Sebastian Morris

Brings out various features of infrastructural development in Gujarat, and provides an explanation in terms of endowments and political economy for the enhanced performance of Gujarat in some of the physical infrastructure segments like electricity, roads, ports. Suggest suitable policy and actions to take infrastructure forward particularly in the weaker areas like tourism, water and municipal services..

More than political constraints, an adherence to orthodoxy on the part of policy makers may have been responsible for the economy operating at well below the growth rate that it is capable of achieving. Part of the problem is orthodoxy’s (limited) understanding of the East Asian trade strategy, which was as far from laissez faire as can be imagined. A purposeful and massive under valuation of their currency was part of the strategy, which while making the ratio of importables to exportables close to their international prices, provided for simultaneous export growth and import substitution, something not possible in orthodoxy’s standard work horse – the 2x2x2 model of international trade. Simultaneous import substitution and export production is theoretically possible for economies with idle resources, with the introduction of third non-traded goods corrected would bring exports and growth itself tumbling down. An examination of causal links among macroeconomic variables would indicate that exports, agriculture and public sector GDP are most “exogenous”. Private sector GDP is strongly influenced by exports and agriculture. The prospect for a sustained growth at 9% or more is real. It is well below the point at inflation can be expected to rise. The need of the hour is expenditure (investment) expansion. The current budget in providing for a tax cut for industry, has done the right thing. But that in itself would not be enough. For structural and other reasons private investment would not show the same bouncy in the years to come that it shown in the past. Further increases in the share of private investment would have to wait many clarifications of legal and other (such as regulatory) tangles. This raises the scope for renewal of public investments in areas like power, with even deficit financing. If the agricultural constraint too can be relaxed via institutional reform, and a disequilibrium exchange rate strategy is in place the 9% may itself be an underestimate of the rate of growth the economy is capable of. Of course the present orthodoxy of the policy makers and the RBI would have to go.

Exports from small firms are analysed and the constraints in expansion and growth of exports from the sector are brought out. A large primary survey of over 1200 firms is used to bring out experiences of small firms. Small firms would have to have a major role in exports from India, because only they have access to the unorganised labour market. Principally, macroeconomic policy especially exchange rate, tariff and credit policies have discriminated against the sector. The adherence to orthodoxy has resulted not only in considerable under-performance of the sector and its exports, but also of the economy as a whole. Relaxation of the institutional and policy constraints in the expansion of manufactured exports should have been the topmost priority, but given the continued reign of orthodoxy this is most unlikely. As such labour absorption by the sector would hardly be able to go much beyond 4% per annum, and the envisaged growth of the economy at rates of 7% or more is hardly likely.

The current situation of a large CAD, low growth, and plunging rupee is a result the combination of early withdrawal from the fiscal stimulus and the RBI’s monetary conservatism. There is possibly a way out if credit can be expanded to close the differential between the low end government bond yields and the repo, accompanied by a large push on investments with an appropriately structured investment tax credit valid for the next twenty four months. It could crowd in investments to attract FDI and portfolio investments and if the RBI does not allow the current rupee to appreciate in real terms then the CAD could close, with reasonable growth as well. Without these actions the holding out operations on the currency by the RBI can at best delay the further fall in the rupee, and growth which would have a await a protracted recovery from the expected rise in exports some six months from now.

This study argues that structural factors – principally population per capita income and population density – can explain a significant proportion of the variation in openness defined as (exports + imports)/gross national production. It also provides a conceptual and theoretical basis for the form of the function that explains openness. Spatial theories of order in the location of economic activities – the ideas of Christaller and Losch – which have found much support in studies of geographers, and other empirical findings of spatial order viz., the famous rank size rule of cities’ populations, and the equally famous ‘gravity-model’ of spatial interaction, can all be used fruitfully to understand openness. They explain why openness is inversely related to population sizes, and more generally the functional form of the structural dependence. Biometricians in the early part of this century had used allometric growth models to understand the form and growth of organisms, across not too distant species. Use of the allometric model to the problem of trade openness only calls for recognising the economy as having a structure and therefore as being more than a collection of producers and consumers; and simple assumptions about the economy’s principal characteristics. Given this structural determination of openness we are able to explain the long standing puzzle of Tarshis that smaller countries, but not smaller regions within a nation, would tend to show greater economic stability. Out study would also call for re-examination of many of the studies linking growth to trade openness, especially those conducted in a cross-sectional framework: We would contend that the measure of the openness that is induced by policy (and other non-structural factors) would have to be proxied not by revealed openness as such, but by the same adjusted for the structural component.

