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Wednesday, January 22, 2020

Rules of Engagement

An eloquent account of how public policy needs urgent re-imagination

Written by Ishan Bakshi | Updated: December 16, 2019 11:51:27 am
Rules of Engagement Book cover of In Service of The Republic – The Art and Science of Economic Policy

Title: In Service of The Republic – The Art and Science of Economic Policy
Author: Vijay Kelkar & Ajay Shah
Publication: Penguin Allen Lane
Pages: 448
Price: Rs 699

It has almost become a ritual. Every year, with the onset of winter, public discourse in the national capital region inevitably veers towards the rise in pollution levels. The proximate cause is often located in stubble burning by farmers in the neighbouring states of Punjab and Haryana. Every year, politicians and bureaucrats mouth the same platitudes, but so far, few concrete steps have been taken. While this has not stopped residents of the NCR region from continuing to hope for government intervention to address this issue, it raises the question — does the solution to every problem lie in government intervention or is there a viable market alternative? Can individuals in the NCR region, and farmers in the neighbouring states, enter into a private contract to limit stubble burning? In other words, does a Coasean alternative exist?

Take the issue of public spending on education. The expenditure per student in government schools has risen from Rs 2,455 in 2010 to Rs 4,385 in 2016. Yet, learning outcomes have declined during this period. With parents, including those from economically weaker sections of society, voting with their feet, switching from government to private schools, should the government continue to pour in more money with little to show for it?

Or, take the case of the imposition of price caps on stents. Though the decision conveys the impression of helping consumers, it raises questions over whether the intervention will be beneficial for them in the long run. One must also ask whether the decision, which betrays a complete lack of understanding of the way markets function, was arrived at after undergoing a careful cost-benefit analysis.

Or, take demonetisation. The contentious decision was proposed as the silver bullet to tackle the problems of black money, and ensure better tax compliance. Yet, the whole exercise was seemingly executed without any detailed analysis of the effects of the move and its consequences, both intended and unintended.

The common thread running through these cases is that despite the dismantling of the licence permit raj in the early 1990s, the Indian state continues to hold a commanding influence over the economy. That government interventions continue to be the norm rather than the exception. And that most of them are ad hoc in nature, executed without any detailed cost-benefit analysis. Yet, despite encroaching on individual freedoms, the Indian state continues to be looked at as a benign force of change.

In opposition lies a very small, almost microscopic, constituency that argues in favour of reexamining the functioning of the Indian state, its purpose and the arbitrariness of the power it wields, and, for a greater role for markets. This line of thinking has been eloquently articulated in a new book by economists Vijay Kelkar and Ajay Shah, titled In Service of the Republic. As both Kelkar and Shah have been at the forefront of public policy for many decades and have witnessed the functioning of the government from close quarters, this book, which draws on their experience, provides a useful framework for thinking about public policy in India.

The authors launch a systematic attack on the nature of government as it exists today by asking a rather basic, but often glossed-over question — should the government be doing this? Simply put, with the Indian economy approaching the $3 trillion mark — the ruling establishment is hopeful of attaining the $5 trillion mark by 2024 — should the government be in the business of running airlines, telecom companies, coal plants, power companies? Should not an increasingly complex economy call for a radical reimagination of the role of the state?

Contrary to the instinctive reaction of most in India, the authors argue that governments should intervene only when the free market yields poor outcomes. And, when governments do intervene, the first question that should be asked is, what is the market failure that the intervention seeks to address? Then, is the proposed intervention the best way to address this market failure? And, whether the Indian states have the ability to effectively implement the proposed intervention?

This is an eminently sensible framework that should serve as a guide for policy making. Interventions should be carried out only after a detailed cost-benefit analysis of their expected impact. This exercise, which the authors point out is carried out in some countries, could help think through not only the intended, but could perhaps uncover even the unintended consequences of government intervention. But, the problem is that in the Indian context, the lack of data severely inhibits such analyses.

There is also the issue of capacity. The efficacy of intervention depends to a great extent on the capacity of the state to implement effectively. But regrettably, the capacity of the Indian state is rather poor. As the authors note, “there is a big gap between dilettantism in public policy and the professional capacity of the state”. But, while this is rather well-known, public policy in India is often formulated in the belief that the state can efficiently implement the proposed policy. For instance, take the goods and services tax (GST). Rather than putting in place a complex, multi-layered tax structure, which has been difficult to administer, a more prudent approach, as the authors argue, would have been to opt for a single rate. This would have been easier to implement and would have reduced the compliance burden, and lowered the extent of evasion too.

At certain points in the book, the authors also dwell on the issue of institutions. Institutional decay has been a much-debated issue in India. Yet, contrary to the hopes of most that rest on appointing an incorruptible person who can fix the system, the authors contend that “a government organisation that is riven with corruption is not one which was unlucky to get a lot of corrupt people. It is one where the rules of the game facilitate corruption.” In typical economist-speak, they argue that the solution to our institutional crisis rests on creating rules that generate incentives for changing the behaviour of both bureaucrats and politicians. This is a reasonable approach. Yet, it requires a buy-in from the very same political/bureaucratic dispensation, which is likely to vehemently resist changing the rules of the game that have benefited them, except at the margins.

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