Book Excerpt: Taking Governance Decentralisation Seriously
North Block, New Delhi, on Dec. 20, 2019. (Photograph: Nishant Sharma/BloombergQuint)

Book Excerpt: Taking Governance Decentralisation Seriously


Excerpted from ‘In Service Of The Republic-The Art And Science Of Economic Policy’, by Vijay Kelkar and Ajay Shah, with permission from Penguin Random House.

The Constitution of India is imbued with federalism: it envisions India as a union of states. It cut up all the work of government into three lists. The Union government would deal with List 1 questions, the states would deal with List 2 questions, and the two sides would amicably figure out how to deal with the concurrent list.

India is a vast and diverse country. The most salient problems vary from one place to another, and the most effective solution varies from one place to another. The constitutional scheme is a wise one. What constitutes a good solution for education policy in Kerala (where schools are closing down as the number of children is declining) is likely to differ strongly from the corresponding solution in Uttar Pradesh.

When schools are financed through the Union government’s scheme Sarva Shiksha Abhiyaan, however, there is considerable standardization all across the country. Such centralization of policy design, at the Union government, has come about in numerous areas. In many respects, we have deviated from the constitutional scheme, and gone too far in centralizing power in New Delhi.

Children eat at school under the government run scheme of “Mid Day Meals” in Laundi, India, (Photographer: Prashanth Vishwanathan/Bloomberg)
Children eat at school under the government run scheme of “Mid Day Meals” in Laundi, India, (Photographer: Prashanth Vishwanathan/Bloomberg)

In the US, the phrase ‘laboratories of democracy’ has come to be used about states. This emphasizes the role of democratic processes in multiple states coming up with different policy strategies, out of which knowledge and experience are improved for the entire country. If there was only one powerful Central government, these gains from experimentation would be lost. In each field, ‘regional role models’ should emerge, e.g., perhaps southern states might look up to the solutions adopted in Karnataka on urban water supply.

We wince every time the expression ‘Central government’ is used in the popular discourse as this is suggestive of central planning and an exaggerated conception of the role of New Delhi. The phrase ‘Union government’ is an accurate description of the constitutional scheme, and a more modest phrase.

The Problems Of Intra-India Disparity

India is a continental economy, and there is very high heterogeneity within the country. As Lant Pritchett says, the ratio of the richest to the poorest parts of India is much like the ratio of the richest parts of Latin America divided by the poorest parts of Africa.

There is heterogeneity about conventional economic measures such as income and capabilities. There is also heterogeneity of political and social preferences, where the south and the west are making more progress on social issues such as the agency of women.

We may have once had a mental model that once economic development takes root in India, intra-India heterogeneity will subside. So far, there is little evidence of this convergence taking place. There are other elements of the international experience, such as the poverty traps in the US or Italy, which have persisted for hundreds of years despite attempts by policymakers to change things. While we should desire convergence, we should not assume that it is afoot.

The heterogeneity of economic and social development, across the regions of India, generates heterogeneity in the public policy pathways desired by different groups of people.

A policy position that is well liked in Uttar Pradesh may not be liked in Kerala, and vice versa. This creates conflict in a centralized public policy process.

(Image courtesy: BloombergQuint) 
(Image courtesy: BloombergQuint) 

These problems are addressed in a federal structure at three levels. The first involves reducing the extent to which decisions are taken in the Union government. While monetary and defence policies need to be done by the Union government, policies on drinking water and elementary schools need not. The preferences of Kerala’s population, on the role and status of women, will diverge from those in Uttar Pradesh, and this should play out into policy thinking in Kerala. Kerala may create rules requiring that half of all policemen should be women before this is done in Uttar Pradesh.

The optimal design of processes within government also varies with locale.

As an example, the price of a schoolteacher in Kerala should diverge from that in Bihar. The Mumbai municipality should have different internals when compared with the Kolkata municipality. By imposing uniformity in the working of government, we inevitably reduce the quality of working of government.

The second involves creating structures that favour migration. When wages are higher in Kerala, or when women have greater freedom in Kerala, this creates an incentive for people to migrate from Uttar Pradesh to Kerala. Alongside this, free movement within the country of capital and enterprise helps exploit the ‘equalizing differences’ feature of the market economy. If labour is cheap in Uttar Pradesh, firms may like to reduce costs by investing in UP. This process is limited by the extent to which basic public goods in UP are of acceptable quality and the extent to which goods and services move freely through the country.

A man holds Indian twenty rupee bank notes at a shop in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)
A man holds Indian twenty rupee bank notes at a shop in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

The third involves fiscal transfers through which the per capita resources available to the state government in poor states are higher than the per capita taxation that is done in those states. This creates the opportunity for local politicians to undertake actions that make progress on policy problems within a larger budget set than would be feasible if local tax revenues were the only resource base.

India is a continent, with very high heterogeneity. There is no one answer to policy questions, on most problems. The fact that many Union Territories—run by the Union government—work better than many states should not lead us to question decentralization. Decentralization of government helps produce local answers to local problems. The ‘subsidiarity principle’ asserts that a function of government is best performed by the lowest possible level of government where it can be performed.

The Constitution of India is imbued with federalism. The evolution of the republic shows an inappropriate extent of centralization, of schemes that are designed by the Union government and rolled out everywhere. The phrase ‘Union government’ is preferable to ‘Central government’ as the latter suggests greater control. Similarly, there is an inappropriate level of control of cities and villages by the capital of the state government. The appropriate role of the Union government lies in coordination problems (e.g., the design of infrastructure networks that cut across states) and in addressing poverty traps where the conventional feedback loops of liberal democracy have broken down.

In a truly federal structure, state and local governments will have to design their own schemes. This requires capacity building in public policy at states and cities all over India.

For decentralization to work, the political system at the level of the state and the city requires reform, in order to achieve adequate checks and balances and dispersion of power.

Vijay Kelar was the Petroleum secretary, Finance secretary, and Chairman of the Thirteenth Finance Commission of India. He also served as the Director of the United Nations Conference on Trade and as the Executive Director of the International Monetary Fund.

Ajay Shah has worked at the Centre for Monitoring Indian Economy, the Indira Gandhi Institute for Development Research, and the Ministry of Finance. He is a professor at the National Institute of Public Finance and Policy.

The views expressed here are those of the authors and do not necessarily represent the views of BloombergQuint or its editorial team.

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