More reforms will treat the symptoms, not the disease

One of the big mistakes we make - both in the media and as a people - is to presume that any change must be reform. We also confuse announcement with action. We have the world’s best laws, but the worst implementation. We make new laws without studying how the old ones have worked. Not only that, we tend to negate the gains from one action with contrary moves in the other direction.

Take today’s key headlines - reforms on the economic and social front. On the economic side, we had the Union cabinet approving the Land Acquisition Bill, reducing spectrum reserve prices by 30 percent, creating a cabinet committee on investments (CCI) and okaying a new urea investment policy. On the social side, between government, Mayawati and a weak-kneed opposition, we are now faced with the prospect of a constitutional amendment to ensure quotas in promotions for SC/ST government employees.

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The last-named change is actually an attempt to throw all norms to the winds. It is intended to subvert a Supreme Court judgment which says quotas in promotions can be done only if a state can prove this with data. But our politicians don’t even want to take the trouble to make a case. They just want quotas - never mind whether it will actually serve the purpose of improving opportunities for Dalits in the higher echelons of the bureaucracy.

We don’t know why there are few Dalits at the top, but we are sure quotas will work. It is difficult to find a more bankrupt way of making new laws when old ones along similar lines have not worked for 60-and-odd years.

Next, consider the economic “reforms”. The government’s pink paper cheerleaders went overboard singing its praises. Thus Business Standard informs us that the government has pressed the “reforms pedal” without checking if its other foot has stepped on the brake. The Economic Times was bubbling over with this headline: “Quick OK for big projects, land bill signal swift govt.”

Words like “swift” and stepping on the “pedal” suggest that speed is more important that direction when it comes to reforms, whether it is economic reforms or social.

[caption id=“attachment_557111” align=“alignleft” width=“380”]  The government seems to be rushing into auctions driven by the need to raise quick revenues this year. AFP[/caption]

But consider how every reform action is counter-balanced by something that will negate or neuter the real impact of the positive change. Moreover, some reforms are meaningless without supporting changes in other policies.

A new cabinet committee on investment (CCI) is supposed to provide single-point clearance to large infrastructure projects costing over Rs 1,000 crore. Commerce and Industry Minister Anand Sharma even called it a “game changer” - a meaningless phrase unless you know what game you were playing earlier and what the new game will be after the reforms.

Were infrastructure projects stuck because rival ministries delayed decision-making or because of some other factor? Environmental clearance is said to be the main roadblock to power and coal projects, but does this mean the CCI can overrule environmental objections under the new regime? Was the problem speed, lack of transparency in norms, or something else? Depending on the diagnosis, the cure has to be different.

Now consider another piece of legislation - the Land Acquisition Bill - which will require 70 percent consent from landowners before acquisition for public-private projects, and 80 percent for private sector projects.

Will a “swift” government, even after the CCI is constituted, be able to over-rule its own new laws on land acquisition, which will now require more consent and hence more time? Land, anyway, is a state subject. If the prices to be paid are two times the market price in urban areas and four times in rural areas, how will any project be viable? Who will even come to the CCI for clearance with such costs? How is the CCI going to convince states that they must not delay land acquisition for big projects? Can the CCI replace states in decision-making? Or should states be co-opted into the CCI depending on where the project is to be located?

The real solution to the problem of delayed project clearances is not a CCI - though it may help marginally - but to have transparent norms and timelines for all clearances. If any clearance meets the norm, it should receive automatic provisional clearance. Only when it breaches the norm should the matter be escalated to the CCI to over-rule an established norm. The CCI should not be the default clearance node, but the final court of appeal for a project that cannot meet normal rules, but may still be important enough for the CCI to give it special clearance - like a decision to wipe out a forest because the best coal is found underneath. In this case, a CCI can prescribe what compensatory efforts need to be made before setting aside an environmental objection.

Even better, the best solution could well be to give states the right to clear projects in their territories as long as they adhere to a specific set of guidelines for environment and land acquisition. This would allow different states to experiment with different policies and over time we will know what works best. If states can decide on multi-brand FDI, why not on project clearances?

Conclusion One: the CCI is not the solution to the problem of clearance delays.

Next, consider the decision on incentivising urea projects. The cabinet decided to give 12-20 percent post-tax returns for new urea plants, and for the expansion or modernisation of old ones. The government expects to achieve two objectives with this move: attract fresh capacity investment of up to Rs 35,000 crore, and a gradual reduction in import dependence. No new urea plant has come up in India since 1999.

The idea sounds good, except for one small thing: Indian farmers already overuse urea compared to phosphatic and potassic fertilisers, and this imbalance is degrading fertile land. The prime issue in the Indian fertiliser industry is the excessive subsidisation of urea compared to the other fertilisers. The total fertiliser subsidy budgeted for 2012-13 is around Rs 60,000 crore.

If the government is going to guarantee higher returns on urea plants without raising market prices of urea (currently capped at Rs 5,360 a tonne), the subsidy bill will go up, and farmers will use even less potassic and phosphatic fertiliser - and make a bad situation worse.

Conclusion Two: The lopsided effort to bring investiment into urea without fixing the subsidy issue is going to make a bad problem worse.

The third major decision concerns a reduction in 1,800 Mhz spectrum price to entice bidders. In the November auction, no bids were received for Mumbai, Delhi, Rajasthan and Karnataka due to the high reserve prices. Since these circles accounted for half the expected revenues from the auction, it turned out to be an overall flop.

There is little doubt that the old reserve prices were a bit out of whack, where circles with similar revenue potential were priced quite differently.

As _Firstpost_ noted earlier , the reserve price per Mhz was Rs 693 crore for Delhi and only Rs 306 crore for Tamil Nadu, when their revenue potential was similar. Mumbai and Karnataka also had similar revenues, but the reserve price for the latter was less than half that of Mumbai.

Fine-tuning prices due to lack of bids makes a lot of sense, but a flat 30 percent cut in all circles sounds arbitrary.

The government seems to be rushing into auctions driven by the need to raise quick revenues this year. It should actually focus on creating a level field for all players and put in place a policy regime for the long-term growth of the telecom industry. The latter goal would call for a slower approach to auctions and prices.

The full telecom policy is not in place. It is being put in place bit by bit, with crucial decisions on mergers and consolidation, liberalisation of spectrum (use of any spectrum band for any service), norms for renewal of expiring licences, and refarming of 900 Mhz spectrum, still left largely undecided.

Conclusion Three: When short-term revenue considerations trump the need for a clear and sensible policy, no amount of tinkering with spectrum reserve prices will be seen as fair and sensible in hindsight. The grumbling in the industry will continue.