State and market: Rangarajan for right mix

CHENNAI JULY 3. The right "mix" of the role of the State and the markets in the evolving economic situation has to be decided on the basis of "comparative advantage" of each possible mix, according to C. Rangarajan, Governor of Andhra Pradesh and former Governor of the Reserve Bank of India (RBI).

It is not a question of whether the State or the market should play a role but what new kind of roles should be allocated for each, he said.

Delivering the first Ambirajan Memorial Lecture under the auspices of the Institute of Economic Education (IEE), Chennai, and the Public Expenditure Round Table (PERT), Chennai, Dr. Rangarajan suggested a matrix of objectives on one side and the market/State on the other to decide the new priorities in economic policy and regulation.

He said State intervention could be directional, regulatory and indicative. Post World War-II experience of developed western countries, erstwhile USSR, China, East Asian countries and India suggested that in the present situation, there could be greater role for the private sector and the market in manufacturing and financial services, along with a greater regulatory role for the State in these markets.

In the provision of "public goods", namely, physical infrastructure (roads, ports and the like) and social infrastructure (primary education and primary health care), there could be a mix of the direct role of the State and the private sector.

The mix could involve options, like the State investing in and managing the infrastructure, the State investing with the management being left to the private sector and the private sector undertaking both investment and management, along with the possibility of the State extending support to the weaker among targeted groups (like State scholarships for poor children studying in privately funded and managed schools).

Declaring that there was nothing that compelled public sector enterprises (PSEs) to incur losses, Dr. Rangarajan said a policy package with incentive and reward schemes and accountability should be evolved to enable a significant improvement in the efficiency of PSEs. In case the enterprises were forced to undertake social obligations, the government should compensate them for the costs on this account. In the case of privatisation of PSEs, there should be transparency and the State should be adequately compensated, he added.

The Chairman of the PERT, K. Venkataraman, said the organisation, which was creating awareness among the public and policymakers about the need for a healthy framework of policies and practices in respect of public expenditure, was developing an Index of Fiscal Responsibility to measure the performance of the Central and State governments in this regard.

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