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

A NEW APPROACH TO ROAD SAFETY IN INDIA(1)

A.    Background Note on Problems of Road Safety(2):

1.  Road Safety is an area demanding increasing importance. There are large number of instances of reported road accidents due to ever-increasing number of vehicles and increasing cases of road rage. For last three years the number of accidents reported are about 5 lacs resulting into fatalities of more than 1.3 lacs every year[3]. Accidents carry high economic and social costs, which are not easy to ascertain. Generally the cost of road related injuries and accidents are assessed in terms of (a) medical costs (b) other costs related to administrative, legal and police expenditure (c) collateral damage in terms of damage to property and motor vehicle and (d) loss due to income foregone arising out of absence from work or impairment/disability or untimely death. Due to lack of sound social safety net, accident survivors often live poor quality of life and have to live with pain and suffering which are difficult to estimate. In developing countries like India, where there is very little asset ownership and lack of social support to families with impaired bread earner,  accidents adversely impact the welfare of accident victims and their dependents.

2. Paradoxically, higher speed vehicles and better quality roads had their own contribution in increasing the number of serious accidents. However, with better design of vehicles there is a decline in fatalities vis-à-vis increase in number of vehicles. Length of motorable road has increased significantly during last 40 years and accidents reported on every 10,000 kms of road have also doubled. Another worrying factor is the number of accident victims getting injured in the accidents. During the same period, number of injured has gone up from 13 to 45.7 per one lac of population.
3. There are several causes of large number of accidents and fatalities. Road design and upkeep is one technical reason about which the engineering departments are already aware and initiate action as per the availability of the funds. However, the mechanism to take care of road victims has not got the adequate attention. Often accident victims go unattended because people are scared to help the victims lest they should get involved in police case. These accident victims do not get timely medical attention for lack of suitable transportation, inadequate medical facilities in local hospitals and reluctance of the hospitals to admit them for want of upfront fee payment. There is a need for overcoming all these bottlenecks and integrating all these elements into a viable system that can provide a sustainable solution to this hitherto largely unattended problem.
4. Road accident victims are not covered under any immediate relief program/scheme of the government. Every case is dealt in isolation and support extended by government to victims also varies from case to case. In most of the cases, support reaches the victim only after the critical first 24 hrs of medical attention is already over. Saving life in an unfortunate happening of road accident by ensuring treatment in a state of the art hospital has financial implications. Therefore providing network of 108 response number, duly supported with linkages to hospitals mandated to admit and treat the victims without bothering about payments to be received from the victim to state of the art hospital is the need of the hour.
5. Even while some projects in the county have made considerable headway in initiating the ex-ante measures such as road accident reporting, data analysis and engineering interventions, these measures have not been incorporated as a standard business procedure across the state.  Furthermore, in the unfortunate occurrence of a road accident, ex-post measures like timely rescue and treatment of accident victims in an appropriate hospital equipped for handling such accidents are not methodically integrated with a comprehensive road safety strategy.
6. One possible ex-post measure that could be attempted is to create a Fund for treatment of road accident victims. The revenue streams for the medical treatment in this Fund would primarily comprise of inflows from Motor Accident Compensation Tribunal (MACT) claims, which are paid to the victim by the insurance company. There would still be a gap between the Funds required for medical treatment and the claims given by the insurance company. This viability gap has to be funded by the Government. It can do so by making budgetary provisions in the annual budget. Alternatively, a cess can be levied on petrol/diesel analogous to the cess for road maintenance. The proceeds from this cess can straight away flow into this Fund. A major bottleneck here is that there is a mismatch in the timing of the Fund flow streams. While the medical expenses have to be paid upfront, there is a considerable delay in settlement of accident claims by the tribunals. This Fund could pay upfront for accident victims’ treatment in an appropriate hospital equipped for treating such cases, with recoupment to the Fund from the MACT award at a subsequent date.

