Governance challenge for India

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Published: July 3, 2019 2:23:13 AM

The list of economic challenges does not stop with these four, but it is more important to understand the governance structures that make these and other reform areas challenging, before lengthening to-do lists.

Governance, India, economic challenges, economic challenges for India, financial sector, tax system, opinionGovernance includes lawmaking, institution building, regulation and administration. All of these are potentially intertwined in designing good policies and in implementing them.

Four of the most important economic challenges for India, as I argued in my last column, are fixing the financial sector, solidifying the tax system, shedding inefficient public enterprises, and reforming the agricultural sector (‘Economic challenges for the new government’, FE, June 18; https://bit.ly/2xc9vDg). The list of economic challenges does not stop with these four, but it is more important to understand the governance structures that make these and other reform areas challenging, before lengthening to-do lists. Indeed, governance challenges invariably underlie economic challenges.

The slogan of the NDA in the 2014 election campaign, “minimum government, maximum governance,” hinted at an overarching idea of reducing unnecessary government interference (presumably including, but not restricted to the economy), while improving the efficiency of what government is actually supposed to do. But that slogan does not provide enough conceptual depth or richness to be a useful guide to action. So how should one think of the underlying governance challenges that India faces?

Governance includes lawmaking, institution building, regulation and administration. All of these are potentially intertwined in designing good policies and in implementing them. For example, inadequate bankruptcy laws, government ownership of banks and non-bank financial companies, and poor regulation all contributed to the bad debt problem in India’s financial sector. The laws were recently improved, and the quality of regulation was improving in a parallel and complementary development, but the political compulsions of the ruling party and the overreach of the Supreme Court have both tended to move the situation further away from a speedy and efficient resolution of the problem.

This is India’s core governance challenge: a tendency to concentrate power and control at the top, among a small number of loyal politicians and bureaucrats. The economic reform process of the last three decades has been marked by innovations in laws, regulatory institutions, and sources of administrative and policy expertise, all of which have the potential to support a higher growth path for India. But the general trend in the current ruling coalition has been in the direction of reversing these innovations, at least de facto if not by explicit rollbacks. Even robust governance institutions are subject to damage and erosion if a leader is determined, incompetent or malevolent enough: one is seeing this process occurring in the US, where cronyism and corruption are rampant in the Donald Trump administration, expertise is discarded or ignored, and there is pressure on supposedly independent institutions such as the Federal Reserve. One might argue that Trump is a strong leader who knows what he wants and is getting it by imposing his will, but many observers are concerned about the resulting long-run damage to various governance institutions.

India’s potential challenges are somewhat different. In particular, its legal and regulatory institutions are not yet robust and efficient enough to support a thriving modern economy. For example, the agriculture sector is one of the areas of the economy that has seen the least progress in changing how productive activities are governed, instead continuing with archaic and severe market restrictions and distortions. Government control of the sector is politically valuable, and it remains to be seen if the new government’s stated interest in reform translates into changes that are politically viable. The internal organisation of the judicial system, namely the manner in which legal proceedings are conducted and lawyers and judges are educated, also remains largely unreformed, as does the bureaucracy.

In this situation of limited institutional strength and efficiency, there is a real danger that those areas which have seen progress, such as the functioning of the Reserve Bank of India (RBI), or where there is a strong tradition of competence and trustworthiness, such as the Election Commission of India, will have their quality eroded by a dominant political force at the top of the governance pyramid. The Election Commission is an interesting case, since it has been considered one of India’s strongest regulatory institutions, but it came in for criticism in the recent election for evidence of weakening impartiality. Of course, the Election Commission does not regulate economic activity, but if elections are no longer reliably conducted, their role as an accountability mechanism for politicians will erode.

In sum, governance is not well measured by terms such as “maximum,” but by indicators of outcomes and efficiency, and by measures of accountability. Cities such as Bengaluru have experimented with citizens’ scorecards, and there is much more that can be done in that respect, especially at the level of cities and towns, where the quality of governance affects residents’ daily lives most directly. At the national level, the link between efforts and outcomes is more tenuous, and the decisions to be made are more abstract: the benefit of giving RBI the freedom to conduct monetary policy without political interference is not something the average voter will appreciate. Privatised banks that are more efficient, but still incentivised to serve less-well-off rural customers, will be appreciated more directly, but again, the link between the government policy and the benefits to citizens is not transparent. It may be that good governance and its recognition will be something that are best built from the bottom up, in which case the national government’s role is to allow and enable subnational governments to flourish. In India’s current situation, both vertical and horizontal deconcentration of governance are desirable, but achieving either will be a challenge.

(The author is professor of Economics, University of California, Santa Cruz. Views are personal.)

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