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Tuesday, August 04, 2020

Shifting to the state

A structural change is afoot. It holds great promise for India.

Written by Neelkanth Mishra | Updated: November 24, 2014 12:05:27 am
The recent debate on whether regional parties can survive is somewhat unnecessary. The recent debate on whether regional parties can survive is somewhat unnecessary.

Is A 1,000-employee single-city company managed the same way as a 1,00,000-employee transnational company?

I recently asked this rhetorical question when an experienced foreign investor asked me why the Indian Constitution couldn’t be changed so that the new government in Delhi could overrule resistance from state governments. It was a challenge to explain to him that India houses one-sixth of humanity. Just because India is a country, and Singapore and Thailand are also countries, it doesn’t mean that the governance structures and economic solutions that worked in Singapore or Thailand will work in India too. Putting it another way, the state of Uttar Pradesh houses more people than Brazil, another member of BRIC — that over-hyped acronym, whose deserved descent into irrelevance ought to speed up.

The makers of India’s Constitution, wise as they were, had thought this through. In the division of powers between the Centre and the state, they restricted the Centre’s economic powers to mainly policymaking in areas such as foreign affairs and trade, as well as those parts of the economy where national scale helps — for example, currency, banking, railways, national highways, airlines and telecom. The rest, including the most important points at which businesses come in contact with government (for instance, law and order, land acquisition, urban infrastructure and power distribution), was left to the states. This is an important driver of the wide divergence in prosperity and growth between states. Even the interface between government and individual citizens is largely at the state level — birth certificates, driving licences, irrigation, electricity, water, education and healthcare are handled by the state governments.

But for most of our independent history, this division of power did not deliver much change. It is hard to isolate causality in complex matters such as these, but an important reason for this was the control exercised by the Centre on the state through the political party. Till the 1990s, more than 60 per cent of India’s population lived in states ruled by chief ministers beholden to the political leadership in Delhi to keep their jobs. What made it worse? Their job security was usually linked to their loyalty, and not necessarily to their performance as chief ministers. That 60 per cent has dropped to 12 per cent. State-level leaders and political parties, which have “skin in the game” when it comes to development, have emerged.

Further, Article 356 of the Constitution, which relates to president’s rule, was also rampantly misused. In the early years, it was rarely used: just five times in the 1950s. Then, our idealism faded, and its use rose steadily: 49 times in the 1970s. The occupants of the throne in Delhi routinely dismissed state governments on a whim. This, too, has changed in recent years — nearly half of this decade is over and we have seen just two instances of president’s rule.

Last, total state government spending is now nearly 40 per cent more, and is still growing faster, than Central spending. This is partly a result of higher revenues accruing from better tax administration, and also because successive finance commissions have increased the states’ share of tax revenues.

These trends are already showing results. Central schemes for rural roads, job creation, electrification and education, among other things, have always been around. But the remarkable improvement in execution over the past decade and a half owes largely to the empowered state leader. With a few exceptions, state governments across political parties have learned from the BJP’s victory in May, which was based on the electoral plank of good governance and growth, and are now pressing the accelerator.

Last month’s elections in Maharashtra and Haryana would be among the rare few contested purely on the plank of good governance and growth. The Brahmin chief minister of Maharashtra and the Punjabi chief minister of Haryana would have no doubt about their governance priorities.

A dramatic improvement in state-level governance, likely driven by changing voter demands and enabled by technological advances like cheap computing, mobile telephony and the internet, is afoot. This has all the signs of a structural change and holds great promise for India in the coming years.

The recent debate on whether regional parties can survive is somewhat unnecessary. A local competitor may lack the resources and processes of a multi-national company, but its local knowhow more than makes up for this. Thus, the correct question is: Which parties and leaders can step out of denial on the change in voter preferences, and, to use consulting jargon, be the “fast follower” (for instance, like a smartphone manufacturer profitably copying iPhone features)? While the BJP led by Narendra Modi was clearly the first among mainstream parties to have caught wind of this change in voter aspiration, parties and leaders that catch on — like they did with the post-Mandal changes in voter preference for caste — will survive, while others fall by the wayside.

A more important question perhaps is: Can political parties that have a presence across states develop and empower state-level leaders so that they become agents of change in their respective states and yet remain within the party fold, despite having the individual ability to pull votes? Can such leaders assert themselves without falling foul of the central leadership?

After all, there exists a delicate and fluid balance between the gains of unification and standardisation on one hand, and those of decentralisation on the other. Managers in companies regularly face this challenge. Allow too much freedom to local management and they run amok, ruining the brand in the local market, or self-aggrandise at the expense of the company, eventually venturing out on their own. Tighten the strings too much and you handicap them, which competitors take advantage of and you lose again. A healthy balance between the two forces drives success.

As the powers of taxation of the Central and state governments get overhauled, such a framework is also critical in thinking through the final debates on the goods and services tax (GST). The long-term gains of the GST seem quite obvious: among other things, the abysmally low levels of service-tax collection could be corrected by letting state governments collect it. As they know the territory better, aided by technology, they can improve compliance. And yet the matter has dragged on for years, highlighting the need for the powers of unification to assert themselves.

The writer is the India Equity Strategist for Credit Suisse

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