Structural Reforms for Better Governance

Structural Reforms for Better Governance

By Ajay S Singh, ICAS[1]

There is no second opinion about growth in India and its further prospects. Reforms took place in 90s and then somehow could not continue the momentum. There have been sporadic reform attempts in the past. During last few years, economy started improving due to global and domestic factors. The macroeconomic outcome in India is currently in consolidation mode with higher growth, lower inflation, stable exchange rate and stronger fiscal and current account position. Despite global headwinds, India now grows at over 7.5 per cent and has potential to do much better. However, due to the slow growth in last many decades, country has huge appetite of growth. India needs higher growth which is sustainable, inclusive and job-oriented in order to fulfill the requirements of Aspirational India. While pushing for higher growth, India also needs to be conscious of her environmental and ecological carrying capacity. There are green activists and people from civil society actively watching government and reminding it of any effort causing distress to environment. It is in this context that correction of structural bottlenecks gains added significance.

What are the major structural bottlenecks that hold India back from achieving its growth potential? First and foremost are infrastructure bottlenecks. One important result of infrastructure hurdles is India’s relative low manufacturing base, especially of capital goods, and low value addition in manufacturing. Manufacturing sector needs to be nurtured with simplified procedures, easy credit, and reduced transaction cost. The presence of a large informal sector and inadequate labour absorption in the formal sector has compromised the optimal utilization of human potential. Apart from the limited manufacturing capacity, low productivity and the absence of required skills are the major constraints.

It is very difficult to realize the intrinsic growth potential, without robust agricultural growth, which is still the lifeline of India’s substantial rural populace. Low productivity and inadequate labour mobility, as mentioned above, have hampered an agricultural transformation. Side by side, the structural factors engendering food inflation would need to be tackled too. It is important in this context to address issues related to the imperfections in agricultural marketing, shortage of storage and processing infrastructure and restrictions in inter-regional movement of agricultural produce. Apart from all the above, there is a historical legacy of ill-targeted subsidies that has cramped the fiscal space for public investment and distorted allocation of resources.

India has a good reservoir of globally-acclaimed scientists, IT experts, academicians and entrepreneurs. For tapping this potential, there is a need to achieve a supply-side transformation entailing increased competitiveness, improved labour mobility and high-quality, export-oriented manufacturing. Promotion of research and development, technology and innovations would be the prime mover of this change.

Being completely conversant with this background and with concrete solutions in mind, it shall undertake well-thought out structural corrections that have elicited favourable response from investors, rating agencies and lenders including multi-lateral institutions. At present, Government’s approach to reforms is calibrated to the requirements of the complex political-economy considerations of our diverse, pluralistic and democratic set-up.

India has identified and agreed to the framework of nine priority areas for structural reforms within the G20[2]. These include: promoting trade and investment openness; advancing labour market reform; educational attainment and skills; encouraging innovation; improving infrastructure; promoting fiscal reform; promoting inclusive growth; etc. The three planks of India’s infrastructure strategy are; prioritization, innovativeness and debottlenecking. In order to give fillip to the infrastructure investments at sub-national level, greater share of central taxes are now transferred to the States, replacing the transfers through Plan schemes. With a steep jump in States’ share of taxes from 32 per cent to 42 per cent[3] of the gross tax revenue, divisible pool, in nominal terms this has amounted to increase in states’ share by more than Rs.1.75 lac crores.

The last two budgets[4] of the Central Government have clearly brought out its infrastructure priorities in terms of irrigation, housing, transport infrastructure including dedicated freight corridors, railway as well as rural connectivity and rural electrification. For infrastructure projects and industrial development, land acquisition is a major challenge. Land acquisition, being a state subject in the federal structure of India, is handled by the states. Initially, it caused delay in many projects but with time, states are now able to acquire land for the infrastructural projects through elaborate consultative process.

In the realm of innovative solutions, the National Investment and Infrastructure Fund[5] has been created to extend equity support to infrastructure. Real Estate Investment Trust and innovative Infrastructure Investment Trusts are being created to reduce the pressure on the banking system. Once these funds and trusts come into effect, infrastructure sector is likely to get a good boost. During to downturn in the steel and some infra sector projects, many banks under sever distress. These moves of the government are essential to give them some respite and also provide some oxygen to the ailing sectors.

