Governments need to understand that resources are held in trust. They must not be wasted
A senior ruling party official in Rajasthan reacted to my question on handling the unsustainable borrowing burden of their recent decision to retire civil servants with, “this bill is only due in 25 years.” My follow-up question on the injustice of 60 percent of Rajasthan’s government budget going to 5 percent of the state’s population was “you don’t understand politics”. I guess questions about electricity in Punjab would get similar answers. The recent decision to deduct off-budget borrowing from state borrowing limits reminds chief ministers to be good political forefathers by replacing steroids, painkillers or placebos with long-lasting drugs – five structural interventions that create well-paying jobs.
A modern state is a welfare state. Human lives were “wicked, brutal 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, as unjust as 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 funded matters. Angela Merkel warned against the fact that Europe does not represent 8% of the world’s population, 25% of its GDP and 50% of its social expenditure. If Indian state governments could print or borrow money without limit, some would have finances resembling those of Sri Lanka.
Adjusting government borrowing limits for their off-budget borrowing leads to transparency as they are routinely breached by vehicles for schemes whose bill falls due in the distant future. Confiscation of future spending – interest payments crowd out spending and revenue spending crowds out investment spending – is important because our prosperity problem is productivity, wages, not jobs. Unemployment is a poor measure of the labor market because self-exploitation is embedded in our three low-wage buffers – agriculture, informal wage employment, and self-employment. But five structural interventions by state governments can create better-paying jobs:
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Reduce regulatory cholesterol: States control 80% of India’s employer compliance ecosystem, which has over 67,000 compliances, over 6,500 filings and over 26,000 criminal provisions. Raising wages requires increasing 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, practiced and applied). State governments that streamline, decriminalize, and digitize their compliance ecosystem will reap less corruption and more formality.
Fix Public Schools: State government skills missions have learned that we cannot teach children 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, quality school education. Interventions to fix public schools have mainly involved smaller class sizes, teacher salaries, teacher qualifications and toilets. These are useful but not sufficient. State governments undertaking a major overhaul of school performance management (the fear of falling and the hope of progress for teachers) and governance (the allocation of decision rights over resources and hiring) will create an unfair advantage in human capital.
Converging education and employability: State governments have often extended and reinforced India’s traditional walls between degrees and skills. This partition makes no sense for the new world of work, organizations and education. States should establish skills universities that create modularity of qualifications (between certificates, diplomas, advanced diplomas and diplomas), delivery flexibility (online equivalent, apprenticeships, on-site and on-campus classrooms ) and pray to the unique god of employers. Graduate 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 surpass full-time learners.
Delegating Money and Power: Cities Drive Productive Job Creation – New York City’s GDP is greater than Russia’s. Cities ensure social justice – the father of an IAS friend traveled from his village to Jodhpur to have his hair cut because the village barber refused to serve his caste. It took 70 years after 1947 for the budget of 28 states to cross the budget of the central government. The combined state government budget now exceeds Rs 45 lakh crore, but 2.5 lakh municipalities and panchayats have a budget of just Rs 3.7 lakh crore. Governments that delegate money and power from state capitals to their cities will avoid the curse of megacities and create the competition that has spurred China’s growth (they have 375 cities with over a million people against our 52).
Civil service reform: Opportunity infrastructure needs better public schools, primary health care, policing and infrastructure. State governments must sell their more than 1,500 loss-making public sector units, reduce civil service compensation to less than 40% of budget spending, and replace spending with capital spending. Moving from spending to results requires a new human capital regime for civil servants through seven interventions; structure, staffing, training, performance management, compensation, HR culture and capabilities. A top-of-the-page tone of “do less so we can do better” signals a desire to create well-paying jobs more than advertisements.
Only a fool would suggest that our Chief Ministers aren’t working hard in tough jobs – elections are won on a complex cocktail of factors which I don’t appreciate. But Nobel laureate James Buchanan said any state has three versions – the protective state (police, rule of law, defence, courts), the productive state (commons like roads, electricity, health , education, etc.) and the redistributive state. . Too many state governments accept the status quo in the first two versions and “innovate” in the third version. It is time to redirect resources to the first two.
During a recent visit to my birthplace of J&K – my first after obtaining my residency certificate – an aging but wise resident suggested that the political dynasties of J&K had forgotten the distinction between a jagir (property that allows you to do what you want) and an amanat (a temporary duty to pass on what you have to the next generation in better condition). He also suggested that nothing can improve anyone’s future than a well-paying job. Irshaad, Haji Sahib.
This column first appeared in the print edition of May 21, 2022, under the title “Wealth of States”. The author is with Teamlease Services