Sustained very high rate of growth (above 8% in the context today in India) would be able to achieve (since a labour productivity growth of 4 to 4.5 % is to be factored in) a labour absorption rate of 3.5 to 4% which is about a percent above the growth in the rate of the workforce. But slower growth of around 6% which is what India seems to be achieving in the 90s on an average would keep disguised unemployment alive for long. Similarly, the transformation of firms and especially SMEs which have little autonomous capacity is itself a function of growth oriented policies. In the nineties labour has been sufficiently flexible to allow rapid growth whenever demand was high. In any case the unorganised workers, did not have the ability to resist hire and fire. Demand has been lower than possible otherwise since the rupee especially in comparison to the East Asian currencies has not been aggressively priced. Lacking a very rapid growth in the market sufficient to overcome disguised unemployment, the transformation of these industries has itself been affected. Similarly the continuation of tariff inversion, high and uncompensated energy taxes hurt manufacturing and especially the small and medium sector whose dependence on relative factor cost is higher. The slow movement towards de-reservation has further attenuated the process. The dynamic inefficiencies and distortions are far more significant than the static efficiency penalty that the economy pays in the continuation of reservation. Without these corrections the move to have “free-trade” agreements with the ASEAN countries would hurt manufacturing in India and especially the SMEs. Many of the traditional small firms are in clusters, and a cluster oriented approach would be important for their success. A strategy based on leveraging trade names /brand names, many of which could be argued to be "geographic indicators", with much equity world wide, would require immediate changes in our intellectual property rights regime. Costs of excise registration and dealing with excise authorities are too large, and there is a fixed component to this cost which cannot be spread over a large value of turnover. Only significantly lower excise rates for small firms could compensate them sufficiently. The criteria of "with and without the use of power" in the Factories Act, be entirely dispensed with. All units with more than 50 employees including the entrepreneur and family labour, be brought /retained under (all) the provisions of the Factories Act. And all other units be entirely exempt from its provisions. Credit is the single most important constraint for small firms. Incentivisation of priority sector targets is the solution. The policy of directed lending to small firms (the targets for priority sector lending) ought to shift from targets or quotas to incentives to banks for lending to small firms. Responsible risk taking in lending would have to re-emerge. Tax based incentives for banks and financial intermediaries are possible. Statutory Reserves based incentives for banks too are possible. Concessions on interest rates are dysfunctional, though the margin above PLR rates ought to be subject to a ceiling. State Finance Corporations which could play a crucial role in financing of SMEs would have to go through quick restructuring and refocus on promotion of new enterprises typically where vast positive external effects are anticipated, such as in technology based small firms, promising industries, nodal industries, industrial estate corporations, in exchanging specific infrastructural support to existing clusters of small firms, etc. Investments in infrastructure especially general roads, power, railways, and water supply would help to improve the performance of small firms significantly. For all small firms power and water continue to remain constraints shamefully after nearly 10 years of reform. These can easily come down at least for export industries if the taxes and cross subsidies on them are made vattable. Despite the Electricity Act 2003, it is shameful that open-access has not been extended to SMEs. Technology based and skill labour using industries such as IT, BT, pharmaceuticals and auto oriented industries, also need to be exploited. In automobiles taxes are still very large and the inverted tariffs / high cost of materials and energy that are uncompensated hurt the prospects of India emerging as a base for manufactures. In IT, Biotechnology, pharmaceutical industries and other related offshoring activities the challenges lie in bringing about better IPR regimes that reduces the risk faced by foreign firms in their operations in India. IPR regimes requiring much insight would have to be worked work out that is able to balance the interest of Indian firms and yet lead to much industrial relocation. The addition of a petty patent register could considerably enhance the extraction of value from the many innovations that take place in the SME sector.…

Public Investments in India have witnessed large delays and cost overruns. The same are estimated and shown to continue to be large, even though they have declined despite many changes in economic policy. What has brought about change in efficiency of overall investments is the sharp decline in the share of the public sector in investments. A modified Harrod-Domar model is used to estimate the growth sacrifice effects of delays and cost overruns and it is argued that the decline in the share of public investments in overall investments adds signficantly to the growth potential, which need to be recognised in macroeconomic policy as well. Environmental factors more than funds constraint have been the principal reason for delays and cost overruns.