Banks need to be encouraged to extend long term loans to infrastructure sector with flexible structuring to absorb potential adverse contingencies. Government has offered some relaxation in External Commercial Borrowing and Foreign Direct Investment norms which would also boost infrastructure investment. The debottlenecking efforts relate to the rejuvenation of the stock of projects on the public private partnership mode and initiatives on strengthening the dispute resolution mechanism, as well as, focus on according speedy clearances to projects. The transparent allocation of key public resources like coal and spectrum, apart from calibrated fiscal incentives, has also given a lot of confidence to the infra sector and it would also catalyze infrastructure investment.

In order to cater to the requirement of skilling and creating employment, an ambitious program called “Skill India”[6] has been launched by Government of India to offer skill-based training to youth. The newly constituted Skill Development and Entrepreneurship Ministry consolidates skill initiatives spread across several organs of government and is standardizing procedures and outcomes across 31 Sector Skill Councils. State governments are on board in these initiatives and it is expected to give good results in coming 2-3 years.

The complementarities built around the flagship Make-in-India program, including; comprehensive measures for improving the ease of doing business, encouragement to budding entrepreneurial talent under the Start-up India and Stand-up India Initiatives and advertisement and global campaign, have evidently improved India’s global ranking as a business destination. India has launched eBiz platform for creating a business and investor friendly ecosystem by making all business and investment related clearances and compliances available on a 24x7 single portal, with an integrated payment gateway. An entrepreneur-friendly, legal-bankruptcy framework-- the Insolvency and Bankruptcy Code-- has been adopted by India.

The Budget 2016-17 has provided for promoting favourable ecosystem for startups, including entrepreneurial hubs. Norms for foreign direct investment have been progressively liberalized in various sectors including defence, insurance, railway infrastructure, construction etc; with most of the FDI sectors having been put on automatic approval route. The first hand reflection of the improved confidence on India is the robust growth in foreign direct investment in the last year. The Government has also launched a nation-wide ‘Digital India’ program with the vision to transform India into a digitally empowered, knowledge society.

For a country like India, industrial development must promote employment. Maximum employment is generated by micro, small and medium industries. These industries look forward to government for support and hand holding in the form of easy access to fund, market and conducive eco-system. Government has established a corpus of Rs.1000 crores fund to create a supportive eco-system for venture capital in these sectors; and, a credit delivery program for micro and small businesses through a specially-created vehicle called MUDRA bank[7]. A scheme for Promoting Innovation and Rural Entrepreneurs, called ASPIRE, was launched for setting up a network of technology centres and incubation centres.

Combining India’s deep mobile phone penetration with unique identification numbers for citizens and a greatly successful financial program, the Government has laid the groundwork for a profound structural transformation in the country.  Though a nation-wide, time-bound program of Financial Inclusion, more than 216 million bank accounts have been opened for unbanked persons since August 2014. Together with Unique Identification framework and mobile telephones, this Financial Inclusion Program, called Pradhan Mantri Jan Dhan Yojana[8], has helped in improving the delivery of services and benefits to eligible persons through direct benefit transfer. Now, India has an astonishingly successful program of direct benefit transfers in cooking gas called the PAHAL scheme apart from other transfer of scholarships to under privileged and minority students, transfer of cash under Rural Employment Scheme etc through web-enabled Public Financial Management System[9]. Success of this system has mad ethe government realize the power of IT enabled financial and accounting management systems. Hence, DBT will now see phenomenal expansion in areas like pension payments, disbursement of relief and subsidies etc. The comprehensive coverage under financial inclusion has also helped the Government in transferring benefits under social security schemes. Since the statutory backing for delivery of services and benefits based on unique identification numbers, called Aadhaar numbers, has been established, this mechanism has now come out of its initial phase of uncertainty. The entire successful initiative has become popular as the “Jandhan-Aadhar-Mobile” Trinity or the JAM Trinity. Now with the financial inclusion growing day by day, there will be demand for more financial institutions. New licenses for banks would give a fillip to the inclusion process.