B. Suggestions: In order to handle the issue of road safety after the accident has happened, following issues need to be dealt in detail:
1. Communication System: A mechanism to facilitate communication with victims of road accidents needs to be developed. One method could be to develop linkages with mobile operators to extend the emergency contact facility to control rooms of petrol vehicles and ambulance in the region. A system may be developed whereby the victim presses the emergency contact button and the message may get flashed to the nearest control room of traffic management setup. From there, based on the location of the victim (which may be identified through the location of the mobile) ambulance may be deployed by road safety setup, if the call is related to road accident. Once the ambulance moves to accident site message may be electronically flashed to nearby hospitals about the possible accident victims approaching the hospital. This information will provide ample time to the hospital to take advance action to treat the accident victim. Ambulance, after picking up the victim may report to the control room or road safety setup, which may then log the accident status with police authorities and road safety Fund. Thus, through electronic methods, inter-linkages may be developed and advantages of technology may be derived to provide treatment to accident victims. In order to facilitate this inter-linkage, mobile/telephone operators need to be taken on board and connectivity be mapped with road safety setup.
2. Hospital System: There is a need to “lay down guidelines for establishing and upgrading trauma care systems at all levels including district hospitals and tertiary care medical college hospitals and creating a grid of medical, allied medical and rehabilitation facilities to provide first aid, care during transportation, emergency care in the hospital and rehabilitation.”[4] The hospitals providing medical treatment for accident victims should be empanelled based on the facilities that they possess. There should be comprehensive and transparent criteria for empanelment of these hospitals specifying thresholds in terms of bed capacity, medical/surgical facilities, medical/paramedical staff strength, diagnostics and radiological capacities. These hospitals should agree to cost of packages for each identified medical/surgical intervention/procedure as approved under the scheme. An MOU may be signed with the empanelled hospitals to treat the road victims through cashless settlement mechanism. The Fund may utilize the services of Third Party Administrators (TPAs) which may be traditional TPA or any other institution assigned the task of managing claims on behalf of road safety set up for claims processing.
3. Claim Settlement System: Once the accident victim is admitted in the hospital, the hospital would provide cashless treatment to him. The details of the beneficiary and the treatment given to him would be recorded in the hospital database. The hospital periodically would upload transaction details to TPA server. Claims would be processed in TPAs office and statement would be prepared and sent to the Fund periodically. Based on this statement, the Fund would make payment to TPA. The TPA would settle the claim of the empanelled hospital. If treatment is not within the pre-defined packages, pre-authorization is obtained from the TPA by the hospital before proceeding with the treatment.
4. Mechanism for audit of claims: There should be an elaborate system of auditing medical claims raised by the hospitals. The basic purpose of the claims audit is to investigate potential mis-billings, frauds and analysis. The idea is to (i) verify that the services charged have actually been rendered, (ii) see the pattern and nature of accidental injuries and claims and (iii) analyse and then assess the expenditure as per demographic profile of the victims. This would mean that there is a comprehensive system of records/documentation which is regularly cross-checked by independent auditors and advises are received for further improvement in the system. It should also ensure that pre-authorization has already been taken in case services beyond the approved packages have been rendered.
5. Mechanism for insurance claim cases: Individuals in many cases may not be very keen on pursuing the case as the treatment has been provided by the Fund. Hence, it is imperative for the fund management to take up the insurance claim cases and follow them up till the award is delivered and Fund is recouped. For this purpose, the Fund management could utilize the services of reputed law firms on commission basis.
6. Fund flow assessment: The Fund would receive periodic returns from TPAs regarding hospital claims. It will also receive regular returns regarding insurance reimbursements. Based on these, there would be continuous assessment of Fund flow. The projections of deficit in the Fund so arrived at, would form the basis for raising demand with the State/ Centre for recoupment of the Fund.
7. Administrative arrangements: An SPV needs to be constituted for operating the fund and for carrying out the functions of coordination with various stakeholders like hospitals, TPAs, auditors, legal firms and Government bodies. There will be a Fund Manager who will be responsible for the fund management, which will include deployment of surplus funds, cash flow management, fund projections and advising on mechanism of raising funds. 
8. Legal and Policy matters: In order to make this system operational there may be a requirement to carry out amendments in Motor Vehicle Act, Laws and Rules related to Insurance of motor vehicles and road accident victims. Changes required in the legal and policy matters affecting the above mechanism have to be suggested.

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[1] Article by Mr.Ajay S Singh, ICAS. Mr.Singh is currently working as Director in Department of Economic Affairs, Ministry of Finance, Government of India.

[2] This article only focuses on key issues and recommends some approaches of sorting them out.

[3] Ministry of Road Transport annual report on road safety- http://morth.nic.in/showfile.asp?lid=1058

[4] Report of the Committee on Road Safety and Management, Ministry of Road Transport & Highways, Govt. of India -  http://morth.nic.in/writereaddata/linkimages/SL_Road_Safety_sundar_report4006852610.pdf

Cash Management and sample ternd analysis

For any entity, cash management is very important. For a sovereign government it becomes further important as government is expected to honor its commitments without fail and incur several social and developmental expenses. Aim of public sector cash management is to forecast the availability of the total liquid cash resources at a point in time which is at the end of day, month, quarter, half year or year. To find out this simple figure a lot of data needs to be collected and then trend analysis needs to be done to find out reasonable requirement of funds. Any unusual or non-linear cash requirement, if estimated properly, will make the job of cash management simpler.

Since variable affecting cash flow are many and there are many factors influencing those variables, complex modern IT systems are available to produce cash flow projections and plans. However, before venturing into complex systems, developing countries must first use and let a system of collecting relevant data for cash management settle down and project cash requirements even without the use of complex software. It is possible to reasonably do the cash flow analysis and planning without an off-the-shelf IFMIS and debt management system with a cash management module.