IPPs, little of the planned investments, espccially from the foreign sector, would materialise. That there are significant social gains in having power generation (and notjust distribution) in large integratedfirms has been little appreciated. Several constraints to the healthy growtf of the sector that had been building up are uncovered in this paper: the inability of the state sector to discipline its management and workforce, large-scale corruption and leakages, load and system imbalances brought about by inadequate investments in distribution systems, and in hydel capacities. The bulk industrial consumers being increasingly left to fend for themselves through captive power generation, as also the political inability to raise the price of power for the household and the agricultural sectors have further contributed to the structural weakness of the SEB system. In the 1990s these have acted to result in a dangerously slow growth in the addition to capacities. The problem was compounded by the severe resources 'constraint' of the state. The vicious circle that exists today can be broken only if the government gives up its monetarist blinkers and realises that investments can in part 'create' savings, especially in a sector like power where the marginal product of power is far more than the cost of generation. Large under-utilised capacities in the equipment sector further add to the savings potential. Central contributions to the SEBs need to be linked to their efficiency, and to the resources they are able to generate. Only then would there be pressure to change for the better. Sections I to VI of the paper discuss Fke recent policy changes, bringing out the dysfunctionalities therein, and present a national alternative. Sections VI to X discuss the key aspects of the problem of the states sector and Section XI sets out the immediate actions in movi-ng towards a healthy electric power system. [The paper is published in two parts. Sections I to VI (Part I) were published last week.]

This note argues that the GEB needs to be restructured urgently. The principal challenge is really to overcome that major ‘agency problem’ that results in leakage of enormous revenue. Plugging the leakages alone would make the GEB profitable at current average tariffs! The key elements of the restructuring would be to directly administer the agricultural subsidies through a coupon system; so that regulation becomes easy, and management of electricity distribution become entirely viable, and can, therefore, be commercially provided. Privatisation of distribution could be necessary given the entrenched vested interests acting against task orientation within the GEB. Yet, complete unbundling would only be dysfunctional at this stage. Some bundling of generation with distribution assets has value to the reform process, and to the ease of regulation. Other details, like the treatment of stranded (IPP) contracts, contracts with central power corporations (BPSAs), the grid rules, pricing o...

Optimal approaches that recognize the specific kind of market failure/s, in the policy and design of infrastructure, greatly reduce the financing costs and improves the ability of to attract finance in the private provisioning of infrastructure. When state systems are weak organizationally it is first best to strengthen the state capacity so that it can minimally perform the roles of design, regulation, development of frameworks, and of monitoring, for the private provisioning of infrastructure. This is particularly so in the case where there are dual market failures arising out of both the natural monopoly and the appropriability failure aspect. The challenges in design and policy are large and with many false starts it is only now barely beginning to be considered in India. Thus infrastructure design rather than debilities in financial markets remain the key problem. The potential to use of foreign capital to finance infrastructure is often overstated. The forces leading to the current mess-up of the Indian banks and FIs in lending to infrastructure are brought in perspective. The key issues in developing state capacity, and the changes required for getting the design of infrastructure right, as also to bring functionality to the role of financial institutions in the private development of infrastructure are highlighted. Governance reforms that make for better development of infrastructure are highlighted.

The efficiency and efficacy of government instruments in implementing policy have been particularly problematic in India. For instance, the incentives, mostly fiscal, to boost been linked to investments, e.g., development rebate and later investment rebate; others have been linked to depreciation like higher depreciation rates for certain categories of plant and machinery; yet a host of other incentives have been in the form of various subsidies pertaining to backward areas and free trade zones; and various duty drawbacks and value based export licensing and so forth. Many of these systems of incentives have long since become dysfunctional, while others are still in force, but surprisingly there has never been any incentive linked to quality, when it is quality which may be regarded as the single most important and fundamental hindrance to our exports and industrial growth. Given the image of shoddiness usually associated with Indian products, for international buyers, the ISO 9000 ...

In this paper we bring together the findings of Subramanian, A. (2019) and Morris and Kumari (2019), and others to claim that the problems with the new national income series are real and need to be addressed. The CPI11-12 too is problematic since the weight of basic food in the CPI11-12 is as high as 45% when there is no wat the same could have been more than 34%. As a result macroeconomic policy may have been handicapped pushing it to restrictive especially monetary policies that may have been one of the underlying causes of the current recession in the economy.

