THE three population giants in Asia – China, India and Indonesia – have now in place
three leaders who are deeply committed to reforms – namely Xi Jinping, Narendra
Modi and Joko Widodo.
What is remarkable is that all three leaders share a common background and
experience in governing cities or provinces away from the central government. They
represent a new generation of leaders that understand the importance of bottom-up
and decentralized development. Large countries like China, India and Indonesia all
face the common problems of large population and dispersed geography, with
different parts of the country at different stages of development, diverse cultures,
languages/dialects and historical outlook. Hence, centralization may add to national
cohesion, but may also slow down the ability of different regions and cities to
experiment and innovate to become new growth poles and agents of change.
All three countries have histories of strong central governments, but the Chinese
experience has shown that competition between provinces and cities have helped the
growth process, but also created new problems. Both China and India since 1949
and 1947 respectively have very strong planning background, but one of the first acts
of Prime Minister Modi was to dismantle the Indian Planning Commission (established
since 1950). In its place, Modi set up the National Institution for Transforming India
(NITI Aayog), which will include chief ministers from the various states to reflect the
shifting power balance between the center and the states.
China coordinates national development through a powerful National Development
and Reform Commission (NDRC), which ensures that the five year plans (and annual
budgets) at every level of government, from county to province, are consistent with its
Five-Year Plans. Both China and India are in their current 12th Five-Year Plan (2011-
2015 and 2012-2017 respectively). China’s 13th Five Year Plan (2016-2020) will put
in place many of President Xi’s fulfillments of the China Dream.
Although India’s GDP and per capita income, at US$1.9 trillion and US$1,499
respectively, are roughly one quarter that of China, the speed of Indian GDP growth
has been rising, whereas that of China is slowing. With much more favorable
demographics and benefiting from abundant cheap labor and opening up, some
analysts think that India’s growth rate will exceed that of China sometime before 2020.
Modi clearly has a vision and mission for India to catch up with China in almost every
aspect of economic development.
Much will depend on his leadership to drive through reforms that were previously
stalled for various reasons, one being the formidable Indian bureaucracy – what
some pundits call “the licence Raj”. The Indian bureaucracy is so famous for
licensing everything that one cynic suggested that the IT industry could not have
succeeded if the civil servants had understood what it was all about. At the heart of
the centralization-decentralization debate is the extent to which local governments
have revenues and powers to decide on their own where and how to deploy
resources to best “fit” their own development targets.
The Indian government inherited its civil service structure from the British after 89
years of colonial rule, but some interesting institutional innovations deserve closer
examination for adaptation in other developing countries facing similar problems of
fiscal management. One such institutional innovation is the Finance Commission, an
independent commission of experts to advise the government (including the provincial
governments) on how to raise revenue and share that revenue. The commission’s
term of office is five years, chaired by an acknowledged authoritative chairman.
It may be serendipity, but clearly the stars are aligned for Indian development,
because the 14th Finance Commission (2011-2014) was chaired by Dr Venu Reddy,
former governor of the Reserve Bank of India, who not only had the reputation of
helping India avoid the global financial crisis of 2007-2009, but also vast experience
having been top civil servant at the Ministry of Finance, and also at the provincial
level.
His report coincided with Modi’s vision of developing India from the bottom-up.
Because India had low tax revenues owing to low tax rates, its ability to spend on
development and infrastructure is currently less than one third that of China.
The 14th Finance Commission recommended new ways to raise state and local
government revenue, either through municipal bonds, increasing tax rates (on
professions, property and mining), and/or imposing tax on new sectors (vacant land,
betterment and entertainment).
The new Indian 2015-2016 budget adopted many of the commission’s
recommendations, aiming to increase government revenue and infrastructure
expenditure. For example, like Singapore, India will also impose an additional 2%
surcharge on the ultra rich. Furthermore, more taxes will be imposed on the mining
sector and public utilities. China’s mining tax on iron ore was 80% (2012), while
India's was a mere 10% (2009).
In a sweeping move to improve the efficiency of public utilities, it was proposed to
meter 100% all water and electricity usage, to cut down subsidies and recover full
costs of public utilities.
Furthermore, in a break with the Finance Commission’s past inclinations that favored
central government control of revenue, the commission recommended that the states
should have 42% share of central government tax. Previously, the states only had
30% share or less, until it was increased to 32% by the 13th Finance Commission.
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