Editorial 1: BSNL has been dialling the wrong consultant 

Context

BSNL’s revival plan has reignited concerns over the rising influence of consultancy firms in the public sector.

 

Introduction

In May 2024, it was reported that Boston Consulting Group (BCG) would be involved in BSNL’s revival strategy, with the state-owned company set to pay ₹132 crore for the consultancy.

• BCG reportedly suggested workforce reduction as part of its recommendations. This sparked widespread discussion, but it is not an isolated incident.
• In recent years, the public sector’s dependence on external consultancy firms has increased significantly, not just in India but globally.
• While India’s total government spending on consultancies is unclear, other countries provide insight into this growing trend.

Country	Consultancy Spending	Year
France	Over €1 billion on intellectual services	2021
Australia	A$21 billion on external labor hire	2021-22

Why is there a need for scrutiny?

• Growing Influence of Consultancies: The BSNL case highlights concerns over the increasing role of consultancy firms in public sector decision-making.
• Need for Scrutiny: The effectiveness and consequences of outsourcing strategic decisions should be carefully examined.
• Lack of Accountability: Consultants provide advice but are not responsible for the outcomes, creating a misalignment of incentives.
• Financial Burden on Public Sector: Regardless of success or failure, consultancies are well-paid, while BSNL and taxpayers bear the risks.
• Questionable Long-Term Impact: Hiring consultants should lead to lasting improvements, but often, problems persist due to a lack of real accountability.
• Weakening State Capacity: Excessive reliance on consultancies reduces the government’s ability to innovate and manage its enterprises effectively.
• Costly Dependence: Instead of developing internal expertise, public sector institutions become stuck in an expensive cycle of external reliance.

Impact on state capacity, conflict of interest

Issue	Explanation
Loss of Institutional Knowledge	Skills and knowledge gained by consultancies are not transferred to public officials, creating a cycle where future projects still rely on external inputs.
Decline in State Capacity	Continuous outsourcing weakens public sector employees, reducing their ability to handle tasks independently.
Crisis of Confidence	Heavy reliance on consultancies signals a lack of trust in the public sector’s ability to govern itself.
Unaccountable Influence	Consultants, unlike public officials, operate without democratic oversight but hold significant power over policies and resources.
Conflicts of Interest	Consultancy firms work with multiple clients, including competitors and regulators, raising concerns about bias and integrity in their recommendations.
Profit-Driven Approach	Consultants focus on cost-cutting and efficiency, which may not align with public sector goals like social welfare and accessibility.
Impact on Public Services	For enterprises like BSNL, aggressive cost-cutting could harm rural connectivity, weakening their role in providing essential public services.

What will work better

• Stronger Public Sector: Invest in building the internal capabilities of government institutions.
• Recruit & Train: Hire top talent and provide proper training.
• Encourage Innovation: Foster a culture of creativity and problem-solving.
• Reduce Consultancy Dependence: Over-reliance on external consultants weakens internal expertise.
• Strategic Autonomy: Strengthening in-house capabilities ensures long-term, effective strategies aligned with public service goals.

Conclusion

The BSNL and BCG case is a small example of the larger debate on how consultancy firms influence public sector management, government efficiency, and accountability. Governments worldwide should reconsider this approach to governance. Strengthening internal expertise, reducing reliance on external consultants, and fostering innovation within public institutions will help ensure long-term sustainability. A well-equipped public sector can drive independent, strategic decision-making while maintaining transparency and accountability in governance.

Editorial 2: High base effect

Context

A shrinking trade deficit, as seen in February, is no cause for cheer

Introduction

India’s goods trade experienced its steepest decline in nearly two years, with exports dropping 10.9% to $36.91 billion and imports falling 16.3% to $50.96 billion in February. While the trade deficit narrowed to a 42-month low of $14 billion, the simultaneous decline in both exports and imports signals potential economic concerns and global trade uncertainties.

Why Did India’s Trade Decline in February?

