India Transformed

by Rakesh Mohan

  A panel has been appointed (chairman: N.K. Singh) to review the working of the FRBM Act over the past twelve years and recommend measures on the general government deficit. General government deficit means the deficits of the Union and the states put together. What this panel says will affect the relative shares of both in access to public debt. Currently, the Union and each state have its FRBM, and they are consistent with what the Finance Commissions have recommended. The panel’s recommendation has the potential to alter the fiscal package contemplated by the Fourteenth Finance Commission.

  The Union government has constituted a committee to examine the desirability and feasibility of having a new financial year (chairman: Shankar Acharya). The committee is required to work out the modalities for effecting the change, in case a change is recommended. The modalities include changes in the coverage of the recommendations of the Finance Commission.

  The Union government has been liberal in permitting the state governments to have their own legislation prevail over central legislation; land acquisition and labor laws are the best examples. This approach is of great significance, though the subjects so far considered indicate political compulsion more than a well worked-out approach. This gives an opening for a new agenda in Union–state relations.

  Unfinished and New Agenda

  With the establishment of the NITI Aayog and the acceptance of the core recommendations of the Fourteenth Finance Commission, an agenda for rebalancing the Union–state relations has been set. Recommendations relating to cooperative federalism and some of the suggestions on the fiscal consolidation road map have yet to be acted upon.

  The GST introduces a new dynamic to Union–state relations. It demands a level of cooperation between the Union and all states that is unparalleled in our history. The recently constituted GST Council, consisting of the Union and state finance ministers, is vested with the powers to make recommendations to the Union and the states on relevant matters. Virtually, the design of tax is to be agreed upon in GST and the Union and the states are expected to act based on that. The weight for a state does not vary based on size or economic strength. The remedies in the case of non-compliance with recommendations and disputes on interpretation are, understandably, not clear at this stage. In brief, a new dynamic has given birth to a new challenge, and fruits of success are high and chances of frictions not low, especially when more than two-thirds of state revenues comes from indirect taxes and the right to taxation will now be shared with the Union.

  Cooperative federalism will be put to the test in the functioning of the GST Council. It will also be put to the test when both the Union and each state have to enact laws as recommended by the Council. Above all, there is the need for harmonization of tax laws, rules, administration, a common IT backbone and continuing cooperation between the Union and state tax authorities. The introduction of GST demands a new era in Union–state fiscal relations based on trust and mutual cooperation. Moreover, development of a common market requires cooperation and trust on the issue of dual control, rate of GST and special provisions provided in the GST law.

  The Union government has indicated its willingness to get presidential assent to bills by individual states, even if some of the provisions were in conflict with an existing Union legislation. These relate to land acquisition and industrial relations, which were done due to political compulsions. However, this opens the doors for setting a new agenda with regard to reforms in the subjects listed in the Concurrent List.

  The liberalized approach to presidential assent to bills by individual states should be viewed as a recognition of the need to empower the states and enable them to carry on reform. In fact, the recent initiatives could be integrated into a new agenda for rebalancing Union–state relations that combines deregulation to strengthen market forces and decentralization to empower the states, which have major responsibility for providing most of the public goods.

  A new agenda combining deregulation (increasing scope for market forces) and decentralization (increasing decision-making powers at subnational levels of government) would involve a review of all important Union laws in the Concurrent List, a review in which the Union and all states are involved.7 It should identify those state legislative actions that have spillover effects on other states. For the rest, presidential assent to a bill by the state could be assured if it is in conformity with the underlying principle of the reform. Each state will then have an opportunity to take the best of Union law and adopt it to suit its requirements. In the process, political support of states to reforms can be reinforced. The new agenda for decentralization has advantages of de-risking, enabling diversity and meeting varied expectations of public service in different parts of the country.

  In conclusion, the evolving decentralized setting and its institutional framework in the country must take note of the changing role of the Union and states in fiscal and macroeconomic management. Greater role of states in the pursuit of decentralized development should not undermine the role that the Union government has to play in maintaining macroeconomic stability. One also cannot undermine the role of the Union government on expenditure functions having positive externalities and on key national priorities. Hopefully, the emerging framework of Union–state fiscal relations will balance these needs and priorities in a manner that follows the principle of subsidiarity in a framework of cooperative federalism.

  13

  Energizing the States

  Laveesh Bhandari1

  A basic foundation has been set up for state governments to manage the political economy of change. The states have not been mere spectators, or mere beneficiaries of central government reforms. They have themselves attempted changes in policy, implementation or administration of their own, and benefited from the result.

