Economic Strategy.

The experience of direct government involvement in agricultural farms, animal breeding, and cold storage (which was closed for over six years and has only recently been leased out) has not been a happy one. Accordingly, the government needs to shift its role to that of a facilitator for promoting private sector activities in horticulture, poultry and animal husbandry. The government must attract the private sector to set up a feed and fodder plant to alleviate supply problems. It must also encourage the private sector to set up cold storage and processing factories. The mission of attracting private investment will have to involve identifying problems faced by private entrepreneurs, aiding them with land acquisition and funding from banks and financial institutions. While joint venture projects can be considered, the prime aim of the government should be to entrust full management responsibility and risk to the private investor.

Apart from the private sector, producers’ co-operatives can supplement direct government involvement in a host of areas such as input and credit supplies, as well as marketing networks. While co-operatives have to be promoted by the government, it is imperative that the co-operatives bear the risks, so that they become viable ventures. What is important is to limit the government’s financial exposure to co-operatives either through direct loans or guarantees; the government has to act more as a catalyst to energise existing co-operatives and promote new ones in areas where they do not exist. Co-operatives need not supplement private ventures, but complement them through better dissemination of information, pooling of risks, and filling in where private initiatives are lacking. Examples are networking through Internet or telephones to inform members about prices of products such as cardamom or ginger ruling in important trading centres in the country, and facilitating borrowing from banks and financial institutions against the collective security of all members (on the Bangladesh Grameen Bank model). The aim of the co-operatives should be to improve market efficiency by improving access to information and reducing imperfections such as excessive middlemen’s margins.

The Governments direct involvement, however, will be required in extension services. While private sector (for example, seed manufacturers) initiatives can be a substitute in areas such as familiarizing the farmers with improved seed varieties, in the short run most extension services, because of the strong externalities associated, will have to be provided by the government. Although the government’s outlay on extension services in agriculture, horticulture and animal husbandry in 1998-99 has been Rs.640 lakh, results have been unsatisfactory and this is despite a 884 strong force of extension service workers in these sectors. The government must change the focus from monitoring of ‘inputs’ (money spent) to monitoring of ‘outputs’ (e.g. oranges produced quality of curing of cardamom, etc.). ‘Voice’ is critical for maintaining the productivity of government expenditure, and community participation can strengthen the users ‘voice’ and improve the effectiveness of government expenditures in extension services.

Given the location of the state and its resource endowments, the viability of processing large amounts of raw material transported from outside the state appears to be questionable. The focus has to be on processing of raw materials produced within the state and service oriented industries. Service-oriented industries such as tourism in the short to medium term and information technology in the medium to long term hold important promise for employment and income generation.

Encouragement of these industries however will require promotion of Sikkim as a tourist and investment destination. Such promotions through advertisement campaigns in the print and electronic media, both at home and abroad, can be costly. Thus, it needs to be orchestrated with the help of media and advertisement experts, experienced travel agents, tour operators and investment bankers. A new industrial policy needs to be announced with the government playing the role of a facilitator. In this policy framework, the emphasis should not be on tax benefits but on making land and building available on an ownership or lease basis, for industrial purposes, and on smooth processing of governments permits and clearances. Promotion of tourism will require strengthening the Sikkim tourism development corporation through staff restructuring and clearly defined performance benchmarks.

Achieving the goal of sustainable developments will only be possible if three fundamental conditions are met. These are; (i) empowering the people with the right education and skills to benefit from the progress of modern science and technology, (ii) building up the right infrastructure particularly in rods and power, and (iii) fiscal consolidation and reform. Fiscal reforms are needed to ensure that there is some fiscal space for augmenting expenditure on infrastructure, both physical and social. The tremendous progress of literacy in Sikkim hides the lack of emphasis on vocational and technical areas. A surfeit of liberal arts graduate and inadequate supplies of workers with vocational training has hampered the process of employment expansion in Sikkim. The education department has to monitor job opportunities, revise the curriculum and set up training institutes for equipping students for jobs in the thrust areas in the long run. Failure to impart the appropriate skills to the local residents for absorption in the growth industries and sectors will lead to not only unnecessary loss of jobs to out-of-state workers, but also increases in recruitment and employment cost of industry.

