Accelerating India’s Development: A State-led roadmap for Effective Governance

Accelerating India’s Development: A State-led roadmap for Effective Governance by Karthik Murlidharan is a superb book that provides sound conceptual frameworks and valuable insights to accelerate India’s development and improve the lives of over 1.4 billion people in the coming years. The state, as the entity with the largest ability to shape the lives of people, is central to this process. The book discusses strategies for improving India’s state capacity through politically feasible and practically implementable reform roadmaps and actions for key sectors to significantly improve outcomes and the delivery of public services. This article briefly summarizes the key insights from the book.

Karthik Murlidharan has over 20 years of experience studying, researching, teaching, and advising on how government can improve the lives of citizens through better policymaking and governance. His book delves into critical topics affecting public welfare, offering valuable ideas and insights for more effective governance in India. While there are no easy solutions, the book provides both a conceptual and practical roadmap with several implementable ideas to improve the quality of public expenditure, the hiring process, personnel management, and fiscal federalism. Policymakers can use these insights to significantly accelerate India’s development.

Indian state in a mission mode vs regular mode

The Indian state performs well in mission mode when tasks, outputs, and deadlines are well defined. However, in regular mode, it does a much poorer job of delivering basic public services, including education, health, security, justice, and welfare to all citizens. The weak performance of the Indian state in delivering these basic services is a critical constraint to India’s development, and the scale of the problem is staggering. Further, there is significant variation in state capacity and development outcomes across different Indian states.

Investing and augmenting state capacity

The central thesis of the book is that India’s weaknesses in basic service delivery are due to weak state capacity. This weak state capacity results from inadequate investments in improving state capacity. This inadequate state capacity is a major constraint to national progress. Investing in and augmenting state capacity should be the top priority for India. For economic growth and the welfare of people, state capacity is a prerequisite.

Indian state is not as large as it may appear

The Indian state is severely under-resourced and understaffed. Intuitively, one might think that India has too many public employees. However, contrary to popular belief, India has too few. India has 16 public employees per 1,000 people, compared to 57 in China, 77 in the US, 111 in Brazil, and 159 in Norway. The 77 public employees per 1,000 people in a market-driven US economy highlights the scale of shortage of public employees in India.

The variation in public employees per 1,000 people across states is even more startling. The number of public employees per 1,000 people in Bihar, Uttar Pradesh, West Bengal, and Tamil Nadu is approximately 3, 6, 6, and 13, respectively. Effectively governing Bihar with such a severe shortage of public employees—only 3 per 1,000—highlights the challenges in managing the state.

Shift from public services to private sector providers

The prevalence of private service providers and the difficulty of improving public systems have contributed to the view that it might make sense to gradually shrink the public sector by allowing private providers to increase their market share in service delivery, as seen in the telecommunications and airline industries. Consumers have benefited from private players offering better quality services at lower prices. While public providers like BSNL still exist, they matter less to citizens as their market share has significantly decreased over time.

However, this is a myopic view. While the expansion of the private sector and market competition makes sense for many industries, it will not work for core state activities. The state has a legal monopoly on functions such as policing and justice and plays a crucial role in providing public goods like infectious disease control and environmental quality. Even with the growth of private service providers, the government remains by far the largest provider of services in education, healthcare, and many other fields, often serving as the only option for the poor. ??

The tax paying elites and middle classes have primarily moved from public services to private education, healthcare, water and even security. It has further weakened the political pressure for improving the functioning of the state. There are studies which indicates that the quality of public services is higher when they are used by elites.

Private providers deliver slightly better services in a more cost effective way. The quality of service delivery by private providers in absolute terms is still low. The situation is like two man being chased by a bear. The first man is only required to outrun the second man to survive. The private sector is like the second man, slightly better than public sector. Further, there are also studies which shows that if the public delivery of services improves, the corresponding delivery by private players also improves to catch up. ?

Key startling facts

• Over 70% of the population use fee charging private providers for primary care, many of whom are unqualified, despite the existence of a free public healthcare system.
• Over 6 crore children under five are stunted or underweight.
• Despite spending over Rs. 7.5 lakh crore (about 3% of India’s GDP) on education annually, half the fifth-grade children in rural India cannot read at a second-grade level. Thus, about 1 crore children finish their schooling every year without even the basic skills needed to participate in a modern economy.
• Environmental degradation is impacting the health of people every day. India is having 13 out of the 15 cities with the most populated air in the world.
• The quality of public and private providers is positively correlated within markets.

