360° Context: The State of the Indian Republic

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Things could be getting even better. The government has the New Education Policy (NEP) 2020 with much fanfare. It is a much-delayed and long-awaited review of the status quo. My daughter in the eighth grade is enthused by the choice that the NEP offers. Yet, like all policies, especially in India, much depends on its rollout and implementation.

Why Engineering Is a Big Deal

Like most other parents, I follow the news and try to keep abreast of what is happening to aid my child’s decisions about the future. The last three decades have demonstrated the great equalizing power of education. Globalization gave all those who had a certain level of education the opportunity to compete in a global labor market. They found employability around the world. Some did better than others. Today, those who studied engineering are running not only information technology companies but also hedge funds.

In the Indian context, those with engineering degrees run everything from marketing and finance in the private sector to intelligence and the ministry of culture in the government. This raises an important question: Why do those who study engineering dominate in most professions in India?

The answer is simple: India defines merit exceedingly narrowly. In a country where labor is plentiful and jobs are scarce, anyone with half-decent quantitative ability strives to get an engineering education. Since 1991, rapid economic growth led to more job creation in India, but most applicants lacked relevant skills. Clearly, higher education was not equipping students for the job market.

Faced with such a situation, companies sought the most efficient way out. They focused on hiring students with a basic understanding of logic and proficiency in numbers. Other knowledge and skills were deemed superfluous. Companies assumed that logical and numerate candidates could always pick up other skills on the job. So, they focused on hiring engineering graduates for all sorts of positions. Others were deemed almost unemployable.

When I ask other parents about the educational choices they make for their children, their unequivocal answer is employability. These choices are based on personal experience. Parents want the best for their children. They want them to get jobs, not starve on the street. So, we send our children to coaching classes from the age of 9 or 10 to clear engineering entrance examinations.

Why Indians Study Abroad

We are not just spending on private coaching. We Indians are also spending $20 billion per year to send our children to universities in Anglo-Saxon lands. We do so because getting into top institutions such as the Indian Institutes of Technology (IITs) or Delhi University is difficult. The entrance exam for the IITs is the hardest in the world. Even the third cut off list for applicants to Delhi University requires candidates to have a minimum of 98%.

There is another reason we send our children abroad. Anglo-Saxon universities in the US, the UK, Canada, Australia and New Zealand offer higher quality education, better facilities and greater career opportunities. An education in Anglo-Saxon lands promises a better life for our children.

The decision to send children abroad does not happen after school. To study abroad, children study in schools that follow the International Baccalaureate (IB) curriculum instead of the CBSE one. While IB grades are preferred by Anglo-Saxon universities, they are not accepted by Indian institutions. So, parents have to make the choice of sending their children abroad at a rather early stage. It determines the schools they choose for their children.

In India, there are many school boards apart from CBSE. These follow different standards in their marking. Equalization committees have emerged to do the hazardous job of comparing apples to oranges. They do so by giving unearned marks to students who have written their exams for boards deemed to be tougher. This process is ridden with pitfalls and hundreds of thousands pay the price for this arbitrary equalization. It is little surprise that IB schools tempt Indian parents.

Higher education outside the elite schools in India is in a poor state. In 2018, 101 business schools applied to shop. Their student enrollments had dipped after their graduates had been unable to get jobs. The education these schools offer has few takers in the job market, leaving them with no option but to close.

To understand the hypercompetition for jobs in the country, it is important to remember that more than Indians, over 50% of the country, are under 25. Employment figures still run low despite past years of high growth. So, India’s young population has to compete ferociously to get “quality” education or good jobs. Not only jobs in medicine or engineering but also in sales or marketing are exceedingly difficult to come by. Hence, parents send children to Anglo-Saxon universities so that they acquire a good education and a decent job. It is for the same reason parents push children into engineering if they study in India.

Making everyone study engineering does not make sense, though. Recruiting most jobs from engineering schools is not a great idea either. The three “Rs” — reading, w(r)iting and a(r)ithmetic — cannot be the monopoly of engineering graduates. There must be space for young people in the labor market who have studied history or philosophy. We must come up with a more catholic concept that gives students a holistic education.

As a father, I hope fervently for reforms in this direction. I want my daughter to have more meaningful choices to study in India. I want her to be able to decide what to study as per her intrinsic interests, not the arbitrary dictates of an oppressive job market.

The views expressed in this article are the author’s own and do not necessarily reflect 51�Թ�’s editorial policy.

