Sanjeev Ahluwalia | Looking beyond the fog of ‘short-term’ results

Consider, that even our erstwhile colonial masters carried the “short-term fog” with them, along with a taste for curry, when they left in 1947. The Brexit referendum in 2016 was unbelievably woolly-headed rather than pragmatic, with the United Kingdom choosing to isolate itself in its pond, after centuries of benefiting from global trade, investment, and access to foreign talent.

India dumped central planning in 2015 when the intrusive Planning Commission – a Nehru legacy -- was replaced with a think-tank style Niti Ayog. Many interpreted this as the end of an era of Big Government and the beginning of decentralisation, empowerment of local communities and a return to bottom-up planning and execution. Admittedly, the force had long dissipated from central planning as a tool for optimising the use of public resources. It had become yet another cog micro-managing the size and composition of the government spend over the next five years. Have things really changed since?

One simple metric for the time trend in decentralisation is a higher share for state expenditure in total (general) government expenditure of the Union and states. According to the data in the annual economic survey, the share of states in general (total) government expenditure, increased from 36 per cent in 2007-08 (the waning year of UPA-1) to 39 per cent in 2022-23 in Modi 2.0. Correspondingly, the share of the Union government decreased from 64 per cent to 61 per cent. A positive outcome, but not significant.

Successive Finance Commissions -- a constitutional body -- which advises the Union government quinquennially, on the sharing of tax revenues with state and local governments, did their bit for enhancing decentralised expenditure, including direct grants from the Union to local Governments. Also heartening is the ability of a constitutional body to influence the Union government to decentralise. Sadly, in comparison, state finance commissions, appointed by state governments, have generally played a “short term” game, preserving the status quo, leaving decentralisation adrift.

Nor do local governments present a credible case for greater decentralisation by failing to fully exploit the property tax base available to them or collecting extraordinarily little tax versus their expenses. Similarly, states do not generally tax earnings from agriculture. The bulk of their tax revenue is from their share of valued added Goods and Services Tax (GST) levied by the GST Council -- an innovative institutional arrangement, in which the Union and all states collectively determine the tax rate. Tax on petroleum products is another big-ticket revenue for states, quite unmindful that consumption is expected to decline over the next 15 years, as renewable energy becomes more affordable and the electric vehicle revolution kicks in. Yet again, short-termism prevails.

However, not all short-term goals are impractical. Consider the trade-off between investment for growth and spending on welfare. Under India’s flagship scheme, free cereals are distributed to more than 60 per cent of families even though officially, poverty levels are at about 11 per cent. Admittedly, a lower middle-income country needs near-term strategies to help families with their immediate needs. Food comprises more than one half of the average consumption basket of the bottom half.

The problem lies in the poor targeting to the really needy and the large deadweight loss (process inefficiency related loss which is enjoyed neither by the producer nor the consumer) associated with the long public sector dominated supply chain of buying foodgrains from farmers at a high administered price, storing, transporting and then distributing them to families. The associated “leakage” or diversion of foodgrain to the open market, was estimated at between 37 and 45 per cent in 2011-12 (Khera and Dreze, Gulati and Saini 2015). This practice persists because it is politically attractive to bind farmers to political parties. Sadly, it also discourages farmers from taking the market risk of planting more valuable crops but associated with market risk. Ineffective crop insurance mechanisms further dilute the farmer’s appetite for risk.

Direct income transfer to a targeted set of beneficiaries would be cheaper and more efficient, allowing exceedingly small farmers to top up their guaranteed income from other jobs or market-based farming. What stops the government from transitioning to a direct transfer of benefits to beneficiary bank accounts? Recent research in progressive Maharashtra by Abbink, Datt, Gangadharan, Negi, and Ramaswami, in May 2022, shows that resistance to direct transfers comes from women who feel they will be worse off by having to buy cereals, without price certainty, and because access to bank accounts is possibly controlled by the menfolk. The Jan Dhan Yojana accounts were opened in the name of the female head of the home, but clearly local patriarchal norms cannot be wished away.

So long as the asymmetric quinquennial electoral cycle frames the development discourse, short-termism is here to stay. The need for deep structural reforms is widely recognised -- in land through a lowering of purchase risk via better records of ownership and ease of transactions, scaling up labour rights along with nimble rules for businesses to employ and dismiss, transparent access to bank credit, higher returns for debt holders via tax benefits, lower reserve ratios for banks and deepening of the corporate bond market.

The problem is to find the political space to implement such basic reforms, all of which create winners and losers. Barring conspiracy theories, the momentum behind “One-Nation-One-Election” is to stretch the “apolitical working space” to at least four years by avoiding state elections during the five years between a national election.

The opposition to the proposal can be muted. But only if India becomes more than just an electoral democracy and “service to the people” is the norm rather than a temporary meme during elections. For that to happen, a precondition is deep political party reform -- the big elephant in the room which no one wants to confront.