To Fix India, Think Local
For all the attention being showered on the Indian budget set to be unveiled on Saturday, there are limits to what any national leader -- even one as powerful and charismatic as Prime Minister Narendra Modi -- can accomplish in sprawling India. Several of Modi's reforms have already run aground in the upper house of Parliament, which his Bharatiya Janata Party does not control. More importantly, on several of the issues of most concern to voters -- education, health, sanitation, irrigation -- responsibilities are constitutionally shared between the national and state governments. In practice, much of the burden falls on the states, which are most directly involved in delivering public goods and services.
That's not necessarily a bad thing. At least one study shows that state spending boosts gross domestic product more than spending by the central government. According to researchers at India’s central bank, a one percent increase in central spending generated a 0.04 percent increase in GDP whereas a similar increase in spending by states raised GDP by 0.11 percent. Most of the gains are attributed to better implementation, since state politicians are generally more answerable to voters.
In this vein, the most encouraging news to come out of the budget process may already have been revealed. Earlier this week, India’s Finance Commission -- a nonpartisan body that decides every five years how national tax revenues should be divided between the central government in New Delhi and India’s states -- made a radical suggestion. The commission recommended raising the share of revenues handed out to the states by a full 10 percentage points, from 32 percent to 42 percent. Governments traditionally accept the body’s suggestions, and Modi was quick to endorse the generous new formula.
As the former longtime Chief Minister of the state of Gujarat, Modi should understand better than anyone how important it is to give states more financial autonomy. Grand, national schemes -- announced with great fanfare in New Delhi but then left up to poorly funded local leaders to implement -- have generally fared poorly. The problems are twofold:
First, India’s states are diverse, at different stages of development and therefore have quite different priorities. The needs of industrialized Gujarat needs are quite different from those of highly educated Kerala, which are in turn different from those of poverty-stricken Orissa. One-size-fits-all policies are doomed to failure. Second, India’s public delivery systems are rife with corruption and leakages. According to consultants McKinsey, as much as half of government spending on basic services doesn't add up to real benefits for citizens. The problem grows worse when schemes are directed from distant Delhi, with little accountability for outcomes.
The BJP has already talked about forging ahead with land and labor reforms -- difficult to pass in Parliament -- in the states it controls, although progress has been slow. The party would be smart to press all states to focus on finding more innovative ways to deliver government services. For instance, government-run schools are a disaster almost everywhere. Facing no consequences, teachers simply don't show up to teach; a majority of students -- even the poor -- pay for private schools. State governments could experiment with a voucher system, committing to fund students rather than schools. Government institutions would then be forced to compete to attract students. A similar experiment could be tried with healthcare -- funding patients and encouraging a choice of hospitals that vie against one another.
In his budget, Modi could indicate a gradual phasing out of giant, centrally-sponsored schemes. But he should go deeper as well. Just as the national government needs to devolve more power, states should also commit to sharing more revenues with local governments, at the town and village level. While the quality of those leaders can be mixed, it's also true that they understand local needs and conditions best -- and they are most directly responsible to voters.
Each state already has its own Finance Commission. Modi should nudge the BJP-controlled states to ask their commissions to favor a decentralizing approach. To get better results at ground level, the states, too, are going to have to pay for it.
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