Tax reforms and trade policy measures reinforce structural reforms in other sectors. India reduced the burden of corporate taxation for smaller companies and simplified compliance procedures in direct and indirect taxes in a significant way. For faster clearance of import and export cargo, measures are being initiated to extend the existing 24x7 customs clearance facility to 13 more airports in respect of all export goods and to 14 more sea ports in respect of specified import and export goods. For regional cooperation and trade, trade facilitation strategic framework is being developed among some SAARC members, including Bangladesh, Bhutan and Nepal. Further, bringing in an Indian Customs Single Window Project to facilitate trade all across is also envisaged.

Reforms are difficult to be carried out in a vibrant democratic set-up like India with more than 1 billion aspirations. It is hoped that Government’s focus on co-operative and competitive federalism would speed up the required consensus on reforms and eventually lead to policy convergence across our vast polity. There are many important reforms in the pipeline; some at advance stage of approvals. One keenly awaited change is the advent of the Goods and Services Tax[10], which is being discussed widely in the public domain[11] for very long but once implemented, will be a significant structural change that can integrate indirect tax framework nationwide, improve transparency in tax administration, reduce transaction costs and unify scattered markets, finally leading to a significant impetus to growth. We are confident that the systematic focus on the “Reform-to-Transform” motto of the Government will metamorphose the Indian economy, polity, bureaucracy and society as a whole.

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[1] Mr.Ajay S Singh is an officer in Govt of India and view expressed are personal. Article was written in 2015 and published in CSMS Journal, Delhi, India

[2] http://www.g20.org/English/image/201606/t20160601_2295.html

[3] http://finmin.nic.in/14fincomm/14thFinanceCommission.htm

[4] http://indiabudget.nic.in/

[5] NIIF- http://finmin.nic.in/the_ministry/dept_eco_affairs/investment_division/NIIF24082015.pdf

[6] http://skillindia.gov.in/

[7] http://mudrabank.com/

[8] http://www.pmjdy.gov.in/

[9] https://pfms.nic.in/

[10] http://www.gstindia.com/

[11] http://www.cbec.gov.in/htdocs-cbec/gst

Public Private Partnership in e-Passport Production in India

1.      Introduction

1.1.   International Civil Aviation Organisation of United Nations has formulated the specifications for e-passport and it paved way for entire world to come-up with e-passport and avail its benefits.  India, too, is likely to decide about switching over to this system in near future. Within the next year, travelers from more than 40 nations may be carrying a new form of passport in response to the decision taken by ICAO of UN and US Government.  This passport is popularly called ‘e-Passport’.  It deploys two new technologies – Radio Frequency Identification and Biometrics.  Radio Frequency Identification (RFID) denotes a family of technologies that communicate data wirelessly from a small chip, often called a “tag”, to a device called reader. 

1.2.   ICAO has prescribed specification for e-passport which relies on the International Organization for Standardization (ISO) 14443 standard. It specifies use of a radio frequency of 13.56 MHz.  The “tags” in these standards are passive as they are not powered; instead they derive power from the signal being emitted by the reader.  Biometrics is a technology of verification of human identity through measurement of biological characteristics.  Recognition of these characters is biometric authentication.  This process is followed day in and day out by every human being (and even animals).  Automation of biometric authentication is the technology commonly known as biometrics.  Thus, it means authentication of biological characteristics from human-to-computer. 

1.3.   Popular computer oriented biometrics include finger prints, face recognition and irises.  These are the three biometrics favoured for e-passport deployments.  Face recognition involves photographic imaging of the face; finger print recognition is imaging and on automated process very loosely analogous to the finger prints matching used in criminal investigations. Finger print scanners can take on optical or silicon-sensor forms. Iris recognition also involves imaging.  The iris is the coloured annular position of the eye around the pupil.  Iris scanning in biometric systems takes place via non-invasive scanning with a high precision camera.  The device that captures user data is called sensor. 