Prudent cash management depends on sound revenue forecasting and tight project expenditure monitoring. An active analysis of historical data of expenditure alongwith assessment of requirements of future spikes and then a trend analysis of the same to cull out data in a scientific manner shall be good enough to get the projections within the acceptable limits. Since quality and reliability of data, in many developing countries may be an issue, hence, trend analysis may throw some data which will be off the mark. But following the model consistently and using corrections in the output, trends may be predicted to near perfection. Detailed analysis of the actual expenditures and its timing and revenues generated against their respective projections is a must. There are several components of expenditure, which are predictable in routine e.g. salary expenses, pension payments. In many countries, for such expenditures, it can be quite sufficient to develop a model for annual expenditure on the basis of monthly expenditure. Variations across and within months would not be significant in normal course. Any abnormal or having bearing on cash flow must necessarily be monitored and factored in while projecting cash flow.

There are several expenses incurred by government which are very volatile. It covers procurement and delivery of wide range of goods and services. In such cases, analysis need to done after obtaining finer details of expenses, may be even going to sub-chapter or line item level. This will eventually provide data to see where forecast errors have occurred and then corrective measures may be taken to avoid them in the future. Good source of data for elementary seasonal trend analysis is the historical expenditure database and annual budget line item appropriation. This may give an insight on efforts made by the line ministry in making an effort to produce accurate forecasts. For much of the analysis, the input data for the forecast will need to be fine. The annual budget by chapter and sub-chapter of the economic classification should provide ample data to project and figure out errors in projections. This data includes annual budget appropriations, revenue estimates, and debt servicing figures. This data may be taken in spreadsheet form and the historical database can be used to produce seasonal trend profiles for each sub-chapter (or item) which is then overlaid on the annual budget appropriation to produce an initial estimate of the expenditure or revenue for the desired timeframe. As the year progresses, there shall be a mechanism to collect further information and cash plans from the agencies and the budget department.

In an excel spreadsheet, data captured may be projected using different trend analysis techniques, depending upon the nature of data and variations therein. Data of revenue and non-tax revenue as well as expenditure of last five years have been tabulated and trend analysis used to project budget estimates of next two years for Government of India.

Table-1
	amount in million INR
	as per actual data
	Budget			Actuals@
	Estimates			for
	2013-14*			April 2013
Revenue Receipts	10563310			78980
Tax Revenue (Net)	8840780			31930
Non-Tax Revenue	1722520			47050
Total Expenditure	16652970			1016640

Table-1 contains data of budget of 2013-14 and actual of Govt. of India in the month of April,2013. Table-2 contains budget data of 4 years prior to 2013-14.

		Table-2 amount in million INR
	Budget estimates (BE) as per actual data
	Budget Estimates
	2009-10*	2010-11*	2011-12*	2012-13*
Revenue Receipts	6095510	6822120	7898920	9356850
Tax Revenue (Net)	4975960	5340940	6644570	7710710
Non-Tax Revenue	1119550	1481180	1254350	1646140
Total Expenditure	9532310	11087490	12577290	14909250

Table-3 has this data and data of two future years derived through trend analysis. Chart-1 and Chart-2 has been prepared from these two tables. Linear trend is having very good level of reliability as value of R-squared is very close to 1.

						Table-3 amount in million INR
	Budget estimates(BE) as per actual data						BE as per trend
	Budget						Budget
	Estimates						Estimates
	2009-10*	2010-11*		2011-12*		2012-13*	2013-14	2014-15
Revenue Receipts	6095510	6822120		7898920		9356850	10258555	11344637
Tax Revenue (Net)	4975960	5340940		6644570		7710710	8545015	9495803
Non-Tax Revenue	1119550	1481180		1254350		1646140	1713540	1848834
Total Expenditure	9532310	11087490		12577290		14909250	16431740	18193802

					Chart-1
Chart of Linear trend of Budget Estimates: Linear projection                                                                                                  (amount in million INR)

 

					Chart-2
Chart of Budget estimates of linear projected values                                                                                                                      (amount in million INR)

 Table-4 and Table-5 has similar data for actual revenue and expenditure of the month of April during last 4 years.

				Table-4
				amount in Million INR
				as per actual data
		Actuals@		Actuals@		Actuals@		Actuals@
		Apr-09		Apr-10		Apr-11		Apr-12
Revenue Receipts		118460		129790		68800		191190
Tax Revenue (Net)		74620		100620		37740		152100
Non-Tax Revenue		43840		29170		31060		39090
Total Expenditure		662170		672260		871300		877090
			Table-5
			amount in Million INR
			as per actual data
	Actuals@		Actuals@		Actuals@		Actuals@		Actuals@		Actuals@
	Apr-09		Apr-10		Apr-11		Apr-12		Apr-13		Apr-14
Revenue Receipts	118460		129790		68800		191190		166360		182080
Tax Revenue (Net)	74620		100620		37740		152100		133660		150616
Non-Tax Revenue	43840		29170		31060		39090		32700		31464
Total Expenditure	662170		672260		871300		877090		981655		1066035

Chart-3

 Chart of Actual data with Polynomial trend analysis and projected values

(amount in million INR)

However, in the case of actual figures of April, variations are too significant; hence polynomial trend analysis has been used (Chart-3). It has given reasonably reliable projections with acceptable value of R-sqaured.

Chart-4

Chart of linear projected values of actuals

                                                                                                                       (amount in million INR)