The tendency to ascribe failure of development policy to bad or inadequate governance has become nearly universal. It seems development finance institutions (DFIs), multilateral agencies (MLAs) like the World Bank and the Asian Development Bank, and policy-makers have all come to the conclusion that poor governance, like a multiplicative factor, reduces even the best policy and prescription to naught. One can dispute this contention in many ways. Since all acts of omission and commission, poor design of institutions and their improper working can be considered as governance failure, the contention is neither an explanation of development failure in a causal sense nor particularly useful from the point of bringing about change in economic performance (or even of governance). The notion of governance failure has to be narrowed down and

Optimal approaches that recognize the specific kind of market failure/s, in the policy and design of infrastructure, greatly reduce the financing costs and improves the ability of to attract finance in the private provisioning of infrastructure. When state systems are weak organizationally it is first best to strengthen the state capacity so that it can minimally perform the roles of design, regulation, development of frameworks, and of monitoring, for the private provisioning of infrastructure. This is particularly so in the case where there are dual market failures arising out of both the natural monopoly and the appropriability failure aspect. The challenges in design and policy are large and with many false starts it is only now barely beginning to be considered in India. Thus infrastructure design rather than debilities in financial markets remain the key problem. The potential to use of foreign capital to finance infrastructure is often overstated. The forces leading to the cu...

Sustained very high rate of growth (above 8% in the context today in India) would be able to achieve (since a labour productivity growth of 4 to 4.5 % is to be factored in) a labour absorption rate of 3.5 to 4% which is about a percent above the growth in the rate of the workforce. But slower growth of around 6% which is what India seems to be achieving in the 90s on an average would keep disguised unemployment alive for long. Similarly, the transformation of firms and especially SMEs which have little autonomous capacity is itself a function of growth oriented policies. In the nineties labour has been sufficiently flexible to allow rapid growth whenever demand was high. In any case the unorganised workers, did not have the ability to resist hire and fire. Demand has been lower than possible otherwise since the rupee especially in comparison to the East Asian currencies has not been aggressively priced. Lacking a very rapid growth in the market sufficient to overcome disguised unemp...

In this paper, we examine the trends in the CPI and the core part of the CPI to bring out a grievous error in the core CPI. The core in certain years shows a jump of as much as 7% in certain quarters due to the error in the way the rent prices are computed. During the periods following the Pay Commission implementation, the “ rent” prices rise in the CPI, because the rents for the entire population are imputed from the “House Rent Allowance” accorded to government employees. “Rents” in the CPI have jumped up by as much as 35% in certain quarters, hugely overestimating the true inflation. This vitiates any use of the core CPI for monetary policy including inflation targeting. This will-o’-wisp that the RBI chased, had no doubt constrained growth in India.

In this paper the core issues that need resolution before water development especially by the private sector, and efficient usage can happen are very briefly outlined. These are Water rights have to be defined more functionally to include tradability. There is a need to move away from price based subsidies in electricity for irrigation and in irrigation water, to endowment based subsidies where these endowments can be traded. Administrative and organizational reform of parastatals in water, is most vital. The starting point of the same would be to grant operational autonomy and empower the leadership of water development departments. Creating institutionalized rules to overlay endowments and rights in cooperative water systems that can put free these organisations from the free-rider problem to lead to efficient management of water and to the enhancement of its generation. A strategic shift to more storage especially in the Deccan and its extensions, and to counter opposition from the post-modernist NGOs both within and outside the country by having excellent policies and actions to manage displacement and rehabilitation would also be necessary. River training for storage, canals, and recreation and navigation along with urban renewal can be an important way to finance vast infrastructure to develop cities and add to water resources as well.

<jats:p>The Indian electricity sector was opened to the private sector under the IPP policy. The NTPC, India's largest and perhaps most efficient generator had to respond to the changing scenario. It set out to set up the Simhadri project in Andhra Pradesh, going beyond to original mandate. The IPP policy, its perversities, the background of the power sector, the problems there in and the response of NTPC are discussed. Case (B) discusses the issues related to Project Planning and Implementation.</jats:p>

The IT industry (both software and hardware) is characterised by 'vast consumer side scale and scope economies' which are incomparably larger than in other industries with supply side network economies like pipelines or electricity distribution. In IT the supply side economies are also incomparably larger because the marginal cost of an additional unit of the software or hardware especially the former is very small. But its uniqueness arises on the demand side. The interaction of these two economies, in a situation of heightened technological dynamism, imposes a greater degree of contingency, and hence path dependency in the developments in the industry as a whole. It makes possible giants like Microsoft and CISCO. Even as they extract a significant part of the scale economies in the form of large profits, such firms are competitive in the more relevant dynamic sense. In this respect these industries are therefore distinguished from nearly all other prior industries. Traditi...

