Weekend reading links

1. In the context of the Jat agitation, Christophe Jaffrelot makes the argument that it is a reflection of the inadequacy of private sector employment opportunities and the relatively high wages in public sector, 

In the private sector, the average daily earnings of the workers was Rs 249 in 2011-12, according to the Labour Bureau, and those of the employees at large, Rs 388. By contrast, in the public sector, the figures were respectively almost three times more at Rs 679 and Rs 945... Understandably, the young Jats, Patels, Kapus and Marathas who do not find good jobs in the private sector fall back on the government. The search for government jobs among these castes is also influenced by their particularly skewed sex ratio... With fewer girls compared to boys in these castes, there is competition in the marriage market. However, there are fewer government jobs these days. There were 19.5 million jobs in the public sector in 1992-93 when India’s population was 839 million. While there are 1.2 billion Indians now, the number of jobs in the public sector has shrunk to 17.6 million. In states that have aggressively implemented the liberalisation policy, government jobs have almost disappeared. For instance, the government’s share in employment in Gujarat is only 1.18 per cent whereas it is 16 per cent in Kerala.

2. Livemint has six graphics drawn from IMF data illustrating how badly India fares on general public finance indicators and expenditures on health and education in comparison to other far less developed countries. General government revenues as a share of GDP is the lowest among the comparison group,

3. The second consecutive weak monsoon and declining farm prices mean that rural distress is compounding general economic woes. Rural incomes have been falling, as reflected in the declining tractor sales,

4. The latest addition to the very large body of evidence that India's middle class is disturbingly small comes from Livemint - just 51 million households with annual income above $10000 out of 267 m families, with the vast majority living at extremely vulnerable income levels. 

And as a reminder to those constantly playing the China theme, the contrast is night and day,

5. Livemint reports that the experiment of having an exclusive tax bench in the Supreme Court, hearing only tax matters, appears to have been a success. The two-judge bench disposed-off 170 cases, a four-fold increase over previous years. 

6. Business Standard draws attention to the just released data on investment proposals, which at Rs 3.11 trillion for 2015, touched an 11 year low. Actual investments too were down from Rs 787.47 bn in 2014 to Rs 779.72 bn in 2015. 

As the Livemint grahic below shows, while the metrics are smaller in investment proposals, the actuals materialized have stayed the same over the past four years. Further, ten industries accounted for 65% of all investment implemented and 10 states for 80% of all proposals. 

The most worrying sign is about the level of investment proposals. Given the aggressive courting of investors and the widespread euphoria, coupled with economic weakness across the world, it was only to be expected that the investment proposals increase. This would especially be so given the low base effects legacy from a weak economy and decision-paralysed governance of 2012-14. But even here, the decline in investment proposals over 2012-15 has been about 40%. 

7. Distressed corporate balance sheets and rising bank NPAs have created a self-reinforcing downward spiral of bank credit squeeze to private firms, especially those outside the larger corporates

8. While capital investment as a share of total central government expenditure has been rising slowly to nearly a fifth, its distribution has increasingly been towards social services - housing, labor welfare, and rural works - whereas the share of transportation has declined sharply.

Interestingly, and underlining the importance of co-operative federalism, just a third of the capital expenditure of the central government is executed by itself, with the major share being transfers and loans to state and local governments. 

In fact, in 2014-15, the central government's capital expenditure was 1.78% of GDP or Rs 1.92 trillion, to the state government's 3.54% of GDP or over Rs 4 trillion.

9. Interesting observation on the changes in India's tax-to-GDP ratio over time,

In the 25-year period from 1965 to 1990, India’s tax-to-GDP increased steadily from 10% to 16% while GDP increased 2.8-fold. In the subsequent 25-year period from 1991 to 2014, India’s tax-to-GDP stayed roughly constant between 16% and 17% while GDP increased 4.5-fold. It is puzzling to us that just as India broke away from its clichéd Hindu rate of growth post the 1991 economic reforms to grow much more rapidly, its tax-to-GDP ratio stayed constant, belying those who would have predicted an increase. That, curiously, India’s rate of tax revenues did not grow commensurate with its GDP growth post the 1991 reforms is inexplicable.

What could possibly be the reason? Given that direct taxes at 2-3% of GDP is marginal, most of the changes would have revolved around indirect taxes. Evidently, in the 1965-90 period, state expanded its indirect tax base, while in the 1990-2014 period, it did little to expand the direct tax base. The later is difficult to rationalize, given the massive income growth, concentrated especially at the top of the income ladder, both individuals and corporates, who, in any case, form the lion's share of direct taxation. In other words, these incomes at the top may have grown much faster than the proportionate rise in their income tax payments. Among all public policy priorities, this demands an urgent examination by the government.    