  Introduction

  Prior to 1991, Indian states were operating under the same constitutional framework as they do now; they operated with the same tools as they do now. Moreover, states continue to retain a large public sector, attempt many direct state-driven welfare initiatives and continue to subsume markets in a similar manner as before. At one level, nothing has changed, apart from the noticeable improvements in prosperity and income levels across the country. But that is only on the surface; even though the economic reforms have been in patches, ongoing and with much back and forth, they have deeply changed a significant part of Indian political economy.

  This essay illustrates the successes and the hurdles with the help of a few cases. Improved literacy rates, improved rural road infrastructure, and the rapid spread of cellular infrastructure and usage are undoubtedly among the major successes of the post-reforms years. At the same time, agricultural markets could have been better served had reforms occurred more rapidly in that area; similarly, the Single-Window Clearance Mechanism (SWCM) was set up in most states but, frequently, is just a façade; in the power sector too, though some change has occurred, the key elements require greater efforts.

  Using these instances, this essay makes the point that a deep and irreversible transformation in the mindset has occurred within state governments. Even in areas where reform has not occurred to the desired extent, there is a noticeable inclination towards greater economic freedom, though within the constraints of political feasibility. This change shows not only in the actions of the political leadership but also within the bureaucracy. Though the economics literature has not yet found robust results on convergence between states, we have enough evidence to show that higher growth rates are spread across most states including those not so well endowed in resources or human capital. This growth has also helped generate greater government revenues, which have enabled both the state and central governments to institute new development/welfare programmes. At the same time, greater openness has allowed access to new technologies, which have had their own impact.

  There have been many iconic chief ministers who have led their administrations and attempted to change things that few did in the two decades prior to the reforms. Th
is note will neither name them nor contrast or compare them. However, there is an evident change in the way states operate in India today that is not limited to a single political configuration. Greater search for investment, proclivity to announce new projects, a sustained dialogue on the delivery of welfare schemes and the need for greater employment have become common objects of the citizen–politician interface across India.

  Embracing private initiative to achieve political economic objectives is no longer anathema or a last resort, despite the modest (at best) success of public–private partnerships (PPPs). Two objectives become paramount across all states in India—growth and welfare. Given the way the nation works, a few decades may elapse before the full force of decentralization and market orientation plays out, but what is difficult to deny is that the new era has been established firmly across different tiers of governance.

  This essay proceeds as follows:

  It first reviews how growth played out across the states and makes the case that the benefits of higher growth ensuing post-1991 were well spread and generated greater revenues, which were also reflected in state government finances.

  It then reviews how three great but largely unsung achievements of the reform process impacted both productivity and incomes, but lack of data and robust analysis has not enabled us to fully comprehend their importance.

  Finally, it uses the examples of agriculture markets, the power sector and the public sector to make the point that many areas have opened up for the states, and they have even set the stage for the next most important leap in these areas.

  Growth and Resources

  Focusing purely on the impact of reforms on state-level economic growth is not easy, as states have had different strategies and resource bases. For instance, while the Green Revolution benefited the states of Punjab and Haryana, service-sector reforms naturally benefited Maharashtra, Tamil Nadu, Karnataka and Delhi more. Studies using data predominantly from the 1990s and the early years of the near millennium found an increase in growth inequality between states.2 Using later data, Kar et al. found a bi-modality, where different states appeared to be attracted to different growth paths.3 Human development indices, however, did not show the same increase in regional inequality as incomes, thus supporting the view that this may be a short-term adjustment phenomenon. The conclusion that liberalization does not necessarily leave poorer states behind received further impetus in the 2000s, when the growth rates of states such as UP, Odisha, Chhattisgarh and Bihar accelerated.

  It is difficult for econometric studies to decipher whether states are converging or diverging because of two critical reasons. Convergence is mostly a long-term process, and such studies are unable to adequately incorporate locational proximity in their analyses. For instance, the growth of Gujarat and Delhi would benefit Rajasthan within no less than a few decades. Similarly, higher growth in Delhi would naturally benefit Haryana and western UP, but for the growth to spread, adequate time will need to elapse. This trickle ‘across’ is difficult to capture but, arguably, would be an important contributor to convergence.

  Table 1 suggests a somewhat weak correlation between decadal growth rates. A state-by-state analysis suggests that while a combination of circumstances and state-government actions can push a state on a path of higher growth for some time, the state might not necessarily remain there for long. As conditions change, states need to change their own focus; some, such as Punjab, did in the 1960s but could not in the 1990s. Yet others like Gujarat and Tamil Nadu could benefit more from the reforms than others such as West Bengal or Karnataka, because they responded better to changed circumstances. Arguably, states that are more flexible are more likely to remain on the high-growth path.

