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What Do We Want Them to Do Now?
Amal Sanyal  Department of Accounting, Economics and FinanceLincoln University, New Zealand  9/19/2010 3:38:47 AM

The central place of the Planning Commission in the Indian economy is being slowly but surely taken over by markets. Since the reforms started, economic policy has been trying to give markets more power in resource allocation except where significant externalities are involved. As a result, major tasks of the Planning Commission are gradually being assumed by markets. The transition of course faces hurdles and is occurring bit by bit as consensus is reached on individual elements of policy. But it is expected that eventually markets will be established in resource allocating position in most areas. This raises questions about the relevance of the Commission in the new environment and calls for possible change in its role.

Any proposed change in the role of the Planning Commission will have ramifications beyond the Commission itself. They will have widespread effects on the functioning of business and the economy. As the Commission loses its central role in resource allocation, the so-called commanding heights of the economy would be controlled more and more by private business. In the new situation some of the existing tasks of the Commission would become superfluous. The nature of the private sector’s interaction with the government will adjust to the new conditions creating new channels and rules of engagement. Further, the Commission’s strategic position in approval and clearances built up over the years may produce obstruction rather than help. Anticipating these developments, a probable suggestion could be to dismantle the Commission altogether and distribute any remaining duties to relevant ministries. But the Commission has a substantial pool of expertise on the economy, infrastructure, technology and social services, and a stock of experience and information. Disestablishing the Commission would destroy this substantial intellectual capital. Secondly, the Commission networks with a large number of institutions all over India, and the social capital value of the network is significant. The networks will continue to have utility in dealing with social services, poverty, rural job creation, community development, ecology and environment; and managing inter-institution relations. Given this, I would suggest that we neither dismantle the Commission nor allow it to degenerate into a non-performing government office. We should instead make the best possible use of the intellectual and social capital accumulated at so much cost.

As stated earlier, the philosophy of the new dispensation is to empower markets while taking care of market failure. I will suggest that these two central ideas be used to weave out a new ‘job description’ for the Planning Commission of the country and make it the spearhead of our reforms as much as it had spearheaded our planned development.

The first of the two tasks revolves around markets. It is about developing those markets that are currently under-developed or are over-ridden with institutions that curb their autonomy. The Commission will also have to establish missing markets, extend existing markets geographically, and ensure that markets remain contestable. The second group of tasks arises where markets fail either in efficiency or fairness terms; or where we have to get economic jobs done without using markets. Markets’ inability to ensure efficiency, the so-called market failure, is widespread in the management of environment, natural resources, the ecosystem and in common properties. Failure of fairness occurs in the supply of merit goods where even efficient markets price the services beyond the reach of many. Market failure and merit goods are the most demanding problem areas of our economy. They have so far defeated all attempts to remove poverty. They include basic social services like health, literacy, education, preservation of forests and environment and preventing pollution. Additionally, the Planning Commission should deal with the government’s service delivery mechanism- I mean those services that are delivered without the use of markets. I have two types of services in mind. The first are those related to governance. The second are those related to the redistribution of income e.g. 100 days work, mid-day meals etc. Both of these service groups display spectacular corruption and unacceptable amount of inefficiency. These services are in crying need of effective mechanism and tools.

I propose that the Planning Commission be engaged in these two areas— of empowering markets where they work, and developing non-market mechanisms where they do not. For this, it has to act both as a think-tank and as an ‘activist’. In the think-tank capacity, its task should be to design incentives, mechanisms, institutions and checks and balances. As ‘activist’, it has to supervise those mechanisms with the help of a network of institutions across the country. Obviously, the change over from the earlier role would require a radical change of mind-set and acculturation. In the sections below, I will elaborate on the two sets of tasks in sections 2 and 3. In the last section, I will briefly outline why it is preferred to get them done by the Planning Commission rather than different ministries.

