Suman Bery: In search of coherence

India deserves to know what its public sector is meant to do.

It is a truth universally acknowledged that the terms of economic debate in India are, for better or worse, set by the Congress Party.

This may be considered a surprising statement, given its long recent period in opposition, and the battering it has received from Hindu fundamentalists and from lower-caste and regional parties.

The major turning points in economic policy have all been on the Congress' watch. These include the 1956 Industrial Policy Resolution (why no Golden Jubilee celebrations?); the 1966 devaluation; bank nationalisation in 1969 ushering in "garibi hatao" (end poverty); the reopening in 1985 by Rajiv Gandhi; and the renewed legitimacy accorded to private wealth and property by Narasimha Rao and Manmohan Singh in 1991.

Fifteen years on, the task at hand is to redefine and modernise our public sector. At roughly the half-way mark in its five-year term, what is the record, in deeds and words, of the UPA government, led by the Congress, on this vital challenge?

Several stimuli provoke this question. Both in the launch of the World Bank's latest Development Policy Review and more grippingly at the NCAER/Brookings India Policy Forum workshop, Lant Pritchett and his associates painted a truly horrifying picture of the way in which our government schools are failing those hapless enough to attend. The response is predictable: all those who can, are fleeing to a largely unregulated private sector. The situation in public health is little better.

The heart of the problem is a system of pay which is economically inefficient but politically deeply entrenched. Most economists would agree that there is a strong theoretical case for public sector provision in the social sectors. Few would agree that the present system is worth keeping.

Second has been the letter from the finance ministry requesting public sector bank (PSB) boards to "review" recent lending rate increases pursuant on the tightening of monetary policy by the Reserve Bank of India (RBI) at the end of July. (As a shareholders' representative elected to the State Bank of India central board, I must declare my direct interest in this matter.)

Of the RBI's many accomplishments over the last decade, one of its proudest (and hardest-won) has been the shift from so-called direct to indirect instruments of monetary policy.

The heart of this achievement is the grooming of the so-called "transmission mechanism" by which central bank interventions influence the larger economy. As noted in an earlier column, putting this into place has taken patient work over at least the last three Governors (Rangarajan, Jalan, Reddy) and a number of markets (money, public debt, foreign exchange). This effort has proved its worth in the sophisticated and relatively painless way in which India has managed the surge of foreign exchange that has washed up on our shores since 2001.

It is an unusual understanding of central bank autonomy which permits the central bank to take monetary policy action and then attempts to frustrate its goals through direct intervention. At the same time it must be admitted that in concentrated banking systems (UK, Canada) fireside chats between the authorities and the heads of the main clearing banks were, at least in the past, not unknown.

The urge to intervene arises perhaps from the concern for collusion and the absence of competition. The right response is privatisation combined with regulated entry. Since the first is ruled out politically, the second has to go slow, as per our four-year "road-map" for the entry of foreign banks.

A second possible response is to have an effective competition authority to examine whether the banks as a whole are engaged in anti-competitive pricing behaviour. Unfortunately, our Competition Commission is ensnared in intramural fights between the bureaucracy and the judiciary. Whether, once constituted, it would be allowed jurisdiction over banks in general or PSBs in particular is unknown, but must be deemed unlikely.

What is clear is that a ukase from the finance ministry, applicable only to the PSBs, is an inefficient and ineffective response to cartel-like behaviour, if that is indeed the underlying concern. While the appeal to individual bank boards is welcome (involvement in selection of bank CEOs should follow), it is not the most obvious way to curb exercise of market power. And, so far from maximising value for the public, in whose name the government allegedly acts, arbitrary intervention condemns these organisations to a slow death as their shareholders flee, their profitability is reduced and their ability to raise capital is impaired.

In fairness, it must be admitted that this government also has important achievements to its credit. Bloody, and perhaps not easily replicable, concession agreements for the Delhi and Mumbai airports were forced through. To my knowledge this goes beyond what China has attempted. Much work has gone into articulating the framework for public-private partnerships (PPPs) in other infrastructure sectors as well.

India urgently needs to redefine the public-private boundary in the way that the UK, Australia and Canada did in the 1980s, and the transition countries of Eastern Europe did in the 1990s. Doing so requires both conceptual and political work.

An ideal opportunity lies in the redraft of the Approach Paper to the Eleventh Plan, discussed by the Deputy Chairman with economists late last week. The intellectual fire-power and political diversity encompassed by the members of the existing Commission are formidable. They should use the platform of the Approach Paper to articulate the need for a new charter for the public sector, both in the interests of public sector employees and the public at large.

Elements of such a charter could include a rigorous, independent evaluation of major centrally sponsored schemes; assistance to state governments in similar ventures; and a model code of conduct on the relationship between ministries and public sector boards to be enshrined in their corporate governance commitments. Once articulated and debated, Mrs Gandhi should be persuaded to take these ideas forward as the charter of a revived Congress-led UPA with modern centre-left ideas, and as a basis for the Sixth Pay Commission.

Her party owes the country this debate. In doing so, it would be true to its history.

The author is Director-General of the National Council of Applied Economic Research (NCAER). The views expressed here are personal