Exports from small firms are analysed and the constraints in expansion and growth of exports from the sector are brought out. A large primary survey of over 1200 firms is used to bring out experiences of small firms. Small firms would have to have a major role in exports from India, because only they have access to the unorganised labour market. Principally, macroeconomic policy especially exchange rate, tariff and credit policies have discriminated against the sector. The adherence to orthodoxy has resulted not only in considerable under-performance of the sector and its exports, but also of the economy as a whole. Relaxation of the institutional and policy constraints in the expansion of manufactured exports should have been the topmost priority, but given the continued reign of orthodoxy this is most unlikely. As such labour absorption by the sector would hardly be able to go much beyond 4% per annum, and the envisaged growth of the economy at rates of 7% or more is hardly likely.

The current situation of a large CAD, low growth, and plunging rupee is a result the combination of early withdrawal from the fiscal stimulus and the RBI’s monetary conservatism. There is possibly a way out if credit can be expanded to close the differential between the low end government bond yields and the repo, accompanied by a large push on investments with an appropriately structured investment tax credit valid for the next twenty four months. It could crowd in investments to attract FDI and portfolio investments and if the RBI does not allow the current rupee to appreciate in real terms then the CAD could close, with reasonable growth as well. Without these actions the holding out operations on the currency by the RBI can at best delay the further fall in the rupee, and growth which would have a await a protracted recovery from the expected rise in exports some six months from now.

The eighties have witnessed major changes in the phenomenon of foreign direct investments (FDI). There have been major shifts their sources and destinations. Japan became an important source, the US the largest host for inward FDI both of Japanese and Western European based FDI. The important underlying reason has been the declining competitive position of US firms in relation to German and Japanese firms, and the assemetry in growth between the three advanced regions – the USA, Japan and Western Europe. An important development has been the emergence, and now dominance, of services related FDI, although these flows have as yet to affect the LDCs significantly. The host countries within the LDCs too have changed as growth in Latin America has collapsed or declined in the eighties. The fast growing economies of East and South East Asia, have became important hosts, since non resource seeking FDI typically seeks to follow growth. There have been changes too within the Indian economy. ...

Briefly the proposal is for market competition in generation, through the development of a hybrid wholesale and retail (for bulk consumers alone) market. It is not a marker for all the electricity in the system, but largely a market that would allow distribution-cum-generation companies to purchase power from each other, and form pure generators; and would also allow bulk purchases and captive generators the choice of supply and customer. A market for generation, while allowing distribution companies the comfort of having some distribution assets, would lead to quicker development of the market and allow easier privatisation. The transmission assets of the GEB would need to be in a PSU with 50% shareholding by the state government and all other shares held by consumer interests including farmers’ cooperatives, households and industry associations and at least 25% of the stock disbursed through the stock market.

More than political constraints, an adherence to orthodoxy on the part of policy makers may have been responsible for the economy operating at well below the growth rate that it is capable of achieving. Part of the problem is orthodoxy’s (limited) understanding of the East Asian trade strategy, which was as far from laissez faire as can be imagined. A purposeful and massive under valuation of their currency was part of the strategy, which while making the ratio of importables to exportables close to their international prices, provided for simultaneous export growth and import substitution, something not possible in orthodoxy’s standard work horse – the 2x2x2 model of international trade. Simultaneous import substitution and export production is theoretically possible for economies with idle resources, with the introduction of third non-traded goods corrected would bring exports and growth itself tumbling down. An examination of causal links among macroeconomic variables would indic...

This study argues that structural factors – principally population per capita income and population density – can explain a significant proportion of the variation in openness defined as (exports + imports)/gross national production. It also provides a conceptual and theoretical basis for the form of the function that explains openness. Spatial theories of order in the location of economic activities – the ideas of Christaller and Losch – which have found much support in studies of geographers, and other empirical findings of spatial order viz., the famous rank size rule of cities’ populations, and the equally famous ‘gravity-model’ of spatial interaction, can all be used fruitfully to understand openness. They explain why openness is inversely related to population sizes, and more generally the functional form of the structural dependence. Biometricians in the early part of this century had used allometric growth models to understand the form and growth of organisms, across not too...