1.4.   E-passports are also the harbinger of wave of next generation ID Cards.  Major initiative by the Government is to assimilate the two technologies in getting a passport made which may act as a very effective identity card of new generation.  Together RFID and biometric technologies have potential to reduce fraud, smoother handling of the documents, quicker identity checks and enhance security.  E-passport also offers substantial benefits to the rightful holder by providing a secure means to confirm that the passport belongs to him or her and it is authentic, without compromising the privacy of the holder.   It contains electronic data; hence validation and authentication of data with central data base can be done very quickly.  Thus, there will be reduction in time taken in inspection systems which may be automated to great length.  These are security concerns leading to slimming, clandestine scanning, clandestine trading, cloning, biometric data leakage or eavesdropping which are being addressed and technological advancements need to be utilized to take care of this problem.

1.5.   United Nations and most of the Europe have started using e-passport.  International Civil Aviation Organisation of United Nations has formulated the specifications for e-passport and it has paved way for entire world to come-up with e-passport and avail its benefits.  India, too, will switch over to this system for all types of passports/travel documents.

2.      E_passports in India :

2.1.   In India there is requirement of about 10 million passports in a year and there is further requirement of 30 million passports for replacement of old designs’ passports in coming years.  There is long pendency in supply of passports and requirement of going in for production of e-passport is more challenging.  Currently India Security Press (ISP), Nashik Road (a unit of Security Printing and Minting corporation of India Ltd.) is engaged in the production of passports and it has got the facility to manufacture about eight million passports per year. Retrofitting for inlays’ insertion etc. is required to be done to make the existing machines capable of handling e-passport work. At present, passport booklet is printed at ISP and personalization handled by passport offices of Ministry of External Affairs (MEA).  With the advent of e-passport data security has become more important and modalities to ensure proper handling of data and data base is the prime concern. Therefore it is necessary to consider the technologic and security model different from the traditional security model available at ISP.

2.2.   In addition to increased production new approach shall also provide answer to data security, continuous technological upgrade and price discovery of monopolistic supplier. Presently ISP supplies passport to MEA at cost plus price which is not a very encouraging model of production of monopolistic goods. However, keeping the security aspect in mind, nature of the specialized products and lack of expertise to decide about the input costs, MEA has no option but to accept the cost indicated by ISP. Any business venture will require resources including funds. Private sector will not like to invest in any project unless there is certainty of returns. Quantum of investment in the field of e-passport production will not only be governed by the acceptance of technological possibilities but also the arrangement of buy-back of major portion of the production by the government.

2.3.   There are several technological possibilities which will guide the requirement of investments to be made and level of activities to be carried out at ISP.  This may be achieved by procurement of machine and technology as done in the past. However there is a need to look at the possibility to go in for different models of financing to facilitate better project management and use of latest technology as elaborated above.   

3.      Alternatives :      

3.1.   In this regard, selection of any the following two broad concepts would decide the further modalities of the proposal:

3.1.1.      Printing of books and basic data entry in the chip of e-passport may be handled at an entity under Public Private Partnership (PPP) model. 

3.1.2.      In addition to above, decentralized personalization of individual inputs in the chips may also be handled by a PPP entity.  This will take care of collection of data, its storage and security.  However, MEA will continue to remain the organization responsible for issuance and validation of passports.

3.2.   In the first scenario there are following options available:

            a.   Outright purchase of machinery and technology.

            b.   Outsourcing of part of the activities pertaining to e-passport.

            c.   Going in for PPP entity under the supervision of Security Printing and Minting Corporation of India Ltd. (SPMCIL). PPP entity shall have the backing and support of an organization having technology to manufacture e-passport.

3.3.   In the second scenario, a PPP entity may handle the e-passport manufacturing and personalization. Thus it would be further extension to PPP model mentioned above.

