Singapore and the legacy of Lee Kuan Yew

I was in Singapore on the day of Lee Kuan Yew’s cremation. As the Founding Father of Singapore he was the longest serving Prime Minister from 1959 to 1990 in recent history. Till two years ago even at the age of 89 he was active in the policy domain. Narendra Modi has done India enormous service by participating in his funeral. We even had a national mourning on Sunday. These gestures have made an indelible imprint in the minds and hearts of Singaporeans. George Yeo the former Foreign Minister, with whom I spent some time, told me how deeply touched they were and how indebted they will remain for this symbolic act. Modi’s instinctive decision suggests the high leadership qualities. Leaders emerge not merely from experience but from leadership instincts. Choosing the right moments and the right occasion is what decisive leadership is about. Everyone knows that the relationship between Mrs. Indira Gandhi and Lee Kuan Yew was not particularly warm. India remained contemptuous that a leader of a small city state, successful no doubt, should not preach economic liberalization to a complex country like ours. We viewed his advice with scepticism. Lee Kuan Yew himself regarded India to be a disappointment for not grasping the opportunity which could transform India. He somewhat changed his views following our liberalisation in the 1990s.

In the last 20 years, the India – Singapore partnership has deepened significantly. India for them represents a large demography, unsatiated demand and a market for managerial skills and technology within a functioning democratic framework.    

It is no secret that after Singapore’s partition from Malaysia in 1965, Singapore has rapidly transited from a third world country to a developed economy. Its per capita income rose from US $ 540 in 1965 to US $ 54,040 in 2014. It has repeatedly topped the list of the Ease of Doing Business and is an example of successful Public Private Partnership. This is even though many regard Singapore as a family run concern.  Notwithstanding timely elections and a functioning Parliament it has suppressed individual liberties, curbed the media to enforce discipline and secure productivity gains. The younger segment has persistently resented these curbs. In a country with a total geographical area that does not exceed 700 square kilometers and a population of 5 million which is ageing, persistent immigration has caused social unease.

Broadly speaking, the Singapore success story has four lessons for India.

First, that it is possible to improve productivity and growth in a State run enterprise, if given autonomy, domain knowledge and best technology solutions.  Singapore Airlines, the Changi Airport and important infrastructure projects are owned by Temasek- a public sector company. Making public sector run efficiently and principles underlining their efficiency and productivity are worth replicating.

Second, Singapore stands out as the shining example of urban planning and water management systems.  Not a drop of water is wasted. All water which is consumed is recycled from sewage and effective treating of rain water.  Water conservation systems and urban planning are relevant for us as we grapple with problems of persistent water shortages and unplanned urbanisation. Singapore is the best Smart City one can think off. Chandra Babu Naidu has been quick to recognise this and ask Singapore to help in building its new capital at Amravati. We could do so for the cities and give more tangible content to SMART Cities.

Third, China is often quoted as an outstanding example of what may be called Controlled Capitalism. Fostering the private sector culture of innovation, technological upgradation, vastly superior managerial skills and combining them with public resources have created models of Public Private Partnership from which we need to learn. India is seeking to re-jig its Public Private Partnership model in terms of risk assignment, eliminating the odour of crony capitalism in exploiting natural resources and securing appropriate benefits to all stakeholders.

Fourth, the transparent administrative system in Singapore in framing its labour laws has lessons for India where reforms in Labour Laws have now rightly focused the attention of policy makers. Also, while collective bargaining power of Trade Unions in India detracts investments, the Trade Unions in Singapore instead   use the collective bargaining to improve education and other social services for its members.  

Finally, emphasis of Singapore and its overarching theme, investment in Human Resource Development, inculcation of skills, and payment of high wages to public servants to obviate temptations of corruption have significant lessons for us.   

True, Singapore is a city-state. Even more true, it neither has the demography nor the complex conflicts of language, caste and religion as in a polity like ours. Yes, small is not always beautiful but small city-states like Singapore have multiple lessons for us. The legacy of Lee Kuan Yew will be India’s constant reminder of its missed opportunities, more importantly of misplaced arrogance and decisive inability of our political leaders to readapt our economic and social strategies till compelled to do so by our economic crisis has been our decisive disadvantage. It is never too late to learn and we have successfully course corrected. In forging deeper partnership with Singapore we are drawing the right lessons from the legacy of Singapore’s Founding Father. 

End of Neo-Colonialism

The babel around the Budget and the XIV Finance Commission and subsequent comments and analyses have now ebbed. There are some States and stakeholders who are critical based on inadequacies of allocation in the social sector. But there is a consensus that the Budget represents a credible balancing act and gives a decisive momentum to the economic upturn which has already commenced. Thomas Sowell has said “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” So which lesson did the Budget pursue?