• India’s goods trade in February saw its sharpest drop in nearly two years.
• Exports fell by 10.9% to $36.91 billion, while imports declined 16.3% to $50.96 billion.
• This resulted in the smallest trade deficit in over three years (42 months), at $14 billion.
• Is a Smaller Trade Deficit a Positive Sign?
  •  Normally, a shrinking trade deficit is good if it results from rising exports.
  • However, in this case, both exports and imports have declined, which raises concerns about overall trade slowdown and economic uncertainty.
• Why Did the Trade Deficit Shrink?

• Experts say the narrowing deficit is partly due to the high base effect.
• Since February 2024 was a leap year, last year’s figures were higher:

Trade (February 2024)	Amount
Exports	$41.4 billion
Imports	$60.92 billion

How Are U.S. Tariffs Affecting India’s Exports?

• U.S. importers are holding back on orders due to reciprocal tariffs set to take effect on April 2, announced by President Donald Trump on February 13.
• This announcement came just before his meeting with Prime Minister Narendra Modi, where they planned to increase bilateral trade to $500 billion by 2030 and finalize a Free Trade Agreement (BTA).
• Despite diplomatic talks between Commerce Minister Piyush Goyal and U.S. Commerce Secretary Howard Lutnick, no significant progress was made apart from agreeing to continue negotiations.

Why Are Indian Exporters Concerned?

• The U.S. is India’s second-largest trading partner, accounting for $118.3 billion in trade last fiscal year.
• Among India’s top five trading partners, the U.S. is the only country with which India enjoys a trade surplus.
• If the U.S. imposes tariffs, India’s exports may suffer, affecting revenue and economic stability.

Why Did India’s Trade Decline in February?

• India’s trade saw its steepest decline in nearly two years. 
• Exports fell by 10.9% to $36.91 billion, while imports dropped by 16.3% to $50.96 billion.
• This resulted in a trade deficit of $14 billion, the lowest in 42 months.

Trade Component	February 2024	Change
Exports	$36.91 billion	↓ 10.9%
Imports	$50.96 billion	↓ 16.3%
Trade Deficit	$14 billion	Smallest in 42 months

• A shrinking deficit due to rising exports would be positive, but the simultaneous fall in both exports and imports is a cause for concern.
• Experts partially blame the high base effect, as February 2023 was a leap year with higher trade figures.
• U.S. importers delaying orders over reciprocal tariffs set to begin on April 2 also contributed to the decline.

How Did U.S. Trade Policies Impact India?

• On February 13, U.S. President Donald Trump announced reciprocal tariffs, just before meeting Prime Minister Narendra Modi.
• The two leaders discussed a $500 billion bilateral trade target by 2030 and a Free Trade Agreement (BTA).
• However, Commerce Minister Piyush Goyal’s talks with U.S. officials yielded no breakthrough beyond a commitment to continue BTA negotiations.

Factor	Impact on India
U.S. is India’s 2nd largest trading partner	Accounted for $118.3 billion in trade last fiscal year.
Only top trading partner where India has a trade surplus	Potential risk if tariffs disrupt exports.
U.S. deficit-cutting moves	Could widen India’s overall trade deficit by 15%, based on last fiscal year’s $241 billion gap.

What Can India Do to Reduce Trade Risks?

• India must diversify its trade partnerships beyond the U.S. to reduce dependence.
• Two potential alternative markets are China and the U.K..

Country	Impact on India’s Trade Deficit	Potential Strategy
China	Accounts for one-third of India’s trade deficit over five years.	Reduce import reliance, boost domestic production.
United Kingdom (U.K.)	Contributed less than 3% to India’s total trade deficit.	Leverage Free Trade Agreement (FTA) to expand exports.

• Free Trade Agreement (FTA) negotiations with the U.K. could be a key opportunity for India to balance its trade.
• Expanding trade with diverse partners will help stabilize exports and imports, making India less vulnerable to policy changes in any one country.

Conclusion

India’s shrinking trade deficit in February is not a sign of economic strength but a reflection of declining exports and imports. The impact of U.S. tariffs and global trade uncertainties highlights the need for diversification and stronger trade strategies to ensure long-term stability.