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“Regulatory and policy reforms needed to facilitate growth”

•       We have started believing that along with China, our turn has come to occupy the place at the top of the global economy hierarchy. Are we already a World power? India National Security Review 2010 placed India as the 5th strongest country in the World after US, China, Japan, and Russia. When analyzed deeper, India faces severe challenges of policy, investment and productivity. These need speedy and effective reforms.

•       The most important lesson from the global financial crisis is that it would be incorrect to say the days of regulation are over. Market based economic systems, particularly financial markets, need more regulation. However, the focus of this regulatory architecture should safeguard retail investors and customers, while at the same time foster growth and competition.

•       India has traditionally been perceived as having too many regulatory constraints. However, these shackles had been largely removed with the first phase of reforms in the early 90s. In addition, regulatory oversight in India has transformed from the administrative controls of the earlier phase into the current and more market-friendly structure of economic regulation.

•        India has been posting incredible rates of growth in recent years. However, there is a disconnect between the existing regulations and India’s growth. Moving forward on the second generation reforms has become critical, with a perception that policy reforms in India have stalled. Some of these reforms are administrative in nature, but broadly they require changes in the statutory framework governing the sector. Presently, we can identity some key policy reforms that are needed to address the constraints that are impeding investment and growth and generating negative sentiments. 

Financial sector / banking reforms

Banking 

PricewaterhouseCoopers (PwC) report titled 'Banking In 2050', states that India’s could become the third largest banking sector by 2050, after China and the U.S., leaving Japan, UK, and Germany behind . This is quite possible if the foundations of the mission are laid firmly now. Fitch ratings have stated India is better placed compared to China in regulating the flow of bank credit. India's regulatory environment has remained focused on controlling credit growth .However, the most pressing issue for banks in India is access to capital.  There is currently a cap on voting rights at 10% for private banks and 1% for public sector banks, which is deterring equity investors from subscribing to equity issues, given that they will not have the requisite “voice” in board decisions. The Banking Laws (Amendment) Bill 2011 seeks to align the voting rights with shareholding patterns. In addition, the Bill provides more flexibility for Public Sector Banks in increasing the limits of authorized capital and permits the use of additional instruments to raise capital. The earlier this is done, the better it would be.

            Insurance

•       Increased insurance cover is required to supplement the social security net, particularly to provide affordable life and health coverage for a wider section of the population. Being a very capital intensive business, the insurance sector needs access to large additional equity funds and domestic capital will need to be augmented by foreign funds. 

The proposed Insurance Laws (Amendment) Bill 2008, seeks to raise the cap on FDI (foreign direct investment) from the current 26% to 49% of paid up equity capital. The need to put this on the Statute Book cannot be overemphasized.

Similarly, in the domain of Pension Funds; the New Pension Scheme (NPS) needs to mobilize the massive pension requirement and potential in India, and there is a need to make the regulator a statutory entity in order to provide more certainty for investors. The Pension Fund Regulatory and Development Authority (PFRDA) Bill 2011, lays out the main components of the regulator’s structure, but does not cover foreign investment policies in the sector. This aspect would need to be covered comprehensively.   

Moving on to the capital markets, development of a corporate debt market, particularly the long term component, is critical for addressing India’s investment needs, especially infrastructural . While the main impediments – like widely varying stamp duties across states – have been known for a while, it is important to increase the participation of contractual savings institutions – insurance and provident funds – in long dated bonds. One impediment is the requirement of a minimum credit rating of AA for subscription to these bonds. Some selective relaxation of these norms to allow a lower ratings cut-off for instruments issued by infrastructure companies, or permission to banks to guarantee bonds, which will provide a credit enhancement, is necessary to bring in more investment funds into infrastructure projects. Development of commodities markets is critical to allow the hedging of input risks, to which Indian corporates are increasingly exposed. The Forward Contracts Regulation (Amendment) Bill 2011, proposes, among other things, demutualization of commodities exchanges, separate clearing corporations and further empowerment of the Forward Markets Commission. Implementation of this law shall address long entrenched regulatory impediments.

 Another current dispensation that hampers faster growth and financial inclusion relates to priority sector lending. Private sector banks are now aggressively expanding their reach in rural areas, using unconventional channels and new technologies.  Presently, an interest subvention of 1.5% and additional incentive of 2% on prompt repayment, is available only to public sector banks for agriculture loans upto Rs. 3 lakhs. This interest subvention and incentive should also be extended to all banks to create a level playing field. We note that private sector banks have expanded their direct agri lending from 7.5% of net bank credit in FY05 to 11.1% in FY10, which is close to the 12.8% levels of public sector banks.