3.4.   In the first scenario the three options mentioned above are briefly examined as under:

3.4.1.      Outright purchase of machinery and technology:  Under this scheme SPMCIL can purchase retrofitting for insertion of chip and antenna of e-passport.  It may also purchase machinery to manufacture RFID i.e. assembly of chip and antenna. Machine manufacturer of RFID and inlay insertion may provide the requisite technological input to facilitate production of site of SPMCIL i.e. ISP.  This method of procurement has disadvantage of huge investment without any commitment of technological upgrades in the fast moving field of e-passport. Further, it will necessitate procurement of latest software from the vendors tied up with the machine manufacturer.  There is a possibility of machine manufacturer dumping his outdated machine as the procurement process takes considerable time.  By the time procurement is finalized, several technological advancements might have taken which are not offered by the prospective supplier. Therefore, it is always apprehended that SPMCIL will not have the machinery and related software commensurate with the technological developments already taking place globally. Further, due to the marketing constraints, for travel documents, ISP will be servicing the captive client i.e. MEA only which will make the job of assessing the technology, quality and cost of travel documents supplied very difficult.

3.4.2.      Outsourcing of part of the activities pertaining to e-passport:  Under this scheme, semi finished passport books printed at ISP may be provided to a service provider who may do the insertion of inlays.  This will not require any additional investment at ISP.  However, this will neither lead to any increase in scope of work of SPMCIL nor enhance the technological capabilities of the same. Further, it has a potential for security risks and huge cash outflows on a regular basis. It will also require procurement of services on a regular basis which will involve tendering. While taking part in the tender, vendor will not be certain to get this business thus every time a risk premium will be charged by him. Hence the cost of outsourcing is likely to be more than what can be achieved through a known source or at our own facilities/premises.

3.4.3.      Going in for PPP by SPMCIL for an organization having technology to manufacture e-passport:  The third alternative which may be explored is to set up a PPP entity supported by an established player in this domain with technical know-how of manufacturing e-passport. By virtue of this partnership the technology partner brings in the technology, their experience and the expertise of e-passport making and sales. SPMCIL through ISP will be responsible for the production of e-passport, providing manpower of the PPP entity with the technology partner having their representation in the board. Although the e-Passport Project will be the main activity of the entity, it  may at a later date, take up other assignments viz. smart cards, etc. which will ensure that the technology partner will facilitate transfer of technology and upgrades on a continuous basis. The technology with the entity should at any point of time not be inferior to technology developed by the technology partner in any part of the world.  This arrangement will ensure that the PPP entity will support ISP in all its future endeavors for smart card & e-passport projects. Further, this PPP entity will be mandated to export/sell its product to non-captive market to the extent of 30% of its production.  This will facilitate discovery of price prevailing in the global market so that SPMCIL is assured of getting the products from PPP entity at a globally acceptable rate.  Since the export will necessarily call for continuous technological updation, PPP entity will remain profitable only when latest technology is used in the production of e-passport and other products.

3.5.   Under the second scenario, above PPP model will further be extended to the personalization centres. Under this model, MEA is also required to play a very significant role. Feasibility and success of this scheme will primarily depend on the opinion, co-operation and acceptance of MEA. As of now, passport data collection centres collect data from the individuals seeking passports. This data is sent to the passport issuing offices. These offices personalize the passport booklets and print the relevant personal pages of the passport booklet. These offices act as repository of data pertaining to personalization. This database may be very handy in the case of e-passport. It may be keyed in the chip at these centres. Safety and authentication of data as well as use of technology to write the data in a most safe, secure and authentic manner may be ensured at these centres by the PPP entity. Data will be handled by this entity PPP ENTITY but it will remain in the custody of MEA only. Validation of data will also be handled by MEA for obvious security and technical reasons.

4.      Analysis of Alternatives:

4.1.   Above mentioned alternatives have strengths and weaknesses.  On evaluation of these options, it is evident that formation of PPP entity for production of e-passport is the most suitable option.  This is primarily due to the fact that SPMCIL will continuously get the latest technology and it will have the prospect of venturing into other areas of production, including Smart Cards.  Further, it will give a boost to export of e-passport and other products through this PPP entity.

4.2.   For the production of e-passport and other security products, it would be appropriate to consider the formation of a PPP entity having backing of some organization with excellent demonstrable technological capability.

