat’s state assembly. None of the 31 MoUs promising power projects in the 2009 Vibrant Gujarat event has seen the light of day, he says in The Economic Times newspaper (though a government spokesman says preliminary work has begun on some). Those MoUs promised investments of Rs. 211,895 crore (US$47 billion) and 58,000 jobs. He faults the government of Narendra Modi for its claims that it has attracted investment commitments of more than Rs. 700,000 crore (US$155 billion) for energy projects. “Investors have promised investments in 42,000 MW of renewable energy projects when the entire solar mission [for all of India] aims at 20,000 MW of solar power by 2021,” he writes. “Gujarat does not need more than 2,000 MW of renewable projects in the state.” (The Gujarat government “doesn’t wish to comment on the Opposition’s remarks,” a spokesman says.)

“Forget the part about the financial commitments; we see this as a big investment if we can do some skill development and knowledge sharing,” says Maheshwar Sahu, the state industries secretary who is credited with orchestrating the event. “Investment flow into the state is only a small part of the objective of this event,” Modi said in his inaugural speech, adding that he wanted Vibrant Gujarat to “energize global networking for knowledge and technology sharing; to learn the best practices and to encourage the people to think big and take up challenging projects.” In fact, this was the first Vibrant Gujarat event that invited other states to set up stalls and pitch to investors. “Instead of being competitors, we allowed 15 country and state seminars to market themselves,” says Sahu. “We feel happy when somebody [else] does business on our soil.” Karnataka state, for example, signed MoUs worth Rs. 30,000 crore (US$6.7 billion) at the event.

Modi in the Forefront

Despite the positioning of the event as a platform for big thinking and relationship-building, “eventually it was all about business,” says Rafiq Dossani, a senior research scholar at Stanford University’s Shorenstein Asia-Pacific Research Center in Palo Alto, Calif., a speaker at the event. Vibrant Gujarat was also successful because Modi was among its chief attractions, adorning newspaper ads, billboards and posters, and bear-hugging industrialists in photos. “It seemed to be organized very much around the presence of Modi, almost a cult figure,” Dossani says. “To some extent, the organization coalesced around that. Having one strong person helps.”

Modi was in the forefront also because he belongs to the Bharatiya Janata Party, the political rival to the Congress Party that leads the national government, Dossani says. “If the ruling party in the state is also [ruling at] the center, they wouldn’t be so bombastic because they would be getting what they wanted from the center — like Maharashtra and Delhi,” he says, alluding to massive airport expansion projects under way in Mumbai and New Delhi.

The agenda was nowhere as aggressive as Modi’s at the 9th Pravasi Bharatiya Divas (Overseas Indian Day) in New Delhi a few days earlier. Vayalar Ravi, minister for overseas Indian affairs, said the event was focused on the “young global Indian … to facilitate their discovery of cultural heritage and opportunities in emerging India.” A “Gulf Session” at the event sought to address the needs of some six million Indians who work in the Middle East and remit nearly US$30 billion annually. Montek Singh Ahluwalia, deputy chairman of India’s Planning Commission, made it clear that the event was not chasing dollars. “I think we can get rid of the notion that we are connecting with the NRIs because we want investment,” he said. “We are not reaching out to NRIs because we need money. The NRIs’ share in the foreign direct investment in the country is just 1.3%.” In February, the government followed up Pravasi Divas byallowing NRIs to vote and stand for elections in India, fulfilling a longstanding demand of NRIs.

Punjab state positioned itself as an investment destination at its NRI Convention held a week later in the industrial city of Jalandhar. But the visiting NRIs were apparently not sufficiently enthused, according to a Times of India report. “Visiting Punjabi NRIs give zero, Gujaratis shower $450 billion,” a headline read. But Ruby Dhalla, a Canadian Liberal parliamentarian who attended, defended the state’s efforts. The deputy chief minister “did a great job showcasing Punjab at the NRI conference. Punjab is a great place to invest for NRIs,” she tweeted, according to media reports.

Promoting first-generation entrepreneurs and tier-two towns were the objectives of the Global Maharashtra Trade Fair and Conference in Aurangabad earlier in January. This event also was not aimed at attracting investments, maintained Mansingh Pawaar, president of the Maharashtra Chamber of Commerce, Industry & Agriculture, which hosted the event. Even so, the event had delegations from 25 countries including the United States, the United Kingdom and Japan, as well as emerging economies. It resulted in several MoUs in automobiles, chemicals, wineries and information technology that are likely to bring investments, Pawaar says. An unidentified German automobile company has committed to invest in the state, an investment that could be worth Rs. 500 crore (US$110 million) and create more than 2,500 jobs, he adds. “We are talking about first-generation investors going global,” says Pawaar, underlining that his event did not pursue NRIs or purely business investments.

Walking the Pro-Business Talk

The action at Vibrant Gujarat was consistent with the state’s 11.2% GDP growth target in the five-year plan ending 2012, says Sunil Parekh, strategic advisor to pharmaceutical company Zydus Cadila and others. He also is chairman of an association of 550 Indian Institutes of Technology graduates who work in Gujarat. The group made several presentations at the event, focusing on 15 areas for technological development.

The Gujarat pitch is matched by the state’s “exceptionally entrepreneurial” people and a responsive and proactive government, Parekh says. He points to a decade’s worth of planning that has equipped the state with a gas pipeline and distribution network that covers most cities, and has attracted investors such as British Gas. The Modi administration has also “painstakingly gathered land at fair market prices with consent from farmers — never by force,” he adds. The Tatas’ Nano small-car project was a beneficiary when it wanted out from West Bengal state where it encountered opposition from farmers over land acquisition a couple of years ago. “We will never have a problem like Nandigram (in West Bengal),” where, in 2007, protesting villagers clashed with the police over a proposed chemicals complex, leaving 14 villagers dead.