Food security / agriculture policy reforms

Nearly 30 % population of India lives in poverty. This segment needs to be provided with foolproof food security. The prevailing high inflation, and particularly the high food prices, make them the most vulnerable. While availability of food grains may not be limited, the supply constraints are significant. The World Bank has recently introduced an Agriculture Price Risk Management (APRM) Product to provide upto $$4 billion to developing countries to protect them against volatile food prices. This product stresses the importance of innovative financial mechanisms to urgently address the risks of a serious global food deficit and price volatility. These include many market-based insurance and other mitigation instruments. Food supply logistics is an important aspect of increasing efficiency in the farm-to-fork chain. One aspect of this is to allow farmers more choice in alternative marketing channels for their produce, instead of the mandated selling to respective mandis (local grocery markets) run by the state-level Agricultural Produce Marketing Committees (APMC).  The Government of India had formulated a model Agricultural Produce Marketing (Development & Regulation) Act, 2003 to replace the Agricultural Produce Marketing Committee (APMC) Acts of respective states to end, or at least mitigate, the monopoly of the state-level APMCs and allow corporates to source produce directly from farmers. A Committee of State Ministers in-charge of agriculture marketing has been constituted in early 2011 to promote market reforms in agriculture. There is an urgent need to allow myriad flowers to bloom in this activity by breaking the monopoly of APMCs. 

Energy

•       India imports 90% of its crude and petroleum requirements; hence it is very exposed to crude price increases. It is imperative to increase efficiency in consumption of petroleum products, and move the prices of regulated products towards market prices. However, this move will expose lower income households to price shocks, and effective subsidy delivery mechanisms for fuel purchases need to be established. The present system of subsidies in this sector are inefficient, a half way house, measure not aligned to market. 

Subsidy delivery mechanisms

•       Food, fertilizer and fuel subsidies now constitute 16% of India’s revenue expenditure, having increased sharply in FY09. A transition to cash transfers or provision of entitlement coupons to deliver subsidies, particularly related to food and fuel, are likely to reduce leakage and bring better target delivery. An increasing transition to cash transfers of specific subsidies to directly target households can be increasingly feasible with the progressive rollout of the Unique Identification Number (Aadhar).

FDI

Coming to Foreign Direct Investments (FDI), it should be noted that FDI inflows into India had been slowing down significantly in 2010-11, whereas they had risen significantly for other emerging markets.

•       The Department of Industrial Promotion and Policy (DIPP) of the Union Government has recently issued a discussion paper proposing an increase in the FDI caps across the board to 49%, which, if implemented, will benefit sectors like insurance and modern retail, where FDI is capped at lower limits or are prohibited.

Land

Infrastructural constraints are the biggest and most significant factor impeding India's growth. If India has to reach the inflexion point, it has to make massive investment in this sector. Estimated investment required is over Rs 39 lakh crores over next 20 years.

Land – its acquisition and its titling are most crucial elements in the entire process.  Land acquisition has become probably the most contentious issue in the political economy of India. The Land Acquisition (Amendment) Bill 2007, redefines “public purpose”, requires corporate entities to acquire 70% of the land required, and pay adequate and timely compensation. There is a built-in value – added sharing provision .One of the reasons for real estate illiquidity – and consequently the lack of transparency – is the absence of a nation-wide title registry. Besides setting up a pan-India electronic registry of all immovable property, it provides for a resolution of disputes via special tribunals. The government would only retard development if implementation of this legislative measure is delayed.  

Mining and minerals and Environment

•       A “Go-No Go” zone classification for coal mines, introduced in 2009, represents an important dilemma for India. While an appropriate balance between the need to access minerals and preventing environmental degradation is desirable, the policy must be sensibly implemented. India’s energy needs for sustaining growth are enormous and will likely rely predominantly on coal. A cautious relaxation of the norm was permitted a few days ago with a Stage-1 forest Clearance given to a mine project in Chhattisgarh, indicating a pragmatic approach to resolving the problem.

Governance

•       Recent instances of inappropriate corporate practices have raised concerns about the corporate governance in India, which could have implications for investor perceptions of investment attractiveness, security and productivity. 

The Companies Bill, 2009 includes provisions for more detailed disclosures, greater responsibility for independent directors and a framework for resolution of insolvency, liquidation and winding up for corporate entities. This latter provision addresses long standing lacunae in terms of the difficulty of exit and closure of businesses. 

Today, as never before, benign forces are matched by more malign ones that are equally global. The world is full of "problems without passports”. If India has to achieve a centre stage in the global comity of nations, the debottlenecking has to begin now.  

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