10. The positive side of the high inflation was that it kept the tax revenues high and ensured that the debt-to-GDP ratio was kept under control. Now with low inflation, nominal GDP growth has fallen, even touching the government's average interest cost, thereby raising questions about the country's debt sustainability.

11. While this is well-known within the government, but rigorous evidence has been scarce,

Since 2009, Accountability Initiative’s PAISA study (Planning, Allocations and Expenditures, Institutions: Studies in Accountability) has been tracking money flows in elementary education. In not one of the eight districts across six states that we have studied did we find a district that received its entire allocated budget within the financial year. For the money that does reach, much of it makes its way to the district half way through the financial year. Even districts in well-functioning states like Maharashtra and Himachal Pradesh face this unpredictability. Once money reaches the district, it can take two to six months to travel from the district bank account to the schools, where expenditure actually takes place... for over 50% schools in India, even small grants that schools are expected to receive annually for essential purchases, are credited to their bank accounts somewhere between November and December, well over halfway into the school year. 

12. For all talk of decentralization, local governments share of revenues and expenditures, on a variety of metrics, remain marginal.

13. This analysis of the CAG report, which paints a very dismal picture of Indian Railways,

As of March 2014, the Indian Railways had spent around Rs.92,000 crore on 479 projects, including some dating back to the 1970s and 80s. But due to shoddy contract and project management, costs have more than doubled, and the Railways needs an additional Rs.183,000 crore just to finish these ongoing projects.

And this analysis of the ticket prices,

The Indian Railways' average revenue per passenger km for ordinary second class is a mere 13.80 paise, 14.54 paise for suburban trains, 27.47 paise for second class mail and express trains, and 109.47 paise for upper class, making it possibly the cheapest rail transport system in the world.

The assumptions underlying the optimism presented in the Railways Budget may not exactly be forthcoming. 

14. Finally, in order to relieve crowding, and boost revenues, Disney introduces surge pricing in its Florida and California theme parks during holidays and some weekends, raising prices by about 20%, 

At Disneyland, located in Anaheim, Calif., which attracts roughly 17 million visitors annually, single-day tickets now cost $99... “Value” tickets, for Mondays through Thursdays during weeks when most schools are in session, will drop to $95. “Regular” tickets (most weekends and many summertime weeks) will climb to $105. “Peak” tickets (most of December, spring break weeks, July weekends) will cost $119. At Disney World in Orlando, Fla., which includes four major theme parks, the price changes are more complex, because they vary by park. At the most popular Disney World park, the Magic Kingdom, which handles nearly 20 million visitors annually, single-day prices will remain at the current level, $105, for value periods. Prices will rise to $110 for regular periods, and to $124 for peak... The largest proportion of days at both Disneyland (46 percent) and Disney World (49 percent) fall in periods designated as regular; peak days account for 27 percent of the year at Disneyland and 29 percent at Disney World.

Sub-national jurisdictions as engines of development

From a very good op-ed in NYT about how well functioning cities (in this case Lagos) could show the way for failing states,

Nigeria, of all places, may be pointing the way to a strategy by which fragile states might begin to succeed: Devolve more power to cities from their corrupt and overcentralized national governments. At least in democracies, the cities have promise because their elected politicians face pressure to deliver specific services to their constituents. In the central governments, which are more remote, there is too much power and wealth to be grabbed by dysfunctional politicians and their cronies, and too little direct accountability...

The turnaround in Lagos can be traced to 1999, when Nigeria returned to democracy and the city began holding regular elections. For the first time since independence, Lagos was able to re-elect its own leaders, or turn them out of office. And while national elections became a mud fight between elites to control the state’s enormous oil wealth, local contests forced candidates to show pragmatism and competence. Citizens in densely populated cities find it easier to organize themselves. And in an ethnically and religiously diverse metropolis like Lagos, politicians could not afford to pit ethnic and religious groups against one another, a problem that has long bedeviled Nigeria. Simple geography also helped the city administration. The powerful and wealthy classes are more likely to insist on better governance when their own neighborhoods are affected.

