Subir Gokarn: Aspirations and achievements

The spirit of competitiveness in politics should find expression in the public sector as well.

For the philosophically inclined, birthdays are an occasion to reflect on the gap between aspirations and achievements. Has it widened, narrowed, or stayed the same?

For most people, the gap will have narrowed on some fronts, widened on others. Understanding why this has happened is an obvious first step towards more favourable outcomes in the year ahead and beyond.

In this respect, a country is not much different from an individual. Independence Day is an appropriate occasion for taking stock of where we are as a nation on the aspirations-achievement gap and charting a course to narrow it down as far as possible.

Various speeches delivered around the country, from the Prime Minister's downwards, are sure to strike the "half empty, half full" note before going on to propose initiatives to fill the glass up a little more.

One theme that will, in all probability, not get the attention it deserves is the enormous divide in the performance of the private and public sectors. The adverse impact that this has on the overall productivity of the system and what this costs the economy in terms of growth sacrifice have not been fully appreciated.

The unfortunate economic reality today is that the state, far from being a partner and facilitator in quest for faster growth and productivity gains, imposes an extra load on the system.

Precious resources that could be used in far more productive ways have to be deployed by the private sector to offset the weaknesses in public delivery.

I've often been asked for my opinion on what the country's sunrise sectors are. My response, at first tongue-in-cheek, but becoming more and more serious over the years, is that anybody who decides to compete against the government has a great chance of succeeding. Four activities come easily to mind.

Equipment for private supply of electricity""generators, inverters, and so on""are needed to compensate for the inadequacies of the larger system. Private security makes up for the perceived failure of the state security apparatus.

Private education at every level continues to surge, while public institutions sink. And, while access to publicly-provided drinking water eludes an increasingly large proportion of the population, the number of brands and the sales volumes of bottled water continue to climb.

Ultimately, of course, all commerce is based on arbitrage. Private enterprise is a constant search for the next arbitrage opportunity, where consumers are willing to pay enough for a product or service to make it profitable to supply.

There is, therefore, no reason to be either surprised or judgmental about the private supply response in the sectors listed above, and unquestionably, several more.

The cause for concern is that in these and other sectors, the feasible private solutions are typically far more cost-inefficient than large-scale, aggregative provision that are more amenable to either provision by the state or an effectively regulated private monopoly, which we do not really have any significant tradition of.

At the root of these kinds of outcomes is the fundamental asymmetry of the reform process. Reforms have, broadly speaking, done two things for the private sector. One, they have increased the space in which it can operate legitimately, primarily as a consequence of the termination of licensing.

Activities that would have been considered "black market" under the restrictive licensing regime are now completely above-the-board and therefore amenable to participation from the organised sector.

Two, they have enormously increased the competitive pressure faced by producers in virtually all sectors, not just from domestic rivals but from around the globe.

The combination of these, by and large, induced outcomes consistent with the predictions of theory. There was a significant expansion of organised private enterprise in sectors in which it hadn't been allowed before and in most of these, competitive pressure forced players to increase productivity or die. The logic of market efficiency and its benefits to consumers works in most cases.

However, to get back to the arguments made above, there are many activities in which, if private provision is fragmented, however efficient it may be, it cannot neutralise the advantages of scale economies.

Why the reforms did not generate comparable forces within the public sector, which would have enabled it to keep pace with the private sector in terms of efficiency and thereby make the entire system far more productive, is an important question.

At first glance, the answer may seem simple. The competitive pressures and threats faced by the private sector simply did not manifest in the public sector.

But, let's remember that market competition in the private domain has its equivalent in the form of political competition in the public sphere. And, by any indication, political competition has intensified enormously during the decade of reforms. No party, at both the central and state levels, can take its tenure in government for granted.

So, the absence of competitive pressure cannot be cited as a reason for the failure of the public system to match the growth and productivity performance of the private sector.

The challenge for the government is to leverage the very powerful force of political competition into desired outcomes. While one cannot obviously transpose private sector solutions into the public realm, useful lessons can be learnt from the experience. Three elements will be critical to the design of a successful strategy.

One, a minimum level of "new blood" has to be infused at all levels. In government, new blood comes in either at the very bottom or at the very top, by way of new ministers. The vast in-between is rigidly insulated. Two, dividing lines between functional units have to be re-structured.

The objective should dictate the structure, not the other way round. Our system of ministries and the boundaries between them is, I believe, dysfunctional from this perspective.

Three, an information system is not simply an after-the-fact recording of activities; it is a way to continuously monitor the productivity of resources and ensure that they are being put to the best possible use. "Outlays vs. outcomes" is not just a conceptual debate; it lies at the core of a successful organisation.

Rather than making commitments that it finds increasingly difficult to deliver on, for the reasons provided above, on this Independence Day, the government should turn its attention and its energies inwards. Otherwise, the gap between aspirations and achievements for the entire country will only become wider.