An idea for the next government

Competing political parties customarily present their vision and outline plans through manifestos before elections. But at India’s level of development and aspiration, any such “to-do” list is unlikely to be complete and cover every group’s expectations. Prime Minister Narendra Modi has talked about taking big decisions if the Bharatiya Janata Party-led National Democratic Alliance is voted back to power for a third consecutive term. The Indian National Congress, which is the leading constituent in the Opposition alliance, has also promised big initiatives in different areas. The aim of this column, however, is not to compare the two. It is to highlight an important idea or theme that should be pursued by the next government, regardless of its composition and structure. The situation reminds this writer of a conversation from 2009 with a prominent economist. The United Progressive Alliance was voted back to power with a bigger mandate. India had witnessed unprecedented growth in the preceding years and the popular view was that it also remained relatively unaffected by the global financial crisis.

The crux of the discussion was that the private sector had done exceedingly well since the beginning of reforms in 1991, and now it was time for the government to reform itself. The argument remains as powerful today as it was in 2009. This is not to suggest that the system has not improved over the years, but a lot remains to be desired. Developmental outcomes are significantly affected by state capacity and its ability to deal with challenges. In this context, economist Karthik Muralidharan’s timely new book Accelerating India’s Development: A State-Led Roadmap for Effective Governance, highlights several areas where improvement in state capacity — sometimes by just refining processes — can significantly improve outcomes. To be fair, the Indian state does some things exceedingly well — conducting Lok Sabha elections is one example — but fails to do more mundane and regular things. As academics like Devesh Kapur have argued, the Indian state does well in episodic tasks and when the exit is automatic.
 

While there are several areas where state capacity needs to be improved, this column focuses on just a few broad aspects. Arguably, the Indian state is unable to effectively undertake developmental work due to the lack of fiscal capacity. Granted, India cannot match the developed world in level of expenditure. But despite increasing formalisation, its tax collection to gross domestic product (GDP) has not improved significantly. As the Fifteenth Finance Commission noted in its report, India’s revenue has remained stagnant for years and is much lower than its peers. According to an International Monetary Fund study for the Commission, India’s tax collection gap was worth over 5 per cent of GDP compared to the potential. Bridging this gap can significantly increase fiscal capacity and reduce borrowings, which tend to crowd out private investment. In this regard, the implementation of the goods and services tax, which was expected to boost both formalisation and tax collection, has underperformed. Since its problems are well known, the next government would do well to initiate reforms. It should also aim to increase the direct tax collection base, particularly income tax.
 

The problem, however, is not limited to revenue. Spending must also be efficient. Government support and subsidies, for instance, are not targeted well and end up benefitting the well-off. They are also often designed for short-term political gains. As Prof Muralidharan notes in the book, for instance, in 2019-20, the Punjab government spent over Rs 6,000 crore on farm power subsidy, compared to Rs 380 crore on agriculture research. The story is not very different for the Union government. India thus needs to get its fiscal priorities right.
 

Further, it is well-known that India has a small window of opportunity to capitalise on its demographics. However, this will not be possible without improving education. Survey results consistently reveal that school learning outcomes fall way short of expectations. Research featured in the book underscores that just increasing expenditure alone may not help. Among other things, filling the supervisory positions can significantly improve learning outcomes. Hiring teachers at the local level can also improve outcomes at a lower cost to the exchequer.
 

One big reason for poor outcomes in areas like health and education is the over-centralisation of fiscal power, including by state governments. India is said to be one of the least decentralised countries. A recent study by the Reserve Bank of India showed revenue expenditure of Panchayats was less than 0.6 per cent of the gross state domestic product for all states. According to one study, local government expenditure as a percentage of total public expenditure was 51 per cent in China compared to 3 per cent in India. Empowering local bodies to undertake certain tasks can improve overall state capacity and outcomes. It will be easier for local communities to hold local leaders accountable for developmental outcomes compared to the state bureaucracy or ministers. India thus needs to improve the capacity of local bodies and leverage it to improve development outcomes.
 

Finally, one area that needs significant intervention and will have a large multiplier effect is the judiciary. India has over 50 million pending cases. There is often talk of fast-track courts for certain matters. But with such a level of capacity constraint, fast-tracking anything will put the rest of the system on a slower track. Capacity constraints and delays in courts create serious disincentives for investments and encourage misuse of power by bureaucracy. Swift delivery of justice will improve the investment climate, increase growth potential, and enhance the overall quality of development. In sum, while the idea of improving state capacity is not new, it is time to make a fresh beginning.