Empowering Our Markets
In spite of the government’s intention, autonomy of markets continues to be curbed by pre-reform institutions and practices. Some of these institutions were officially designed to oversee resource allocation and use. Others sprang up unnoticed to divert parts of that allocation into private use. Over the years, both types of institutions have established themselves along the supply chain in all significant markets or in their purchasing institutions. Piecemeal change of rules and institutions since the onset of reforms has failed to eliminate their influence. In many cases, the overt licence-permit system has given way to a complex of arrangements that upholds non-market decision-making only in less transparent manner. It is now clear that we cannot make the transition by announcement and legislation alone. To rid markets of constraining rules and institutions we need suitable mechanics of checks and balances, and of incentives and disincentives at the points where markets meet the institutions.

To empower markets, we have to grapple with a range of forces on the supply and demand sides. I give some examples to provide an idea of the challenge.

Primary agricultural producers — of cereals, pulses, oilseeds, vegetables, fish, poultry, meat etc — face disproportionately large buyers, do not have access to information of other markets, lack transport, storage and finance. They are also harassed by local extortionists.

Rent seeking at government offices and panchayats does not allow prices to reflect anything close to the cost of production. Further, the problem is caught in a vicious cycle, because rent seeking can abate only when markets take over in a true sense. The circularity does not have an easy solution as supervision at decentralised level is enormously costly and corruptible.

Many industries are subject to extortion along the entire supply chain from raw material to the customer. Arbitrary extortion at different stages of value addition leads to distortion of relative prices at these stages. Extortion is a law and order problem only on the surface. A nexus between extortion and politics is clear in most cases.

Many markets are subject to avoidable transaction costs. Some of them are visible like multiple tax jurisdictions and multiple and in-kind subsidies. But there are many items that are not as visible, e.g. costs incurred at the stages of inspection, audit, certification and clearances.
In many cases markets are prevented from becoming contestable by cartel-type accommodation or political favouritism. Obstruction by incumbent groups usually takes the form of collusion on input, labour and product pricing. Political favouritism occurs through manipulation of tender practices, bid rigging, deliberate delays, influencing buyers and so on. Legal action is not easy because of lack of verifiable evidence and, often, official complicity.

Subsidy on purchases is widespread. Some are provided on inputs, e.g. on power, diesel, petrol, loans etc for farm or industrial use. Others are plain consumption subsidy e.g. on travel, accommodation and other services for government and public sector employees and legislators. State governments provide many additional forms of consumption subsidies. Many are in kind and hence highly distortionary.

Type and quality of consumer goods and services are dictated in many local markets by non-market forces through the guise of customs, culture and chauvinistic ideology.

Producers are sometimes forced by local politicians and musclemen to differentiate between different parts of an otherwise undifferentiated market. Some parts of the markets get priority supply and servicing. In products where delivery or servicing takes time, it distorts the functioning of the market. A wide variety of markets face this sort of distortion.

Apart from these, we have to grapple with organised illegal transactions that feed into other markets and undermine efficiency and fairness. Many of the problems discussed here arise from unlawful behaviour. But we cannot eliminate them through the route of law enforcement alone because of political connection and corrupt enforcement machinery. To clean up, we have to develop economic incentives and employ technology and e-governance measures that could lock at least some illegitimate transactions.

Externalities, Public Goods and Merit Goods
Even as markets are strengthened, important markets will continue to fail because of externality. Secondly, markets are not able to supply the right amount of public goods. Third, they produce merit goods at prices unaffordable to many given today’s income profile. But public production alone cannot settle these supply issues satisfactorily as it leads to poor quality, corruption, and indifferent or arrogant behaviour. Both private and public production have to be used in these areas in an astute mix, and a variety of issues like funding, incentive, institution design and targeting need to be sorted out. For this, available models of management and organisation for using the private sector in a public non-market context need to be improvised for Indian conditions.

Quite apart from all these, we have to improve governance and redistributive services, which are produced and delivered through government agencies outside the network of markets. As is well-known, they are characterised by colossal inefficiency, insensitivity and corruption. We cannot claim a place in today’s world until these deliveries are radically transformed. To resolve the issues of fairness and efficiency in all these areas — externalities, public goods, merit goods, governance and redistributive services — is a gigantic task. Here is an illustrative list of issues involved.

