The Reserve Bank and the finance minister should not be expected to reduce interest rates and increase budget deficits to compensate for failures of implementation when they fear that such steps could create further economic problems. Solutions to what are ‘management’ problems must be found elsewhere. They lie in developing capacities of institutions to design and implement processes that will produce desired outcomes effectively.
Turning to the social sector, India is doing very poorly, compared even to its peers in the developing world, on many measures of education and health. The principal problem is not insufficient allocation of financial resources, though some economists and social activists focus on the insufficiency of allocations. The principal problem is that the money allocated and spent does not produce the outcomes desired on the ground. Innumerable evaluations by many Indian and international agencies have documented the poor productivity of resources in India’s social sector schemes. An estimate of approximately 85 percent wastage, first mentioned by former Prime Minister Rajiv Gandhi, seems to be validated by many studies.
No doubt hundreds of millions of people across India are suffering from lack of good education, health, sanitation and other essential facilities they need for decent livelihoods. When the loss is so high, between the overhead tank into which resources are allocated by the finance minister, and outlets on the ground from which people obtain outcomes, it cannot be a good strategy to just keep putting more and more resources into the tank in the hope that more will trickle down to the people. The finance minister has to keep budgets reasonably balanced too. Therefore, delivery institutions in the social sectors must be fixed on a high priority.
In physical infrastructure sectors (urban infrastructure, roads, power, etc) as well as social sectors, a root cause for insufficient progress is poor implementation. Results have to be produced on the ground across the country—in the states, the cities, and in the villages. When state and local governments are not able to deliver effectively, and citizens’ demands for results increase, a natural instinct of the centre is to take charge. It devises solutions, imposes them and monitors implementation. Until it is found that this solution of centralisation is making the problem worse: ‘One size does not fit all’. Local bodies cannot develop their own capacities if they are not expected to manage. Thus, while there can be occasional successes with centralisation, the root problems of poor implementation and insufficient institutional capabilities actually become worse.
Prime Minister Narendra Modi has recognised that the time has come to reverse the over-centralisation of management in India. He has energised the concept of federalism and empowerment of states. Cities are being empowered to manage their own Smart City plans. Modi abolished the central Planning Commission, and replaced it with the Niti Aayog whose charter is to develop capacities for local level planning and implementation, and systems of cooperation between stakeholders.
This strategy is right. The finance minister can use his budget as a significant opportunity to help implement this strategy. It will help him achieve his own objectives of better outcomes for citizens with less strain on the government’s finances. Institutional capabilities—for local management, for inter-agency coordination and stakeholder cooperation, and better regulation—must be improved urgently. These are areas in which institutional capacities in India are falling short of its challenges and aspirations. Capacity building does not require much money. The amount required will be a very small fraction of the investment required to build physical and social infrastructure, whereas the improvements that better capabilities can make to the overall productivity of investments are very huge.
The finance minister’s budget is an occasion for him to strongly signal the need for a national thrust for building institutional capacities for implementation, and to enable this thrust with resources. The PMO can provide the ‘muscle’ for the thrust, as it seems inclined to. The Niti Aayog can provide the ‘mind’ (the architecture and design of processes required), as it has been chartered to, and for which the previous Planning Commission had already left some blueprints in the description of the India Backbone Implementation Network, and processes for developing urban and rural local management capacities. The finance ministry can provide the ‘money’. Their ‘3M’ cooperation in this strategic thrust will put India onto a trajectory of faster, more inclusive, and more sustainable growth.
(This story appears in the 04 March, 2016 issue of Forbes India. To visit our Archives, click here.)