T Thomas: Resumption of reforms

Agriculture, PSUs and FDI should be the priority areas

When P V Narasimha Rao was elected prime minister and was forming his Cabinet, he sent P C Alexander to Manmohan Singh to tell him to get ready to be sworn in as finance minister.

When Alexander went to Manmohan's home, he was asleep, having returned from an overseas trip. He was woken up and told that the new prime minister wanted him to get ready to be sworn in as finance minister. The only question Singh asked Alexander was whether he was going to be a sacrificial lamb!

India was teetering on the abyss of bankruptcy and the Reserve Bank of India was selling gold from its reserves to maintain our foreign exchange obligations. He was assured that he would have a free hand. Rao kept his word and Singh launched the economic reforms of 1991, which pulled India far from the abyss.

Thirteen years later a similar drama has brought Singh to the prime minister's office. Singh comes with no parivar or baggage from the past.

Although the media have highlighted that he is the first Sikh or non-Hindu to be appointed prime minister, I am sure he does not see himself as a Sikh. He sees himself as a professional who has the privilege of being called upon to guide his country forward. He will do so without compromising on his principles.

He is quite capable of giving up the post rather than compromising on his ethics. He is not a rich man and leads a simple life. When he was at a loose end after the Rao government fell, he went back to teaching at the university to earn a living.

Having an honourable alternative career is his strength. He can afford to be bolder than run-of-the mill politicians who tend to hang on to their positions. Now let us look at some of the possible priorities for reforms.

Agriculture: The first priority is the creation of employment in rural areas where 70 per cent of our population lives. The Indian farmer is poor and lives in squalid conditions. Yet Indian farming is cost intensive owing to the small size of holdings and the low level of knowledge of farmers, leading to low productivity.

Indian agricultural produce will not be able to meet international competition. When import quotas are removed, imports of cereals could flood our markets as is actually happening in the case of milk and fruits. So we have to improve productivity and the quality of Indian agricultural products and at the same time create employment opportunities in rural areas.

A very successful integrated rural development programme set up by Hindustan Lever Limited in the 1970s in the backward district of Etah in UP offers some useful lessons. The major challenge is to bring knowledge of modern agricultural practices to the village level through a mentor who will live in the village for a period of time and become part of the community.

This cannot be done by government officials who are traditionally mistrusted and feared by villagers "" nor do many of them have the right motivation or training except to exercise authority. We need bright young people with some idealism and the right motivation. One way of providing such a cadre is to use the agricultural universities in each state.

About 100 youngsters graduate each year from at least 40 such universities in India, that is, 4,000 graduates. It will be very useful for these young men and women to be asked to spend the last two years of their course actually living in villages and implementing an integrated road development programme.

Being from the same region or state, they will know the local language and customs. Companies will be willing to sponsor these graduates for the two years because they could be ideal recruits for the management of rural markets.

These agricultural graduates can advise farmers on what crops to grow, depending on the economics of prices and costs; how many crops to grow in a year; how to procure and use the best seed and fertiliser mix; how to prevent crop damage; how to manage the actual level of water; how to store and market the produce.

Today the average farmer is guided by his tradition and local knowledge. Our objective will be to upgrade his knowledge. By increasing the productivity of the available land we can create more employment and wealth in rural areas.

That, in turn, will create local industries to maintain agricultural equipment like tractors, drills, pumps and pipes and, later on, to assemble some of these. Farmers will want their children to go to school and be willing to invest in schools and roads and to improve sanitation and hygiene. With more wealth in rural areas, the whole scene can be transformed as has happened in Etah.

The public sector: The second priority for the prime minister is reforming public sector undertakings (PSUs). Singh is right in refusing to sell shares of profitable PSUs to strategic investors for two reasons.

Firstly, this can lead to the creation of private sector monopolies, which are even worse for the consumer than public sector monopolies. Secondly, the government will not realise the best value of the enterprise being sold. What is required is to bring PSU management more in line with that of successful private sector companies. The following steps could be taken for achieving this.

The government should create an Indian Management Service (IMS "" as distinct from the Indian Administrative Service) to recruit, train and develop managers for PSUs. The recruitment will be through the same process used for the IAS or the railways. This will provide a pool of talented managers who can be drawn upon to serve in any PSU.

The government should ask leading private sector companies to take on a few IMS candidates for training as part of their own management training programme. For instance, out of a total training period of two years IMS candidates may spend one year in the management training programme of one of the private sector companies. This will enable them to imbibe some of the culture and practices of the private sector.

Separate institutes of management should be set up to provide for training and development of IMS officers at different phases in their career. This will be patterned on what is done by leading private sector companies.

To attract the best talent, the remuneration of IMS candidates has to be comparable to that offered by the private sector. The remuneration should not be inhibited by what is paid to other government services. PSUs can introduce a stock option scheme for employees, the option to be granted only after a minimum period of service and on the basis of the performance of the PSU in terms of growth and profitability.

PSUs should be audited by recognised private audit firms rather than by the Comptroller & Auditor General. Their reports will be made available to the public and to Parliament.

The key to successful management of PSUs is to enable them to adopt the management practices of the private sector and not those of traditional government departments.

Foreign direct investment: A third area which needs attention is that of foreign direct investment (FDI), where India lags far behind other countries. With P Chidambaram as finance minister, the prime minister can afford to take some bold steps.

Speaking from personal experience as an investor in this country, I can say that the major remaining irritant to foreign investment today is not the policies but the procedures administered by the RBI. Today with foreign exchange reserves of over $100 billion, why should the RBI with its extremely bureaucratic procedures be in the picture at all? When one wants to invest in most other countries, their federal banks do not interfere.

What has to be ensured is that foreign investments are within the guidelines laid down by the government. This can be done by scheduled commercial banks. It will immensely facilitate foreign investments if Singh allows scheduled banks to assume the responsibility of ensuring that foreign investments are in conformity with government policies. This one change can easily increase FDI in India, probably by a factor of five, and can act as a great stimulant to our economy. It will also transform the image of India among international investors.