Gujarat is also on its way to becoming a power-surplus state — a major differentiator from power-deficit states such as Karnataka, Parekh says. The state leads the country in solar energy installations. More than a dozen investors including Sharp, Panasonic and Mitsui have taken up pieces of a 500-megawatt solar project at Patan in north Gujarat making it the largest in Asia, he adds. Sahu says the state’s plan is to generate up to 2,000 MW from renewable energy sources over time.

Gujarat has also “got its act together and understood the needs of investors, foreign and domestic,” Parekh says. The state, in partnership with Japanese firms including Itochu and Mitsubishi, is planning 16 new cities along the Delhi-Mumbai Industrial Corridor, he says. These would be eco-friendly cities, complete with green buildings, energy conservation capabilities, waste recycling and mass transit. A state that has historically been short of water, Gujarat has interconnected the rivers that feed it. It also has reserved 500 hectares near Ahmedabad for prospective companies from Taiwan and Korea. “Land has been parceled, and it is ready to go, plug and play,” Parekh says.

Identifying and Fixing Shortcomings

Even as the checkbooks were out at Vibrant Gujarat, the state administration realized it could face a talent crunch when investments take hold. That was the backdrop for 479 MoUs it struck for knowledge-sharing and capacity-building, including 307 for skill development and 142 for networking between universities. Sahu says the state’s skill development programs aim at creating a talent pool of at least 200,000 people annually from 2013, or a million skilled people in the next five years. Parekh’s top concern is that the state “is not innovative” enough to power its growth plans. “The number of patents being filed by Gujarat is very, very low,” he says. “We are masters in manufacturing but we also have to create new knowledge.”

In one stroke to tackle both the talent crunch and foster a spirit of innovation, Parekh has tapped foreign universities to form “knowledge partnerships” with local learning institutions. He arranged for 31 international universities to be represented at Vibrant Gujarat, including the University of California, Berkeley and the University of California, Los Angeles, and Sweden’s Karolinska Institutet, one of Europe’s largest medical universities. Some 14 partnerships were struck at the event, Parekh says. The Gujarat government “has actively facilitated these partnerships and provided the platform … to start looking at new collaborations so universities can provide a global outlook.”

The availability of the right kind of talent is often the decisive factor for businesses in deciding where to locate their operations or expand, says Daniel Levine, principal at MetroCompare, a consulting firm in Fanwood, New Jersey, that advises businesses in site selection and negotiating economic incentives. A former government executive, Levine helped guide state policies in attracting business relocations and expansions from New York to New Jersey, including Goldman Sachs and Merrill Lynch.

“University and education systems and training programs are really good ways to encourage companies,” Levine says. “One way to give comfort is if you have a local university that is graduating students.” He recalls that talent availability was the chief reason Swiss pharmaceutical giant Novartis preferred Cambridge, Massachusetts, over its New Jersey U.S. headquarters a few years ago to house its expanded R&D operations. Cambridge scored because of its access to the students and research at the Massachusetts Institute of Technology, and a talent pool in biomedical research, vaccines and diagnostics.

Governments could also step in with public-private partnerships of the kind Gujarat is attempting, Levine says. For example, IBM has entered into a partnership with the State University of New York to train nanotechnology workers. A focus on quality-of-life issues including good schools, housing and roads helps in attracting and retaining top talent. Silicon Valley has attracted talent globally precisely because of these factors, he says.

Shaking Off Stigmas

States could earn bonus points for pro-business policies, but some stigmas are difficult to shake off, Levine warns. In India, corruption in government has been a major turn-off for business. Business leaders including Wipro’s Azim Premji, Mahindra & Mahindra’s Keshub Mahindra and HDFC’s Deepak Parekh recently complained about a “governance deficit” in an open letter to the central government. Scandals in recent months have plagued governments in Maharashtra and Karnataka and the central telecom ministry, among others.

“We are alarmed at the widespread governance deficit almost in every sphere of national activity covering government, business and institutions,” the businessmen wrote. “Widespread discretionary decision-making has been routinely subjected to extraneous influences.”

Gujarat didn’t figure in those scandals, and Parekh attributes that to transparency in the state administration. He says various state secretaries meet monthly to review investment proposals. “The junior officers call the investors and ask them what stage their investment is at, and de-bottleneck things,” he adds.

Gujarat, however, continues to deal with the ghosts of riots following the torching of a train that killed 58 Hindu passengers at Godhra in 2002. According to official estimates, 790 Muslims and 254 Hindus were killed in the riots. Sahu and Parekh say Godhra — as the carnage is described — is not an issue with investors. “Nobody asked me about Godhra. That is buried in oblivion,” Sahu says. “Possibly people had more faith in the stable policies of the government and its leadership,” he adds, explaining Vibrant Gujarat’s success.

Dossani says Godhra has left deep scars. “It is still a ghettoized state as far as Muslims are concerned,” he says. “People say Muslims are doing better compared to other states and I am sure there is still some truth in that because a rising tide lifts all boats.” All the same, Dossani feels that while the Modi regime tries its best to banish memories of Godhra “and focus on growth,” it is also being “naïve” in its denial of the problem. “A population where 10% is getting ghettoized will slowly become a millstone around the necks of the 90%,” he says. “But that takes a long time.”

As Dossani says, the Modi administration would ensure against a repeat of the Godhra violence. Levine says states could overcome such stigmas by getting businesses to share happy experiences. “The experience of other businesses is a real testimony,” he says. “The best recourse is to have executives meet one on one with each other and talk about experiences they have had. Foreign investors could talk about highly integrated work forces, great teams, etc., and give testimonial support that the community has figured out a way to move forward.”

 

Wharton NEWS, 10 Feb 2011