Expanding ‘government as usual spending’ or improving the quality of public expenditure

Key startling facts

• Central and state governments combined spent over Rs 13 lakh crore in 2022-23, i.e. over 15% of the total budget, on education and health. Most of these services are provided either free or at highly subsidized prices. Yet, 30-70% of Indians choose fee charging private providers.
• Private school account for over 50% of school enrolment in Urban India and around 30% in rural India.
• India is one of the most over centralized countries in the world. India spends only 3% of its budgets at the local government level compared to over 50% in China.
• The combined spending of central and state governments in 2019-20 was Rs. 55.5 lakh crore, amounting to 27.6% of India’s nominal GDP of Rs 201 lakh crore that year.
• Even a 2% efficiency gain in public spending is worth over Rs. 1.1 lakh crore annually.
• States account for over 60% of India’s public spending. In service delivery sectors, the state accounts for nearly 90% of spending in education, and over 80% in health and welfare.
• Over 50% of public spending is in committed expenses of salaries (21.9%), pensions (11.7%) and interest payments (17.3%). These are actual figures for 2019-20.
• Total spending by state generally considerably exceeds revenues. In the year 2019-20, the central and state governments issued Rs. 15.6 lakh crore of additional debts. Thus, 28% of public spending in 2019-20 was financed by borrowing. Further, this debt figure only includes debt taken directly by governments and does not include debt by state electricity distribution companies and others.
• Net capital outlay was only 14.5% of total public spending i.e. Rs. 8.1 lakh crore in 2019-20.
• The shares of states total spending financed by their own revenues is over 70% for Delhi, Maharashtra, Gujarat, Tamil Nadu, Telangana and Haryana. For Bihar its below 30% and for states such as Madya Pradesh, West Bengal, Jharkhand and Assam.
• For Tamil Nadu, revenue from alcohol taxes yielded over Rs. 36,000 crore in 2021-22, which was around 12% of total budget spending and about 30% of the states own tax revenues.
• From the year 2016, the government of Bihar introduced prohibition to combat alcoholism. During the year 2015-16, government of Bihar generated 16% of Bihar’s own tax revenue alcohol taxes. ????
• Air India is estimated to have had cumulative losses of over Rs 1 lakh crore prior to privatization, which were ultimately born by the taxpayer.
• About 5% of the landowners gets 50% of the electricity subsidies. ?
• The Marginal Cost of Public Funds is the cost to society of public spending. Each rupee of state expenditure in India is likely to come at a cost of Rs 2 to Rs 3 for society. If the gain to society exceeds it, then only expenditure of Rs. 1 makes sense.

Investing in state capacity and better governance can enhance the outcome in all development areas and deliver much more for citizens than simply expanding ‘government as usual spending’. The default and intuitive response to address the governance challenges of sectors be it education, healthcare, public safety, skill development, urban development, rural development is to advocate for increase in department and programme budget. This book gives the critical insight that research shows that increased budgets often do not translate into higher outcomes. Whereas even the modest investment in better governance can have much larger impact than increasing ‘government as usual budget’. The evidence from multiple studies across sectors shows that investing in better governance can be over ten times more cost effective than increasing spending in a government as usual way.

The quality of public expenditure in India is poor on many factors, including low social returns on public investments, poor targeting, and delivery of service delivery of welfare spending, large time and cost overruns on capital projects, and subsidies that reduce economic efficiency and citizen welfare. We as a nation can achieve a lot if we improve the quality and the efficiency of the existing expenditure rather than focusing on increasing sectoral budgets.

Free electricity to farmers to facilitate irrigation costs tens of thousands of crores every year but generates low or even negative return on investments, and mainly benefits rich farmers with more land who use more water, and has accelerated water crisis by encouraging sub-optimal water intensive agriculture.?

The school enrolment has significantly increased with various interventions of the government, but it has not resulted into improved learning outcomes. The surveys that civil society group Pratham releases states the grim status of schooling, too many of school going children finishes the schooling with very poor learning outcomes. Pratham studies revealed that children between the ages of 14 and 18 struggle to read a standard II level texts. More than half of the children are not able to do basic arithmetic.?

The high public investment itself is not going to solve the myriad problems related to infrastructure, developmental, education, skilling, employment, healthcare etc. The focus should be on improving the effectiveness of the Indian state and the quality of public investment rather than advocating for increased budget.

The book with the analogy of a car beautifully explains it. The Indian state is like a traditional Ambassador car. Political parties compete to see who gets to drive, which passenger to prioritize and where to steer it. However, the car itself is outdated. Adding sectoral budgets without improving the government efficiency is like adding fuel to an antiquated Ambassador car. The additional fuel can help move the car a little bit, but the translation of fuel into distance will be limited. The Ambassador car won’t move much even with more fuel (budgets) and pressure (accelerator), without strengthening and upgrading the car itself. ??The top priority of the government should be to upgrade the car i.e. the Indian state by investing in governance and public system rather than focusing on where the car should go and adding more fuel to it. It will accelerate India’s development.

Enhancing state capacity and better public system or simply expanding budgets for more ‘government as usual spending’

The ideological and public discourse revolvers around whether government should prioritize expenditure on physical infrastructure or on social sector and welfare. ?The economists leaning on the economic right have argued that economic growth is the key driver of better long term development outcomes and therefore prioritize growth enchasing investments, such as infrastructure. The economists leaning on the left have argued that the goal of investment is not boosting per capita income per se but improving human development and quality of life, through better education, health and others, which will also improve longer term growth. The views of both the sides economists leaning on the economic right and right have merits. More growth gives more human development and more human development would give more growth. However, this focus on budget allocation may be distracting from the more important issues, which is to improve the quality of public expenditure rather than what we spend on. Investing in enhancing state capacity and better public system to improve governance will enable us to improve outcomes in all sectors and deliver much greater improvement in citizens life than simply expanding budgets for more ‘government as usual spending’.