  Table 2: Major Deficit Indicators of State Governments in India (Percentage of GDP)

  Year

  Revenue Deficit

  Gross Fiscal Deficit

  Primary Deficit

  1990–91

  0.9

  3.3

  1.8

  1995–96

  0.7

  2.6

  0.8

  2000–01

  2.5

  4.0

  1.7

  2005–06

  0.2

  2.4

  0.2

  2010–11

  0.0

  2.1

  0.5

  2015–16

  –0.4

  2.4

  0.8

  Source: State Finances: A Study of Budgets of 2006–07, and 2015–16, Reserve Bank of India.

  Growth is one dimension of success; increased access to resources is another. Through the last two and a half decades, greater resources have been made available to the states in a number of ways; for instance, the Eleventh, Twelfth and Thirteenth Finance Commissions each increased the states’ share of taxes marginally, but the Fourteenth increased it by a significant 10 percentage points. Together, these have enabled states to maintain and improve their fisc, despite the great burdens imposed on them by increased welfare, subsidies and various pay commissions (see Table 2).

  Three Successes

  The reforms and consequent growth created extra resources that allowed India to speed up three significant initiatives—the objective of universal literacy through Sarva Shiksha Abhiyan (SSA); universal rural road connectivity through the Pradhan Mantri Gram Sadak Yojana (PMGSY); and widespread penetration of rural telephony at low cost to the consumer. Kale and Bhandari pointed out that the high growth rates post 2005 would not have sustained for so long were it not for these three successes of post-reforms India.

  To put it another way, India has surpassed aggregate literacy levels of 80 per cent (see discussion below), connected rural residents to a well-spread road infrastructure and empowered them through access to communications, including the internet, at relatively low costs. One would expect all these factors to have had tremendous impact on rural productivity, but unfortunately, due to a lack of long and thorough data on capital stock in India, the increase in total factor productivity cannot be captured accurately.

  Circumstantial evidence, however, reports the same—an increased proclivity to go back to school among manual workers; a lack of major production disasters despite poor agriculture seasons in 2009 and again in 2013–15; sustained high-growth levels in rural areas—all of which strongly indicate (though admittedly not prove) that a very deep change had occurred in the agriculture sector and rural India.

  Literacy

  First, consider basic literacy. Between 1991 and 2011, literacy levels went up from 52.21 per cent to 74.04 per cent—adult literacy rate (fifteen years and above) improved from 61 per cent in 2001 to 69.3 per cent in 2011—and are expected to cross 80 per cent by 2016 (census figures and author estimates). This has occurred largely due to the expansion of the SSA. Table 3 shows how various elementary-stage indicators improved rapidly.

  One of the most significant impacts of SSA has been a considerable decrease in dropout rates. According to the Statistics of School Education (SES), the dropout rates for primary stage showed very little decline during the period of 1990–91 to 2000–01, from 42.6 per cent to 40.7 per cent respectively. However, after 2000–01, when the SSA was launched, the dropout rate among primary school going children declined from 40.7 per cent in 2000–01 to 25.7 per cent in 2005–06. Similar decline in the dropout rate has been observed at the upper-primary stage of education. SSA has also been a boon for girls’ education. All of this augurs well for the sustainability of demographic and economic changes and for the future in general.

  At the same time, no one can deny the poor quality of education being imparted in Indian primary schools. Much has been written on the matter, especially since the release of ASER data since 2006 about the less-than-satisfactory learning achievements of Indian schoolchildren. While the glass may be only partially full, it is significantly better than before.

  Rural Roads

  Let’s look at PMGSY (see Table 4). The programme
has been driven by the Centre, but its implementation falls under the state governments’ ambit. As per the PMGSY 2014–15 Annual Report data, the number of habitations connected by the PMGSY increased from 13,687 in 2000–04 to 77,877 in 2010–11 and to 1,08,637 in 2014–15. However, the pace appears to have increased since, with 65 per cent of rural habitations expected to have been connected by 2015, another 17 per cent sanction has occurred and the remaining (18 per cent) is expected to be covered by 2019.4 This is not simply about connecting villages with each other, but also to the closest market; this is not only an initiative in human interest, but has tremendous economic implications as well.

  Table 4: Rural Roads in India over the Years

  Year

  Length in Kilometre

  Percentage of Total Road Length

  1950–51

  2,06,408

  51.61

  1960–61

  1,97,194

  37.60

  1970–71

  3,54,530

  38.75

  1980–81

  6,28,865

  42.34

  1990–91

  12,60,430

  54.15

  2000–01

  19,72,016

  58.46

  2010–11

  27,49,804

  58.80

  2012–13

  31,59,639

  60.39

  Source: Basic Road Statistics of India 2012–13, Ministry of Road Transport and Highways, Government of India (latest available).