Problems of reactive governance

There is no substitute for proactive steps to address problems in the economy

Governance can be classified into three broad categories — proactive, reactive and inactive. The National Democratic Alliance rode to power in 2014 on the back of a promise to provide better governance. Nobody then defined it as proactive governance. But the general expectation was that Narendra Modi will be more proactive in addressing the concerns and pain points for the people and the economy.

The obvious reference point was the inactive governance seen in the last few years of the Manmohan Singh-led regime at the Centre. Policy paralysis is a different name for inactive governance. What Mr Modi promised was a goodbye to inactive governance and replace it with proactive governance that meant quick policy intervention and remedial action without any delay.

Reactive governance lies somewhere in the middle of the governance spectrum, with proactive governance at one end and inactive governance at the other. Reactive governance appears a little better than inactive governance, but in fact it can be more harmful because the response to a policy challenge or a difficult situation can often be delayed. Instead of anticipating a problem and taking preventive as well as remedial steps in advance, reactive governance creates the impression of a government being responsible, but its very nature could result in the worsening of a situation or suboptimal outcomes.

Two developments last week suggest that the Modi government may have fallen prey to inactive governance. The failure to anticipate problems in time has led to delayed response and a flawed diagnosis has resulted in a policy package that is not likely to ensure the desired outcomes.

The Rs 70-billion sugar package approved by the Cabinet is aimed at helping the sugarcane farmers, whose arrears from the sugar mills have crossed Rs 220 billion. However, the package is not just for the farmers. It has turned out to be a bigger package for the sugar mill owners. And that is because the diagnosis of the problem confronting the sugar sector has not been appropriate.

A technological innovation in the sugarcane variety has led to a dramatic increase in its yield. Thus, sugar output this year has increased by almost 55 per cent over the 20.3 million tonnes output recorded in 2016-17. And thanks to the innovation in the sugarcane variety, the output next year too would continue to be high, resulting in much higher sugar production, compared to the annual demand of about 25 million tonnes.

An effective solution to the problem of overproduction would have been to link the sugarcane prices to those for sugar. Sugarcane prices, decided by the Centre and the states, need to be lowered so that sugarcane farmers get the required price signals to switch over to the newer and more remunerative crops at a time when there is a sugar glut in the country. Without addressing this basic problem, announcing a package for the sugar industry will have a limited impact.

Providing financial assistance to sugar mills to build capacity for processing molasses to produce more alcohol is a welcome move. But this is a step that should have been taken long ago. This suffers from the flaws of delayed policy response. This year’s move will have an impact, but it will be felt only after a few years. Worse, the decision to fix retail prices of sugar can be counterproductive, returning the country to the past regime of deleterious price controls.

Similarly, the decision to set up a committee on creating an asset reconstruction firm that could take under itself all the bad assets of stressed banks seems to suffer from the same problem of reactive governance. Trying out the idea of what is popularly called a “bad bank” after wrestling with the problem of stressed banks for the last four years appears to be a tired response.

The idea had been mooted earlier and was given up. So, is this attempt to revive the “bad bank” idea an outcome of the government’s desperation over the continuing saga of bad loans of public sector banks that are getting bigger every quarter? Why was the idea given up when it was first mooted? And what happens to the earlier plan, formulated right at the start of the tenure of this government, for Indradhanush or bank recapitalisation? Has governance become so reactive? As the Modi government enters the final lap of its five-year tenure, before the May 2019 general elections, it must explore how it can become more proactive and as far as possible avoid policy responses that are just reactive by nature.