And unlike national politicians, local leaders know that the better they perform, the more money their city nets. The better its roads, schools and business environment, the more likely companies will pay taxes, and individuals will buy goods and services, which also contribute to the tax base. At the national level, by contrast, the great majority of the central government’s income has little to do with government’s performance, since about 75 percent of the national budget comes from the $50 billion a year that Nigeria collects in oil revenue.

Whether Lagos is a model or not, the central point about encouraging cities as the locus of development is hard to disagree. For many strife-torn African countries, where the capacity of the central government is very weak, smaller sub-national governments are far more likely to be effective. Among sub-national governments, city governments are best positioned to push the boundaries on economic growth. Therefore, devolution of power to city governments should be top of the agenda in political reforms for these countries. In large countries like India too, the major source of dynamism is already from well governed states rather than the central government.

The challenge is to get national governments to devolve power to these local governments. Multi-lateral agencies and international diplomacy should spend as much capital pushing for such reforms as they do with democratization and the like. That will be good politics as well as sound economics.

The importance of decentralization - Lessons from Camden

Times has this (HT: Andrew Fraker) story of the county of Camden in New Jersey which has decided to disband its ineffective and unionized police force. 

The police acknowledge that they have all but ceded these streets to crime, with murders on track to break records this year. And now, in a desperate move to regain control, city officials are planning to disband the Police Department. The reason is that generous union contracts have made it financially impossible to keep enough officers on the street. So in November, Camden, which has already had substantial police layoffs, will begin terminating the remaining 273 officers and give control to a new county force. The move, officials say, will free up millions to hire a larger, nonunionized force of 400 officers to safeguard the city, which is also the nation’s poorest...Camden’s decision to remake perhaps the most essential public service for a city riven by crime underscores how communities are taking previously unimaginable steps to get out from under union obligations that built up over generations... the plan to put the Police Department out of business has not prompted the wide public outcry seen in the union battles in Chicago, Ohio or Wisconsin, in part because many residents have come to resent a police force they see as incompetent, corrupt and doing little to make their streets safe.

And what was the trigger for this reorganization? Budgetary problems arising from the Great Recession.

Camden’s budget was $167 million last year, and of that, the budget for the police was $55 million. Yet the city collected only $21 million in property taxes. It has relied on state aid to make up the difference, but the state is turning off the spigot. The city has imposed furloughs, reduced salaries and trash collection, and increased fees. But the businesses the city desperately needs to attract to generate more revenue are scared off by the crime.  

Camden's police force is characterized by features that are commonplace among police and other public systems in countries like India - unionization, generous salaries and benefits, erosion of professional standards, and indiscipline manifesting in rampant absenteeism (30% at anytime!). And worst of all, they are ineffective. But the difference is that the people of Camden have decided that enough is enough and disbanded the entire system. This post is not to debate the merits and demerits of the correct contracting model of a police force for Camden, but about the popular indignation that led the residents of Camden into exercising their rights.

Why is it that Camden can take such decisions to enforce accountability, while small towns and villages in India, faced with even more apathy and neglect from the public officials appointed to serve them, can't? I will argue that the difference is decentralization. The police department of Camden are a distinct police force, appointed by the Camden county, paid for by them, and therefore accountable only to them. The accountability relationship of any Camden policeman is directly to the residents of Camden. The firing of one policeman or disbanding of the entire force itself is therefore a matter of concern only to the people of Camden and their police force. It has no regional or national consequences.

In contrast, most public functionaries in India are appointed by the state government. They form part of a large statewide labour force. They are transferred and posted by the state government officials and even receive their salaries from there. Their service conditions are part of a statewide set of standards and their powerful unions will do whatever it takes to ensure that no attempt is made to dilute its generosity. In other words, their fortunes are almost completely linked to their masters in the distant state capital. Their only link with the local community they are supposed to serve is that they just happen to have been posted there, and that too temporarily. Given this massive incentive incompatibility, is it any surprise that we have things as they are?

The teacher or the policeman could care less what the local residents think about them and their work ethic, however bad or perverse. In simple legal terms, the local residents have no role in deciding who should serve as their local school teacher or doctor, and can do nothing to punish errant officials. They cannot even stop their salaries, leave alone suspension and dismissal. Any action to change their service conditions to suit local requirements, leave alone disband them, will have statewide ramifications and is therefore not a possibility. Local residents have to accept whoever are foisted on them. And they do so with resignation because they have come to realize that it makes no difference and they don't anyway pay for these services.

In the prevailing regime, no Indian panchayat or municipality will face the budgetary nightmare that Camden faces, foreclosing that "forced" reform option.