In retrospect, there were some overarching policy options to leverage that the Finance Minister had.

One, the classic choice: growth versus inflation. How much of fiscal flexibility was acceptable to enhance public outlays in infrastructure – railways and highways? The budget has adhered to the path of fiscal rectitude by meeting the fiscal deficit target of 4.1% this year.  It has postponed the terminal fiscal deficit target of 3% by an additional year with somewhat higher intermediate targets. The rating agencies prefer a closer adherence to the fiscal roadmap.  Of course the new time path must be adhered. I have for long argued that parliamentary approvals must be ex-ante than ex-post. The recommendation for a Fiscal Council contained in the Finance Commission’s recommendations is sensible.  This along with the new Monetary Policy Framework Agreement between the Finance Ministry and the Reserve Bank of India would act in congruent ways. It will ensure harmony between monetary and fiscal policy and thus Mint Street and North Block.

Two, subsidy rationalisation. There are significant gains in rationalising petroleum and fertilizer subsidies by de-regulating petrol and diesel and moving over to the Aadhar based LPG subsidy.  Further action is needed on fertilizers, particularly Urea. There must be pari-passu progress as JAM (Jan Dhan-Aadhar-Mobile) gathers momentum.

Three, congenial external environment to be harnessed. Oil prices have dramatically declined from $82 to $59 with soft commodity prices. The current account deficit is acceptable even though in the long run sluggish export behavior needs innovative action beyond conducive exchange rates.  We could have used this opportunity to create greater fiscal space for the future. Public debt could have been retired or a Consolidated Sinking Fund for amortisation of debt created. The Finance Commission suggests this can “tide over, roll over risks and the weak cash management practices.”. A middle path has been preferred. Substantial benefit has been passed to the consumers enhancing their purchasing power, allowing oil companies to recoup some losses and raise revenues to meet fiscal targets. Given the opportunity, this must be pursued.

Four, the XIV Finance Commission’s recommendations. There is overwhelming precedence that on devolutions they have been treated as awards than recommendatory. Consequently, total devolution to the States is now 62% of which 42% is from common divisible pool of taxes. The rise in tax devolution to States and the Non Plan grants to local bodies together represent a sharp cut of ’206292 crore from the Centre’s resource block. In the shrunken resources for the Central government the funding pattern of schemes has under gone a structural shift.  The Budget at a Glance again highlights the middle path. It classifies public outlays in three categories – schemes to be supported by the Union,  schemes to be continued with change in sharing pattern and those fully de-linked from Central support. The major flagship programmes of the government remain in the Union list like the Sarva Shikaha Abhiyan, MGNREGA, Pradhan Mantri Gram Sadak Yojna. There are others which would be financed with a changed sharing pattern. Schemes de-linked from Central support, leaving it for the States to decide are rather small. The most contentious being the Backward Region Grant Fund to Bihar, KBK and Bundelkhand.

There has been misplaced criticism that social sector outlays have been drastically pruned.  In making such comparisons a methodological error has crept in.  Analysts have compared the Budget Estimates of 2014-15 with the Budget Estimates for the current year. Those familiar with public finance know that normally the comparison is between the RE (Revised Estimates) with BE (Budget Estimates). Such comparison would suggest that allocations have been kept more or less intact. In the case of Integrated Child Development Scheme (ICDS) the reduction is sharp, but the pattern of funding is yet to be decided.

Thus the Budget and the Finance Commission are two sides of the same coin. It emanates from the design and conception of a new financial architecture of Centre-State relations. It is a giant step in promoting federalism where much larger untied resources become available to the States for selecting, designing and implementing programmes best suited to their needs. The Government had little option given the shrunken envelope after accepting the Finance Commission’s recommendations.  After all you cannot have the cake and also eat it. States cannot have both the cake of large untied resources and eat the Centrally Sponsored Schemes as originally conceived.  One can argue of whether this was the best approach or could the recalibration have been somewhat different? 

Will this new model of Fiscal Federalism work? There are inherent risks but also existing opportunities for Team India. The risks are well known if the State Governments act irresponsibly or promote fiscal profligacy. But in the end, the Government at the Centre and the States are judged by the improvement and development of life quality by the Electorate whose periodic mandate they seek.

The new fiscal architecture eliminates the form of neo-colonialism like what Rudyard Kipling described as the White Man’s Burden  viz. the Centre knows what was good for the States. A new social compact between the Union and the states has been ushered.

Thus, the adoption of the XIV Finance Commission’s recommendations and the Budget reflect that the Government has accepted both, the first lesson of economics and the first lesson of politics. A credible balancing act is what the budget is all about.

This Dividend Will Be A Cracker