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Thursday, June 30, 2022

Governments must understand that resources are held in trust. They’re not to be frittered away

Manish Sabharwal writes: Chief Ministers ought to create high wage jobs, and not borrow money future generations will have to repay

Written by Manish Sabharwal |
Updated: May 31, 2022 11:35:22 am
Only a fool would suggest that our chief ministers don't work hard in difficult jobs — elections are won on a complex cocktail of factors that I don’t appreciate. But Nobel Laureate James Buchanan said any state had three versions — the protective state (police, rule of law, defence, courts), the productive state (common goods like roads, power, health, education, etc.), and the redistributive state.

A senior Rajasthan ruling party worker reacted to my asking about handling the unsustainable borrowing burden of their recent civil servant pension decision with, “that bill is only due in 25 years”. My follow-up question about the injustice of 60 per cent of the Rajasthan government’s budget going to 5 per cent of the state’s population got “you don’t understand politics”. I guess questions about electricity in Punjab would get similar answers. The recent decision to deduct off-budget borrowings from state borrowing limits reminds chief ministers to be good policy ancestors by replacing steroids, painkillers, or placebos with sustainable medicine — five structural interventions that create high-paying jobs.

A modern state is a welfare state. Human lives were “nasty, brutish, and short” before there were democratic governments that could tax and borrow. In A Brief History of Equality, economist Thomas Piketty suggests that “the world of the early 2020s, no matter how unjust it may seem, is more egalitarian than that of 1950 or 1900, which were… more egalitarian than those of 1850 or 1780”. But how the welfare state is financed matters. Angela Merkel warned about the unsustainability of Europe being 8 per cent of the world’s population, 25 per cent of its GDP, and 50 per cent of its social spending. If Indian state governments could limitlessly print or borrow money, some would have finances resembling Sri Lanka’s.

Adjusting state borrowing limits for their off-budget borrowings leads to transparency because they are routinely breached through vehicles for schemes whose bill comes due far in the future. The confiscation of future spending — interest payments crowd out expenditure and revenue expenditure crowd out capex — matters because our prosperity problem is productivity, wages, not jobs. Unemployment is a poor labour market metric because self-exploitation is baked into our three low-wage shock absorbers — farming, informal wage employment, and self-employment. But five structural interventions by state governments can create higher-wage jobs:

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Reduce regulatory cholesterol: States control 80 per cent of India’s employers’ compliance ecosystem of 67,000+ compliances, 6,500+ filings and 26,000+ criminal provisions. Raising wages needs raising the population of high productivity firms that access capital, value talent, use technology, and care about corruption (transmission losses between how the law is written, interpreted, practised, and enforced). State governments that rationalise, decriminalise, and digitise their compliance ecosystem will reap lower corruption and higher formality.

Fix government schools: State government skill missions have learned that we can’t teach kids in three months or three years what they should have learned in 12 years. The most powerful tool for social mobility and employability is free and quality school education. Interventions to fix government schools have primarily involved smaller class sizes, teacher salaries, teacher qualifications, and toilets. These are useful but not sufficient. State governments that undertake a significant overhaul of school performance management (the fear of falling and hope of rising for teachers) and governance (the allocation of decision rights around resources and hiring) will create an unfair advantage in human capital.

Converge education and employability: State governments have often extended and reinforced India’s traditional walls between degrees and skills. This partition is meaningless for the new world of work, organisations, and education. States should set up skill universities that create qualification modularity (between certificates, diplomas, advanced diplomas, and degrees), delivery flexibility (equate online, apprenticeships, on-site and on-campus classrooms), and pray to the one god of employers. Degree apprentices innovate at the intersection of employment, employability and education. State governments that remove barriers in their path will see their population of employed learners exceed full-time learners.

Devolve money and power: Cities drive productive job creation — New York City’s GDP is higher than Russia’s. Cities deliver social justice — the father of an IAS friend travelled from his village to Jodhpur for haircuts because the village barber refused to serve his caste. It took 70 years after 1947 for the budget of 28 states to cross the central government’s budget. The combined budget of state governments now exceeds Rs 45 lakh crore, but 2.5 lakh municipalities and panchayats have a budget of only Rs 3.7 lakh crore. Governments that devolve money and power from state capitals to their towns will avoid the curse of megacities and create the competition that drove China’s growth (they have 375 cities with more than a million people versus our 52).

Civil services reform: The infrastructure of opportunity needs better government schools, primary healthcare, policing, and infrastructure. State governments must sell their 1,500+ loss-making public sector units, cut civil service compensation to less than 40 per cent of budget spending, and replace expenditure with capex. Moving from outlays to outcomes needs a new human capital regime for civil servants via seven interventions; structure, staffing, training, performance management, compensation, culture, and HR capabilities. A tone from the top of “do less so we can do better” signals the will to create high-paying jobs more than ads.

Only a fool would suggest that our chief ministers don’t work hard in difficult jobs — elections are won on a complex cocktail of factors that I don’t appreciate. But Nobel Laureate James Buchanan said any state had three versions — the protective state (police, rule of law, defence, courts), the productive state (common goods like roads, power, health, education, etc.), and the redistributive state. Too many state governments accept the status quo in the first two and “innovate” in the third version. It’s time to shift resources to the first two.

In a recent visit to my birthplace of J&K — my first after I got my domicile certificate — an ageing but wise resident suggested the political dynasties of J&K had forgotten the distinction between a jagir (ownership that allows you to do whatever you want) and an amanat (a temporary duty to hand over what you got to the next generation in better condition). He also suggested that nothing can make anybody’s future better than a high-wage job. Irshaad, Haji Sahib.

This column first appeared in the print edition on May 21, 2022, under the title ‘Wealth of states’. The writer is with Teamlease Services

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