Only one word: Decentralisation

Written by Surjit S Bhalla | Updated: Feb 15 2014, 10:27am hrs
The year was 1967 and the US economy, and polity, was on the cusp of change. Technological change was happening, civil rights for blacks would soon begin to be a reality, the womens movement was gaining momentum, the anti-war movement was on the verge of take-off; and social attitudes towards sex, marriage, and life were soon to be permanently altered. On the screens appeared Mike Nicholss movie, The Graduate, easily one of the classiest movies of all time. (His first movie was Who is Afraid of Virginia Woolf). In that movie, there is one exchange that still resonates today, and with the same shock, and urgency, and prophesy. The exchange is between a very young man, Benjamin (Dustin Hoffman) who is being advised about his, and the countrys future, by an elderly businessman Mr McGuire (with whose wife and daughter Benjamin has affairs).

Mr McGuire: I just want to say one word to you. Just one word.

Benjamin: Yes, sir.

Mr McGuire: Are you listening

Benjamin: Yes, I am.

Mr McGuire: Plastics.

Benjamin: Exactly how do you mean

The year is 2014, and India, analogous to US in 1967, maybe on the cusp of a major changepolitically, economically and socially. The most important one word in India might just be : decentralisation.

To Benjamins how do you mean question, my response.

It is hard to imagine anyone in India not arguing for increased power to the people. The AAPs surprise victory in the Delhi elections is just the latest proof of this demand for change sweeping across the world. Change being brought about because the ruling order (politicians or otherwise) talk, without actually speaking, and hear, without actually listening.

Of course, decentralisation can be taken to an extreme. In Delhi, the AAP demands that not only economic decisions but also foreign policy decisions should be taken by the people. One can demur on that as one can demur on, consistent with the AAP theology, that Khap panchayats can take a vote on censuring what women can do, wear, or say. So what do I mean by decentralisation

I mean economic decentralisation, and power to the states. Some start in this direction has already been taken by the Congress-led UPA government (one of the few correct decisions they took in the last 10 years). When FDI in retail was allowed, it was with the condition that each state would have the right to allow, or not allow, FDI in retail. The same logic needs to be followed across the board on most economic decisions.

For starters, a new state rights law can be passed which stipulates that all central government expenditures pertaining to poverty alleviation would be decided upon by individual states. At present, around R4.8 lakh crore, slightly above 4% of GDP, is spent on subsidies pertaining to food, fuel, fertiliser, kerosene, LPG, mid-day meals, and employment guarantee schemes. That is around R4,000 per person and around R20,000 per poor person. These subsidies are decided upon by the central government, and in the last ten years, by the theology of Sonianomics.

Given regional inequalities, we need to decide how this money is to be divided among the states. The Planning Commission has its methods, the Finance Commission has its calculations, and even the Finance Ministry has chipped in with its own (somewhat shaky) recommendations. Arriving at which state obtains how much is something a few rigorously tested quasi-academic studies can easily, and quickly, establish.

The first policy change will be, should be, that there are no more centrally-sponsored schemes, let alone any in-the-name-of-the-poor corrupt adventures. There will be the immediate benefit of removal of politically-inspired names (the Nehru this and the Gandhi that) for schemes meant to primarily help the poor. The states will be able to do what they wish with this money. Bihar should be able to obtain at least R60,000 crore (out of the total subsidies) to spend as it wishes. At present, Bihars total budget is around R1 lakh crore, with non-plan expenditures around R50,000 crore. The allocated Bihar budget for centrally-sponsored schemes (like MGNREGA) is only R5,000 crore.

If Chief Minister Nitish Kumar wants to spend this money on bicycles, computers and mobile for girls (but beware of Khaps!), he would have every right to do so. Alternatively, Nitish would have the right to spend this money on schools, hospitals, or for digging underneath every temple in Bihar to look for gold, as the UP Chief Minister, Akhilesh Yadav may also do. And alternatively yet again like Akhilesh, Nitish might choose to take MPs on a fact- and gold-finding trip to Australia.

What will Nitish have to do in exchange Short of not violating national laws, nothing. But he would have to agree to the following. His government would have the right to come up with new labour laws, which can be even more retrogressive than our existing 19th century laws, or with progressive laws that benefit Bihar's economy. He would have the right to make a decision on what property tax rates to set, what fuel subsidies to allow, and whether to have caste reservations. His state can follow affirmative action policies (such as his policy to benefit the girl child), or he can increase caste reservations to 67% of the population (as it is in Tamil Nadu). The half-baked Supreme Court ruling on reservations (no more than 50% allowed, as if people can be divided into halves) will be ruled unconstitutional, hopefully by the Supreme Court itself. If not, the people, through a referendum, can demand that there be a new Constitutional commission, provided a two-thirds vote is obtained.

The costs of implementing the new States Rights are negative, i.e., they are benefits. Let us assume that Nitish actually looks for gold. The citizens of Bihar will vote with their feet. Either they will leave Bihar for greener pastures, or they will kick him out. There are no costs involved in moving towards a more federalist structure called the United States of Indiaonly benefits.

The author is chairman, Oxus Investments, an emerging market advisory firm, and a senior advisor to Zyfin Research, a leading financial information company.

Twitter: @surjitbhalla