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Photo: AFP
Photo: AFP

Does India suffer from an oversized government?

The problem with minimum government, maximum governance is it focuses on the size of the government without any attempt to improve quality of governance

What should the size of the government be? The general perception is that India has an oversized and bloated government which acts as a drag on economic efficiency and growth. While most commentators agree with the general statement of large governments being bad for economic efficiency, there is a consensus that even in a private capitalist economy, governments are necessary not just as regulators but also providers of basic services such as law and order, health and education.

However, there is little clarity on what the size of the government should be. There is even less of a consensus on how the efficiency of a government should be measured.

In general, most Indians believe that the government is too big and intrusive and should be downsized. This was the general feeling that the National Democratic Alliance (NDA) tapped into while campaigning for the 2014 general election. The NDA led by Narendra Modi championed the slogan of “minimum government, maximum governance" to drive home the point of a small and lean government.

However, the reality is that not only is the size of the Indian government small compared to countries with a similar level of development, its involvement has also come down over the years. One way to measure the size of the government is to look at the number of government employees per lakh population. The Seventh Pay Commission report gives a comparative estimate. The US, which has a similar federal structure, has 668 government employees per lakh population. In comparison, India has 139 government employees per lakh population.

Including state government employees and public sector undertakings does little to change the ratio of public workers to population, with the US employing five times more government employees per lakh population than India.

As a proportion of total workers in the Indian economy, less than 4% of workers are employed by various levels of government. The comparative figure is: 34% in Sweden, 32% in Denmark, 29.25% in Norway, 26% in Finland and 16% in the US.

Although there is no benchmark for the percentage of government workers and economic prosperity, India does appear to be an outlier as far as the percentage of government employees to total workers is concerned.

Another way of measuring government activity is by the size of government expenditure vis-a-vis the total economy. By this measure, too, total final government expenditure as a percentage of gross domestic product (GDP) was 10% in 2013, declining from 12% a decade ago. As against this, most European governments have upwards of 25% share, with the average for the European Union at 21%. The US spends 15% of its GDP as government expenditure.

In terms of government spending per person in 2009, India spent $886 per person as against $1,567 by China, $3,382 by South Africa and $4,053 by Brazil.

Clearly, by all measures of government activity, the problem is not the excessive size of the government. On the contrary, it is the small size of the government. But more important than the size of the government is the quality of governance.

Unfortunately, there is no correlation between the size of the government and the quality of governance. The latter depends on various other factors. Notable among them are the accountability and transparency of governments, a strong and independent judiciary and media and, finally, the trust of the citizens in the government.

Richer countries are able to spend more from state coffers and have larger governments because citizens trust the governments to be accountable, transparent and open to scrutiny. These governments also follow the rule of law and avoid excessive discretion in governance.

This, in fact, is a two-way mechanism with a large part of public services being maintained by the government, which in turn encourages greater participation and trust from the citizens in the government.

Importantly, a large tax-GDP ratio and large government spending also force governments to be accountable and be friendlier to the private sector since they are an invaluable source of revenue.

In general, northern European countries which have large governments also figure among the most business-friendly governments and are seen to perform better on the ease of doing business rankings than governments with smaller size.

The problem with the strategy of “minimum government, maximum governance" is that it solely focuses on the size of the government without any attempt to improve the quality of governance.

For a large country like India, what is needed is greater spending by the government on public services such as education, health, nutrition and maintenance of law and order.

On most of these, the government has taken a back seat, with the service of provisioning increasingly being handed over to the private sector.

While the government has moved ahead in ensuring a rule-based regulation of various aspects of governance, its efforts are limited to its involvement in natural resource management. However, its track record on improving the quality of governance on public services leaves a lot to be desired.

The solution to improving governance does not lie in reducing the size of government but in increasing the size of government and making it transparent and accountable to citizens.

Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.

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