NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Monday, January 21, 2008

By NK Singh

The flutter created by the Nano, Tata Motors? new low-cost car, will not subside anytime soon. This car, costing about a lakh rupees ($2,500), is half the cost of the next cheapest car, made in China ($5,000). It reportedly meets the required benchmarks on safety, fuel efficiency and emission norms. Sceptics question these claims, asking us to wait for drive tests to validate them. However, the widespread enthusiasm accorded to the car represents a new middle class euphoria. People have experienced a sudden sense of empowerment in the possibility of their steadily rising incomes bringing the fruits of development within their grasp. While pedestrians opt for the cycle, and the cyclist yearns for a two-wheeler, the vast majority of the urban working class aspire to a car for safety, status and respectability. Nano helps them make this psychological transition.

We have often been told by the likes of CK Prahalad that there is enormous opportunity at the bottom of the pyramid. Nano is yet one more example. The rapidly increasing teledensity in semi-urban and rural areas is another. I believe that embracing innovative low-cost services has wider benefits for the Economy. Illustratively, low-cost housing, affordable educational hubs and reliable healthcare facilities. Ingenuity and engineering skills can drive fundamental changes in the Economy in multiple ways. It is well known that agriculture now yields only 18% of India?s GDP but provides livelihood to over 58% of the population. Massive urbanisation has scarcely begun. It is inevitable that we would need to provide employment to millions through non-agricultural means. We have to improve agricultural productivity, moving it up the value-addition chain, while supporting labour-intensive manufacturing. If done, this could mark the start of our effort to fill ?the missing middle?, with comparative factor endowments sharpening our competitive edge.

Building self-contained satellite cities entails a daunting pace of urbanisation. Without low-cost housing, affordable education and reliable healthcare, this would not be possible. There are many affirmative action initiatives outlined in the Eleventh Five Year Plan, which, if implemented, can kindle the ingenuity of the corporate sector.

The Nano also provides policymakers an opportunity to correct some manifest distortions. First and foremost, India needs an integrated energy policy. Continued subsidisation of fossil fuel consumption results in multiple distortions of the Economy. The massive under-recoveries from the sale of petroleum products by oil Companies is clearly iniquitous. The subsidies benefit the affluent and compress resources available for social and physical infrastructure. No doubt, the petroleum sector has constituted an acceptably large percentage of indirect taxes. Rationalising the tax structure for petroleum and related products is an independent exercise which cannot be linked with the broader principle of economic costing for multiple forms of energy.

Depoliticising the pricing of petrol, diesel and kerosene would help mitigate environmental degradation, minimise adulteration and free resources for outlay on public goods. It is equally important that even while per capita energy consumption rises, given the current pace of economic development, priority must be accorded to energy efficiency and investment in renewals. Without a rational pricing policy, renewals will remain commercially unviable. We have for long known that subsidising electricity and fuels, not to mention other forms of cross-subsidies, have not proven electorally advantageous to the party in office. Just think of Gujarat and Himachal. India has entered a cycle of multiple elections this year and the next, and so leaving energy policies in a mess at this juncture would be irresponsible governance.

Second, the framework of the Urban Reforms Mission need restructuring. The proposed allocations in the Eleventh Plan for the urban sector are grossly inadequate if it is to cope with the inevitable rapid pace of urbanisation, extend mass transport systems in non-metro cities, and support the development of satellite towns.

Third, India needs an integrated transport policy. This goes beyond improved planning and implementation of rural roads, upgrading district roads and state highways and speedier completion of various components of the national highways project. A coherent approach is needed to improve operations and maintenance, secure better management of vehicular traffic, and apply user charges for road amenities. Highway patrolling, provisioning and economic costing of parking space need attention, too. Besides, our public transport systems remain hopelessly inadequate and inefficient. Perhaps the Delhi Metro example need wider and innovative replication in many other cities as well as emerging satellite configurations. Buses need fiscal incentives apart from improved quality and large investments in driving schools and operations modernisation and maintenance. A sensible transport policy would also need to be multi-nodal, including sensible tariffs for different modes of transport for goods and services. Deregulation and competition have made air travel affordable to millions. Depoliticising railway fares, with an increased dose of competition, will be to everyone?s benefit.

The replication of the Nano model in multiple sectors can make growth genuinely inclusive. India needs to plan for rapidly rising rural and middle class aspirations. The time has come for their embedded yearnings to be realised.