Traditionally the focus is on budgetary allocation across sectors and less on how allocations improve service delivery and citizens life. It is the state capacity which actually determines how the top line of budget allocations translate into the bottom line of development impact for citizens. ??

The landmark 1991 economic reforms could be done relatively quickly because they were mainly about scrapping and removing ineffective policies. In contrast, building a more effective state is a long-term task that will require steady and continuous effort.

‘Sarkari naukri is the dream job, and the second order and third order consequence of that

Key startling facts

• India’s tax to GDP ratio of 18 percent is around half that of higher income countries, such as the US or the UK.
• India’s ratio of public employees salaries to GDP is among the highest in the world.
• As per book of Amartya Sen and Jean Dreze, published in the year 2013, relative to GDP per capita, public-school teachers are paid three times more than in China.
• As per multiple studies, government school teachers earn five to ten times more than private school teachers in India.
• Given India’s ratio of public employees salaries to GDP and low tax to GDP ratio, it is easy to see why the government is so understaffed.

India has among the highest public sector pay premiums in the world. The high cost of salaries and benefits of public employees contribute to staff shortages and weak state capacity. Further, there are studies which suggests that unconditional increase of pay of incumbent had zero impact on the outcome, whereas even modest amounts of pay linked to performance gets significant improvement on outcome. The demand to revert to old pension scheme in many states will further contribute to staff shortages without much impact on the outcomes.

With the existing tax revenues, it is unaffordable to hire enough staff at these compensation levels and it has significant unseen impact on the overall economy and the market. Its distorting the market. As government by far is the most lucrative employer, there are lakhs of applicants for every government job. The government job has become like a lottery. The candidates are attempting everything from being a clerk, to a teacher, to a forest guard. The job more or less does not matter, what matters is the secure government job with attractive pay. It incentives rote learning and exam taking skills as the most lucrative employer in the economy cares only about exams and not skills. Its not as if the private sector is not creating good jobs, but the government has distorted the labor market by being the most lucrative employer. The industry many a times has complained that most of the graduated are lacking the skills and are unemployable in the private sector. All this has resulted in such a system that is not serving the state, its not serving the candidates and it is not serving the economy. ?

The most audacious decision to adopt democracy on universal franchise at Independence made India a global outlier, since there was no precedent of a country doing so at such low level of literacy and per capita income. The policies, programmes and various efforts of the government post-Independence is also reflective of the this low level of literacy and per capita income.

Although the book gives many insightful actionable roadmap for building an effective state and accelerating India’s development, a few key insightful ideas are;

• Data and Outcome Measurement: Data can be an integral part of state level planning, resource allocation and management. With the technological advancement and emergence of tablet and smartphone-based data collection, data collection is now quicker, cheaper and more accurate. Annual district level multisector surveys can be undertaken to measure key development indicators for sectoral outcomes. High frequency phone survey data through outbound call centres can also provide rapid feedback on ground level programme effectiveness and can significantly improve the service delivery of various programmes and schemes.
• ?Personnel Management: Personnel Management is one of the most important components of management that matters for organizational effectiveness, and somehow this component is severely neglected in India’s policy discourse. The state capacity cannot be improved without improving the personnel management, quantity, quality, autonomy and accountability of public employees. Investing in human resource management information system, data driven performance measurement and management, institutionalizing capacity building and competence based career progression, hiring staff on fixed term renewable contracts can be implemented and iterated to strengthen the state capacity. The idea of empanelment of all those people who are taking UPSC and state service exams can bring good results. The system can only admit about the top 0.1%, for the rest it may be big waste. But in reality there is not much difference in quality between the 0.1% and the top 1%. All those candidates in the top 1% or 2% can be empaneled with ranks for government based 3 to 5 year contractual jobs. Depending on up the requirement of qualification, the state may directly engaged them as per the requirement. ??
• Federalism and Decentralization: If the local government can generate more revenue through property tax and user fees, it would lead to effective decentralization and local government control over the expenditure as per the demands of the society.
• Judicial System: The Indian court system has accumulated a backlog of about 3 crore cases, which have been pending for over a year. Securing justice is a long and arduous process, and the process itself can be a punishment. Filling judge vacancies in district courts results into speedy resolution of cases and boosts economic activity by unlocking assets for productive use, which would otherwise be unutilized while under legal dispute.
• Misdirected accountability towards compliance: The accountability in the public system is directed towards compliance rather than outcome. The inadequate autonomy and bureaucratic process of compliance is also having significant impact on the service delivery. The increase in autonomy on process and accountability for outcomes can significantly improve the service delivery and outcomes.

Accelerating India’s Development: A State-led roadmap for Effective Governance by Karthik Murlidharan is a must-read book with full of insights for everyone, concerned citizens, policymakers, students, researchers, administrators, those on the economic right left or center.? This book teaches us on thinking and acting in the public interest, offering valuable lessons to contribute towards accelerating India’s development.??????????