The supply of merit goods, and those services that have both private and public goods character have a common set of concerns. For education, literacy, health etc we need to determine the appropriate domains of public and private operation. Next is to decide on the right amount of public provision – quantity-wise and cost-wise. We need to develop an acceptable norm for central and state governments’ relative share of costs. Further, we need to cut through the ad hoc designs of existing programs and establish efficient designs of delivery. The designs must consider (i) incentive for public delivery workers- e.g. incentive for rural school teachers and health workers; (ii) incentive for the recipients to accept the service e.g. for households to send children to school and immunise children; (iii) effective targeting at least cost; and (iv) quality assurance.
Environment, forests, wild life, river and marine resources; ecology in general: We have a set of regulations introduced by different authorities at different times without co-ordination. Little thought has been given to the question of incentive of economic agents to abide by the regulations. Multiplicity of authorities makes enforcement opaque and prone to corruption. Nor can responsibilities be fixed. The tasks here are to set up incentive-compatible regulations; establish mechanisms that might hold some corruption in check; and design e-governance that might lock some evasion and deals. There is also the need to simplify the regulations and in each case get a single authority to handle them.

For redistributive services like 100 days’ work, various rojgar programs, mid-day meals etc: We have to design methods that address delivery to the targeted beneficiaries, ensure that the allotted funds are spent, ensure that the beneficiaries are not cheated of their entitlements.

I do not claim that these issues are new. Economists, planners and the government have remained aware of them and have worked on them. The problem is that the methods used in the past are seriously wanting in the new milieu. They emerged in the context of central planning, import substitution and an environment of distrust of private business. They were influenced by the pulls and pressures of supply lobbies, state governments, local actors and central ministries. Further, activities in these areas being state subjects or joint subjects, they have been influenced by the politics of centre state relations. Arguably, regulations and institutions grew as response to the politics of the day rather than economic and social problems. Needless to say, they would fail to serve in the new environment.

Why Planning Commission?
Just as we are seeking industrialisation and higher growth, we are also seeking to eliminate absolute poverty. Industrialisation and higher growth requires rapid reform of markets. At the same time action on poverty would require attention to market failure and merit goods. For both tasks we require radically new vision and models, not modification of existing formulas. We need visionary thinking and smart solutions not just expedient ones.

If we agree on this agenda, we need to settle the question of agency – to whom to assign the jobs. We have two alternatives. The first is to distribute the jobs among central ministries and pass those involving state subjects to state governments. The second alternative is to employ a single pan-Indian organisation with adequate reserve of talent and expertise. I favour the latter and suggest the Planning Commission. The Planning Commission is preferable to the decentralised approach for both reforming the markets as also organising non-market production.

To deal with the constraints on market operations, we require an organisation that has the full view of the economy and a system-wide vision and expertise. It is because of this that the Planning Commission has an edge. If called upon to strengthen markets in their jurisdictions, individual ministries will end up duplicating efforts in several places and yet leave gaps in the overall mechanism. Different rules for separate jurisdictions will leave loopholes that would undermine and corrupt the system. Planning Commission can avoid the waste of duplication and produce system-wide mechanisms that avert loopholes. Secondly, the Planning Commission can pool its expertise to bear on all the dimensions of a given issue– economic, legal, political, technical and so on. To develop a comparable amount of talent and intellect pool at all important ministries is simply wasteful.

In case of non-market production, too, the decentralised approach has serious drawbacks. Generally more than one ministry has interest and jurisdiction over any given social issue. Their approaches and priorities are generally different and any given issue will result in a number of different responses from different ministries. The responses often lead to turf wars, delay and lack of transparency about who is responsible. On the other side, the fact that the problems fall under different jurisdictions means that we require an organisation that can see all aspects from a systemic and non-jurisdictional view point and have expertise in all the dimensions of the problems. Clearly the job suits an organisation like the Planning Commission better.

I should however point out that the Planning Commission would require some change in its mindset to spearhead the transition. The organisation was an instrument for centralised economic decisions, a culture that politicises economic decisions. This has politicised the Commission in the past. Its enviable core of technical and economic expertise has rarely been allowed to solve problems for the country on its own. They have been led and constrained by political people rather than experts. To make a transition, the government should realise that a liberal market economy has much less need of political personalities in its economic establishments, and enable the Commission to give its best by handing its leadership to experts. 

(The views expressed in the write-up are personal and do not re?ect the official policy or position of the organization.)


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