Subir Gokarn: The catch-up state

It is high time the public sector started playing catch-up with the private sector.

This column marks ten years of my writing for this newspaper. Over a period characterised by a number of occupational and locational changes, writing this column has been a challenging, rewarding and comforting constant. I would like to thank all the readers for their attention over the years and members of the Business Standard team, past and present, for the opportunity and support.

Looking back over the decade, a number of themes have recurred fairly regularly, even as the contexts in which they have been explored have changed, sometimes dramatically. From my perspective, the enduring issue over the last decade has been the attempt by the Indian state to redefine its role and relationships with the rest of the economy. In many areas, the process has been marked by a reasonably coherent strategy and has, sooner or later, ended in a collectively positive outcome. In others, the redefinition has been driven by compulsion rather than intent and, as a result, been messy, even chaotic.

In the former circumstances, the private sector has generally responded powerfully and productively to the opportunities provided by the new environment. In the latter, lack of clarity and predictability about the intentions of the state has typically left a vacuum, which the state is unable and the private sector unwilling to fill. In many of these, a disproportionate share of the burden appears to have fallen on the less affluent. If there is one lesson we have collectively learnt over the last decade, it is that the relationship between the public and private sectors straddles a fine line between substitutability and complementarity.

Let's accept the fact that a sustainable balance between substitutability and complementarity was never going to be found with a simple wave of the reform wand. Theory and lessons from the experience of other countries are necessary inputs, but they can hardly be expected to cover all the angles and complexities of our specific conditions. As a consequence, they have been particularly useful in developing the blueprints for gross changes. The economy has benefited enormously from the application of these blueprints to trade, industry and the financial sector. One could argue, of course, that there are still many things remaining but the momentum generated by what has been achieved so far not only virtually guarantees irreversibility, it also generates pressure that will induce the remaining changes sooner or later.

However, when it comes to activities like infrastructure or social services, for example, historical baggage, the current state of affairs and a host of other issues like multiple jurisdictions have resulted in the vacuum between public inability and private unwillingness. Lessons from theory and others' experience have had very limited impact here because they do not address many variables that play a role in the Indian context and collectively resist what looks like a good, practical approach on paper. The result is dashed hopes and expectations and an intensifying quest for private solutions, which, being relatively expensive, tend to aggravate the economic divide rather than mitigate it.

As much breathing space as these private solutions have provided so far, it is inherently limited and cannot sustain forever. In other words, the realisation of gains from substitution between the private and public sectors is constrained by the failure to appreciate and act on the many complementarities that support and reinforce that process.

From this perspective, there is likely to be a significant shift in emphasis in the economic debate in the coming years. While the debate during the last several years has been dominated by a sense of satisfaction, even celebration, of the many achievements of the private sector in response to the opportunities as well as threats that it has faced, that theme has, in my opinion, run its course. The next phase will be characterised by increasing dissatisfaction about the widening gap between private sector accomplishment and public sector delivery and unkept promises. Perhaps the 2004 election outcome represented the beginning of this shift; continuing inertia will only intensify it.

In short, the debate will shift from substitutability to complementarity. It is high time that the public sector started playing catch-up with the private sector, to both ensure that the momentum generated by the latter is sustained and the benefits of its performance become more widely accessible. Easy to say, of course, but what needs to be done, and more importantly, can be done differently to facilitate the catch-up?

The best lessons for this will come from the experience of our own private sector. This is obviously going to be a major trend in the coming years as the private sector gets more and more involved in the process of recommending structural changes in the public sector. There have been important examples of this in recent years, but most of them have met with strong resistance, usually a triumph for the status quo. But, this inequity cannot continue; private sector concerns gain an increasing edge by virtue of the fact that their achievements are threatened by the refusal of the public sector to change. Obviously, the change blueprint has to be specific to each situation and consistent with the objectives and the resources available. But, a few general principles are worth considering.

One, identify the binding constraint. If the objectives are important enough, the organisational structure must be subordinated to them. So much of government failure is due to the difficulties of operational co-ordination and a solution must be found at this level. However, if the structure is considered sacrosanct, then the objectives must be redefined to realistically reflect the capacity of the structure. Each alternative will be appropriate in different situations; the challenge is to figure out which is which.

Two, diffuse and decentralise the capacity to change. A system of governance with a centre of gravity in New Delhi is out of tune with the wide and increasing diversity of local conditions, which require local knowledge and understanding for feasible solutions to emerge. As suggested above, theory and comparative experience will only get us so far.

Three, insulate the forces of change firmly enough to allow them to keep the pressure on but not to the point of alienating them from the day-to-day functions of the organisation. More importantly, individuals must rotate relatively frequently between the two sets of roles.

I look forward to observing and commenting on the process for the next ten years, or at least as long readers continue to pay attention!

The author is chief economist, Crisil. The views here are personal