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A thing of the past

Published in The Week, January, 19th, 1997

The planning commission has little role to play in the new environment The current debate about the actual level of poverty in India belies the real issue. Whether it is 19 per cent as Dr. Manmohan Singh announced a couple of years ago or 37 per cent as the Planning Commission now reveals, is beside the point.

If the Planning Commission was so concerned about using the Lakdawala methodology to measure poverty, why did it not have the gumption to question Dr Singh's estimates?

Nobody disputes the fact that poverty is still the deadliest predator that stalks the Indian masses. The real issue is the role of the Planning Commission in the new environment. Much has been said and written about the reform program. Yet, the Planning Commission has escaped attention! Is it relevant or appropriate to persevere with methodologies and institutions that are essentially based on the Soviet model of central planning that are 50 years old? Does the socio economic environment permit the rigors of five-year plans?

The Planning Commission is still unable to provide accurate analyses based on real time data. Providing estimates for the level of poverty in 1993-94, is, to say the least, hopelessly inadequate - akin to closing the barn door after the horses have fled.

So, is the Planning Commission a data collection and analysis body? Living in the statistical past is simply unacceptable in todays wired, information technology-driven economy. If it is a policy making group how can it make policies relevant for the dynamic present and future? The past is no longer an accurate basis for predicting the future because the global geo-strategic and economic fundamentals have changed. Adding to the complications is the phenomenon of time compression. As Toyo Gohten, Japan's former minister, said long term now means about 10 minutes!

Is the Planning Commission then a body that is supposed to allocate scarce resources optimally and channel them into various sectors of the economy? If that is so, the writing is on the wall: it has been universally observed and agreed that centralization has failed, state control of the economy results in high costs and that redistributive economics has failed. That is why there is a global shift from state domination to market domination. The state no longer dictates the flow of resources in most forward-looking economies; instead it is the collective decision-making of millions fuelled by the democratic impulse and based on the risk return and profit principles.

'Big brother' cannot and must not decide what investments must be made and where, except in a very few areas. In fact, only in those parts of the economy where the magic of the markets do not work must the government decide the flow of resources. In the majority of the economies market forces have proven to be the most efficient allocators of resources. Continuing with centralized allocation of resources is quite simply, perpetuating the sub optimal and therefore high cost misallocation.

Is all this just ideological hard sell or is this the way the global economy has evolved?

First, the global economy is today different from the static concept that our planners embody within their plans. To move our people onto a higher standard of living we have to think of the Indian economy as being an integral part of the global economy because national boundaries have been rendered irrelevant by technology and profound shifts have occurred in the definition of markets and manufacturing.

Markets today mean people with continuously changing needs, wants and specifications. This contrasts with the fixation that even many marketing professionals have with "place". Similarly, manufacturing no longer means a centrally located factory. Even a facility to assemble outsourced parts is becoming obsolete. In its place, is a truly global process spread across continents. Many times the product is produced and delivered at the customer's doorstep (information packages on Internet for example). Products are designed, produced and delivered in a process that combines the skill and productive capability of people and machines in many countries. Manufacturing today is a marvel of global communication, co-operation and logistics.

It will be correct to say that manufacturing too has shifted completely from place to process. Around the world many companies have evolved into virtual corporations, which are located in cyberspace. They move from project to project, forming and re-forming flexible teams of people with resources and production facilities changing with each project. Whether the projects produce tangible products like cars or intangibles like computer software, the manufacturing process is multi location and based on global alliances - all integrated with information technology.

The challenge therefore is akin to laying out the course of a motor rally. How do you get the rally to pass through your territory without disrupting traffic? Clearly, getting the great global manufacturing rally to pass through our country is highly desirable because it provides jobs, tax revenue and investment.

Secondly, international trade today is actually trade between parts of the same company! According to a recent article in SPAN, international trade is about $5 trillion a year. Significantly, the total sales of foreign affiliates of international companies is also very near the same figure. Even if some allowances are made for differences in the methodology of data collection and accuracy, what stands out is that the bulk of global trade is the aggregation of intra firm trade.

Thirdly, trade is the result of investment. In other words, if we want to create a trade surplus we must open ourselves to global capital. Because foreign direct investment is the engine that drives trade.

Foreign investment has to create productive capacity, only then can exports (sales to affiliates) begin. The more FDI we attract, the more companies will set up operations in India, the more they will sell to their affiliates abroad resulting in greater trade surplus. The traditional export led growth strategy has now been transformed into FDI-led growth.

What does this mean? Quite simply that the decisions are not with governments but in the hands of entrepreneurs, investors and managers united in their quest for profits and efficiency. There is simply no place for slow-moving bureaucratic institutions and exercises. Precisely why the public sector controls just about seven per cent of the GDP in the developed economies; the figure is twice this in the developing economies.

Reform and restructuring of the Indian economy is far too complicated to be left to ignorant (dishonest) politicians and bureaucratic bunglers. While the entire economy is being transformed it is incongruous that the government itself and its various arms (including the Planning Commission) are immune to change.

What we need is a new institution charged with this exciting, if awesome, task. Perhaps the Planning Commission could (with much pruning, downsizing and skills and technology up gradation) be converted into the Ministry of Economic Transformation (MET).

The MET would then be the single source of economic policy relating to reform, liberalization and privatization. It could create autonomous regulatory authorities that can monitor fair play in the markets (perhaps with constitutional protection against meddling in the Election Commission). Working along the same lines could be a Ministry of International Trade and Investment (a la Japan) that can grapple with all the complexities of intra-firm trade and foreign direct investment. The present resources of the Planning Commission can be allocated between MET and MITI.

These ideas are fine but will the established politico-bureaucratic nexus take kindly to any change in their status or power? Of course not! Yet we must pursue alternatives to the status quo. Perhaps the intensity of change and the heat of public debate will force the government to take a re look at the role of the Planning Commission. Meanwhile, only if the Planning Commission can design a blueprint that will reroute some global capital into poverty alleviation can its existence be justified. In any case, it is about time that a debate is begun on whether or not we should decommission central planning!

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