Sunday, August 7, 2016

GST Needs Infrastructure to Succeed

But that is just the starting point. India needs to think strategically about how its large market can be served.

A recent article on the spate of reminiscences about economic reforms since 1991 characterises them as manifestations of the Blind-Men-and-the-Elephant paradigm or the Rashomon Effect.1 Both address the difference between perception and reality, and how each player’s experience of the same events is from his/her unique perspective, which can be different from everyone else’s. So, even if the reminiscing is accurate, no single tale captures all of reality. This is the story of India’s infrastructure. It is as though diverse descriptions lack the organising principle of a systems perspective, an overview of the totality of interrelated circumstances and events.  

There are two resulting insights for future reforms: the need for a conscious integrated-systems approach, and getting the fundamentals of infrastructure right for a solid foundation. A third, unrelated, insight arises from our balance-of-payments situation: the need to strategise for India’s domestic market because of the prohibitive cost of imports in a large and growing economy which relies on energy imports. 

The need for infrastructure was an early refrain, acknowledged episodically, and repeated at intervals. Given the vast scope of our requirements, and the ways we have gone about it, this is simply not enough. Our approach itself remains a work in progress, not effectively addressed so far. We can’t have a burgeoning services sector without good infrastructure. The recent flooding and gridlock in the service hubs of Bengaluru and Gurgaon demonstrate what’s wrong. Manufacturing can’t flourish either, nor can any other activity. They all need access to good infrastructure. 

Some advocate the primacy of services for growth, questioning the manufacturing initiative. No doubt services will remain the major growth engine for the foreseeable future, enabling considerable employment, provided the infrastructure supports training and competent, efficient functioning. We’ll need commensurate improvements in security, and law-and-order, difficult as that may be, to capitalise on the potential for tourism and travel. But uncertainties about the desirability of manufacturing in India are misplaced, because without more effective domestic product development and manufacturing, the services potential will be held to ransom by the increasingly high imports, especially of high-technology products required to support that growth. A market with this level of demand and growth has tremendous scope for domestic production for many products, provided (a) the policies and (b) the infrastructure facilitate production and supply.  

Even sweeping changes in policies such as the single goods and services tax (GST) will have their full impact only when infrastructure supports and facilitates its application. For instance, without adequate communications and logistics, much of the large and growing Indian market will still not be effectively served. This applies across all areas of economic activity, for demand as well as for supply, whether for health, education, entertainment, production and delivery, products and services through e-tailing or brick-and-mortar, tourism and travel, financial services, or IT-enabled services for domestic and external markets. It also applies irrespective of whether the mode of organisation is large scale, or small and entrepreneurial. 

Digital connectivity greatly facilitates efficient deployment of other forms of infrastructure as well. All connectivity does not need to be broadband because apart from the present benefits that accrue from voice links, many smart applications are possible with narrow-band connections in the evolving arena of the Internet of Things (IoT).2 The IoT often involves relatively small amounts of data going both ways, usually from machine-to-machine, over extended periods, using limited bandwidth and power with various technologies, and in places that may be hard to reach. In India, we’ve seen tremendous growth in voice with restricted data capacity, with more limited access to broadband for high-speed data. We’re also familiar with the constraints this imposes, starting with the limitations for education and health care services, and hence the need for broadband for these and much else. This despite the statistics on Internet use, which show India as being second globally as of June 30, 2016, with over 462 million users, with China being the first with over 721 million, and the US third with nearly 287 million.3 These figures seem to mask the inadequacy of our services; in network readiness, India has slipped from 89 (out of 143 countries) in 2015 to 91 in 2016. Instead of focusing on figures about assets that may not function, the Digital India initiative needs to emphasise the delivery of high-quality services to users through changes to administrative policies (i.e. where technology is not the constraint, but the rules and market structures are), and to double penetration from the present 36.5 per cent to cover 920 million users. 

Even 25 years on, the crucial insights of (a) a coherent overview and objectives, (b) a foundation of infrastructure, and (c) strategies to develop local sourcing for domestic markets, aren’t sufficiently emphasised in our reforms. Many key players act as though they are in a bubble or silo, apparently unaware of interlinked realities. One aim of the reforms was – and needs to be – to establish effective infrastructure and institutions. While beginnings are made, these are not carried through to completion, to become fully functional.  

Apart from establishing a solid base of infrastructure through synergistic and path-breaking steps in changing our rules and removing constraints, we have to think strategically about our large market and how it can be served, instead of being suborned by simplistic assumptions of comparative advantage, of being able to buy what we need from wherever it’s produced, or allowing 100 per cent foreign direct investment (FDI). Of course we must import and allow FDI on reasonable terms, but while trying to consciously develop and sustain an approach such as China has done in building Huawei, or Brazil in building Embraer. This is highly desirable for our communications and aviation sectors, despite all the cons of industrial planning. Not that this approach is without risk, considering what happened to Bell Labs and Lucent, now taken over by Nokia Networks. But, the consequences of not planning and acting on such initiatives are likely to be much worse.

Shyam (no space) Ponappa at gmail dot com