4.3.   PPP entity: PPP entity with support of an established player in this domain with technical know-how of manufacturing e-passport may be assured of equity of asset support. This may be almost like a Financial Joint Venture wherein all equipments & assets from both partners should be transferred on commercial terms to the Special Purpose Vehicle (SPV). All manufacturing equipments may be purchased by the SPV. Land and other facilities may be provided by ISP on lease to the SPV. In addition to the e-Passport Project, SPV may at a later date take up other assignments viz. smart cards, etc. which will ensure that the technology partner will facilitate transfer of technology and upgrades on a continuous basis. The technology with the SPV should at any point of time not be inferior to technology developed by the technology partner in any part of the world.  This arrangement will ensure that the SPV will support SPMCIL in all its future endeavors for smart card & e-passport projects. Also this arrangement will ensure that ISP is updated for not only the current technology but all future technological advances in this domain. Management may be controlled by SPV technical partner. It will also minimize the financial and operational risk in acquiring new technology with proper expertise.  Further, this PPP entity will be mandated to export/sell its product to non-captive market to the extent of 30% of its production.  This is necessary to ensure that correct prices are known to SPMCIL since it will be another captive buyer of e-passport and other products.  This mandatory export requirement will give way to a very transparent mechanism of discovering the appropriate price of the products prevailing in the global market.  Thus, SPMCIL is assured of getting the products from PPP entity at a globally acceptable rate.  Since the export will necessarily call for continuous technological updation, PPP entity will remain profitable only when latest technology is used in the production of e-passport and other products.

4.4.   India Security Press, a unit of SPMCIL: The main objective of India Security Press is to provide products requiring high security printing to various departments of Government of India, State Governments, Banks and other foreign and international bodies. India Security Press puts its main thrust to ensure the security in its products, which are exceptionally available otherwise. India’s passports are currently machine-printed and machine-readable, according to International Civil Aviation Organization (ICAO) specifications. As mandated by the Government of India, Passport book making and printing is the task of India Security Press and as such it is necessary for India Security Press to update & upgrade itself to match the challenges for introduction of e-Passport by the Government of India. 

4.5.   Roles and Responsibility: The roles and responsibilities of both the firms – ISP and the Technology Partner may be summed as below:

4.5.1.      Joint Responsibility

                          i.      Since it is proposed to be a SPV almost like a Joint Venture both the organization have to bring in funds towards the equity of the SPV. The representation in the Board will be from stake holders including Technology Partner, SPMCIL and MEA.

                        ii.      70% of the Sales of products requisitioned by SPMCIL shall be made to SPMCIL. Remaining 30% has to be exported or sold to un-captive market. For new products, 100% sales may be made within the country of India or elsewhere but the exports have to be increased to 30% in a phased manner.

4.5.2.      Responsibility of the Technology Partner and SPMCIL

                          i.      Technical know-how and technical recommendation on manufacturing equipments to be bought by the technical partner of SPV and Training of manpower and Technologically updating of the SPV from time to time and domestic and International Sales Support.

                        ii.      SPMCIL shall take care of local Statutory & other Registrations & Approvals, Land & other facilities on operating lease to the SPV, Manpower and day-to-day management, Local Sales Support for the existing products and government liaison.

5.      Recommendation: Based on the above it is recommended to go in for SPV for e-Passport manufacturing. SPV may be almost like a Financial Joint Venture with equity participation from stake holders. In this SPV all equipments and assets shall be transferred from both partners on commercial terms. All manufacturing equipments shall be purchased by the SPV under technical advise from the Technology Partner. Land and other facilities to be provided by ISP on lease to the SPV. Although the e-Passport Project will be the main activity, SPV may at a later date take up other assignments viz. smart cards, etc. The Technology Partner to provide an undertaking that they will ensure transfer of technology and upgrades on a continuous basis. The technology with the SPV should at any point of time not be inferior to technology developed by the firm in any part of the world.

With clearly defined roles and responsibility, SPV will definitely be a successful model to take care of production and supply and ensure that deficit in passports is not there. Further, latest technologies will also be available through this SPV under PPP mode.

Note:

This article was written in 2007 and subsequently updated in 2014. Views are personal and need not necessarily reflect the views of government i.e my employer.