Approaching inclusive economic growth

The recent Planning Commission approach paper and the robust (and public) responses from the RBI and the finance minister offer a great opportunity to get some clarity on India?s growth strategy. It?s good to begin with what everyone agrees on.

First (just to make it explicit), growth is good and faster growth is better, other things equal. Second, India needs more inclusive growth?this goal is driven by pragmatism (reduce social conflict) as well as idealism. Third, health and education are areas of paramount importance for improvement?again, this is supported by practical considerations and by evidence, as well as humanitarian motives. India?s record here, particularly in its least well-off regions, is shockingly deficient. Fourth, India?s public sector is abysmal at delivering services, including those related to health and education.

Given what we all agree on, it is surprising how little consensus there is on how to proceed. Part of the problem is inertia. Obsolete economic models keep getting recycled, as a substitute for hard thinking and careful observation. In some cases, the thinking is shallow, or model-free. Another factor is self-interest: no one wants to lose out from change, or be the one who is blamed if a policy innovation goes wrong. Better to keep saying nice things and suggest throwing more money at old problems. Finally, the issues to be tackled are large, complex and interdependent: there can be a genuine diversity of analysis and conclusions. Thus, the RBI, FM and Planning Commission (PC) can all rationally disagree. It is surprising, though, that the PC approach paper itself has internal contradictions; there is an appearance of schizophrenia in its arguments.

It would certainly help if all parties in the debate made their assumptions and analyses more explicit. One can excuse the FM and RBI for being brief, but the PC does a significant amount of explicit modeling elsewhere. It is shocking that the approach paper?s 92 pages lack any explicit analytical framework, or any coherent model.

If that exists, it should have been made public, in background pap-ers reviewed by external experts. This is public money, supposedly being spent for the public welfare. There should be nothing to hide.

Absent the ideal of full information, what can we reasonably say?

First, since everyone agrees that the government is doing a terrible job of spending our money to improve the health and education of the disadvantaged (as opposed to providing many low-effort jobs for the relatively privileged or well-connected?there it does well indeed), it makes no sense to recommend increasing the amount of money that is wasted (the approach paper admits the waste but then says ?spend more??that?s the schizophrenic part). This conclusion is independent of the parlous state of India?s public finances, and the existence of fiscal responsibility laws. Those factors simply buttress the fundamental point.

But we still need to help the poor and disadvantaged. The reason why government money is wasted is well known. The new way of describing it is ?lack of accountability.? Put more plainly, the system provides no motivation or incentive for most government employees to spend money well, nor does it usually give them clarity of purpose or the means to act well.

Ultimately, giving greater control to citizens as taxpayers, through decentralisation, will be one way of improving this situation. The app-roach paper suggests this. But the build-up of local institutional capacity that is required will take time. What can be done more quickly? The PC offers minor suggestions, but none of these gets to the heart of the problem.

Essentially, the PC is not, and never will be, equipped to allocate funds to meet local development needs in areas such as health and education. After 50 years, it is still weakly considering measuring outcomes instead of just funds disbursed. It might be successful in a new role of evaluating and funding infrastructure projects above a certain size. But its channeling of funds in countless schemes and programmes will always be futile. The approach paper discusses reform here in guarded terms, but backs off from any real change.

Why not treat the state governments as responsible entities, accountable to their voters? Let the Finance Commission decide all non-capital transfers (making them unconditional), with a new methodology that replaces two ineffectual formulas (the PC?s and its own). There is no need to weasel out of revenue deficit targets, or give the states an incentive to copy the Centre in fiscal chicanery.

One could tie this new freedom for the states to requirements that they seriously assign significant tax authority to local governments, improve the working of state finance commissions, invest in building local government capacity, and report the results. They will need to do that to improve their own spending quality: give them a push in that direction.

Any change in the PC?s role and functioning can be done without changing any law, let alone the Constitution. If the reform is done in consultation with the states, and designed well, no state will be an immediate financial loser, and each will gain in flexibility. Each will have to be more accountable to its own voters. The PC does not need to lose either?its members could be more productively employed, concentrating on a few big things, where they might realistically contribute positively. Inclusive growth should start with basic health and education. There, improving public service delivery is critical. And that requires changing outmoded government institutions.

?The writer is professor at the University of California, Santa Cruz