Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Getting India to work again

Narendra Modi's strategy of competitive yet cooperative federalism can help increase the country's languishing total factor productivity

Before the last national election, a public debate had broken out between eminent economists. One side said that economic growth must come first to produce money for social sector programmes. The other side said investments to increase human potential will contribute to growth and must be given priority. The country’s basic problem was that investments, whether in infrastructure or the social sector, were not producing outcomes efficiently. Therefore, merely putting more money down clogged pipes was not a good strategy.

Prime Minister Narendra Modi has the right approach to release the productive capacity of the Indian economy. The problem is not finding more money to invest in India’s growth story. Investments will come from domestic and foreign sources, provided they can yield good returns. Investments in new projects have been stuck too long. Public investments in the social sector have also not been producing the required outcomes. The causes in both cases are bottlenecks in execution created by contentions amongst stakeholders and poor coordination among agencies. When the 12th Plan was being conceived in the Planning Commission, many suggested that there should be a moratorium for laying new foundation stones. Just put down finishing stones for the next few years, they said.

Some bottlenecks are at the centre but most are in the states (and districts and cities). Therefore, the approach of competitive federalism, advocated by the PM to motivate the states to make improvements is the right one. States must have the ability to prevent bottlenecks from arising and for clearing them when they do. The problems of coordination among agencies will be reduced by pressure for performance from the top and with systematic follow-up. The PM himself is setting the example. And several CMs are setting up their own programme management offices with assistance from international consultancies. However, this is an incomplete solution. It does not get to the root cause of many bottlenecks that arise upstream, in contentions among stakeholders about the purposes and the designs of policies and programmes.

India is a proud democracy. People have the right to speak up, to organize themselves, and to approach courts for their rights if they are denied. Many bottlenecks in projects and programmes (and in changing laws) in India arise because there are contentions amongst stakeholders about the purposes of projects, programmes and laws and about equity in the benefits. In a democratic system, cooperation of stakeholders cannot be mandated by top-down authority, as it may be within an organization in which the chief executive has the authority to fire employees who do not fall in line. Unhappy citizens cannot be thrown out of cities, states and the country. They will remain within and will continue to not cooperate if their needs are not met fairly. Therefore, states, cities (and the national government too) need methods for managing cooperation systems. These require systematic processes for effective participative planning, and for coordinated implementation by several agencies together. In fact, the NITI Aayog, formed on 1 January 2015 to replace the Planning Commission, has the charter to introduce such systems in the country, rather than to make plans and allocate money as the Planning Commission did.

The total factor productivity of the Indian economy must be improved. It is conventional to measure the productivity of enterprises and nations in terms of output per unit of labour. Therefore, productivity can be improved by employing less labour. However, India must employ more labour in production activities, because India’s large population of youth must be engaged in productive activities. Otherwise, there can be huge social and political problems. The government’s emphasis on skill development is right. But it will fail if more productive jobs are not created very fast too.

India needs more productive and internationally competitive enterprises to create more jobs. For this, enterprises in India must improve their total factor productivity, not merely labour productivity. And to achieve this, there must be greater cooperation of employees and managers, and more cooperation with other stakeholders too.

If there is one caution that one may suggest to government leaders in the centre and in the states, and to industry leaders, too, it is this: Do not try to ram down change. Seek the cooperation of stakeholders. Win their trust. India has democratic traditions and institutions; they give us a high standing in the world. Whenever the cooperation of stakeholders is not obtained while implementing projects or managing enterprises, and there is any sense of unfairness, stakeholders can react, by public protest or through the courts. Then bottlenecks will arise, reforms of laws will stall, and investments will slow down.

Good cooperation systems will improve India’s total factor productivity. PM Modi seems to have anticipated this. Therefore, he abolished the Planning Commission and created a new NITI Aayog to replace it.

The charter of the NITI Aayog requires it to promote good processes for cooperation amongst stakeholders, for bottom-up planning, and for cooperative federalism. The principal domain expertise the NITI Aayog must have is the expertise required to assist states and cities to develop cooperation systems. It must also create processes for the states and cities to learn from each other and cooperate with each other.

These processes are required to implement the strategy of competitive yet cooperative federalism that the PM has advocated for the country, which is a good strategy to increase the country’s languishing total factor productivity.

The author is a former member of the Planning Commission.