Power shortages and the lack of road-connectivity have been two major impediments to economic growth in the state. The power shortfall of 14.03 MW with an installed capacity of 38.10 MW in 1997-98 is not only ironic when viewed in context of the 8,000 MW hydroelectric potential of the state, but also a serious impediment of the development of industry and tourism in the state. While the generation of hydroelectric power will not only promote economic activity in the state but also contribute to the state exchequer, the investments required for setting up hydroelectric power projects are considerable. It is neither feasible nor desirable for the state to pump huge funds into hydroelectric projects and bear the associated management responsibility as well as risks of executing and running such projects. On the other hand, attracting private investment in hydroelectric power involves paying attention to a considerable amount of technical and financial details such as the optimum concession period, power purchase agreement, and financial structuring of the project. The government should set up a high-level committee of distinguished experts to advice and guide on how to attract private investors and negotiate with them. The high-powered committee can also help in explaining the nature of the proposed projects and neutralize hostility to hydroelectric projects because of environmental considerations. The committee can build up popular support for the proposed run-of-the-river projects in Sikkim by highlighting their eco-friendly characteristics.

Given that power may have to be exported to the rest of the country, strengthening of all the links to the eastern grid by upgrading the transmission line between Melli and Vidyutnagar (as recently proposed by the Power Grid Corporation) is a prerequisite for attracting private investors into the power sector. Further, private investment is hampered by the existing tariff structure-the current electricity tariff of Re.1 per KWh compared to the generation cost of Rs.1.53 per KWh implies higher losses with higher production- and this need to be revised to make generation a profitable activity. Tariff determination will have to be depoliticised by setting up a State Electricity Regulatory Commission.

Lack of proper road communication facilities is another serious constraint on the growth of the state. In the absence of a rail network or commercial air services, roads are the only means of getting to and around the state. A single highway- National Highway 31A under the jurisdiction of the Border Roads Organisation, an all-India Organisation-is Sikkim’s main support link with the rest of the country and the world. Travel and transportation along this important highway is slow not only because of inadequate width but also because of the shops, houses and establishment on the sides with an inappropriate access control policy. Furthermore, given the states fragile terrain, heavy rain resulting in landslides on NH 31A often cuts Sikkim’s only link with the outside. State highways and village link roads suffer from the same limitations as NH 31A, only more acutely. Marketing opportunities for goods produced in Sikkim, the price and timely availability of inputs, and the attractiveness of Sikkim as a tourist destination cannot improve without a second highway linking Sikkim to the rest of the country and improvement in the quality of all roads, including village link roads. While the second highway linking Sikkim to the rest of the country may be developed by the Border Roads Organisation, the responsibility for the other roads will have to be borne by the state government. The government should review and improve the cost-effectiveness of the expenditure management system, including workers per kilometer of road maintenance, the muster-roll system of employment and the tendering system.

The fiscal position of the state has become precarious and unsustainable with the fiscal deficit and debts as a proportion of GDSP at 20.91 per cent and 71.87 per cent, respectively, in 1998-99. Thus reform is essential for restoring fiscal sustainability. Fiscal reform is also essential for opening up fiscal space and step-up outlays on infrastructure such as education, roads, water supply, sanitation and urban facilities and for achieving sustainable growth. Necessary steps include raising more revenues and rationalisation of users charges in line with the costs, revamping the tax administration, redirecting subsidies only to the needy in the medium term, containing the growth of the public sector through a ban on all new employment, privatization of public sector enterprises, and better expenditure management with strict monitoring of all projects and departmental activities. In expenditure management the emphasis has to shift to a monitoring of output and actual delivery of public services (away from a purely mechanical analysis of outlays) and scrutiny of processes and an exploration of alternative ways for the delivery of services.

While the economic strategy has to be consistently pursued over the medium term to achieve the goal of sustainable growth, a bold beginning should be made with some immediate steps that are delineated below.