Home / Opinion / Partha Mukhopadhyay | The right size for the state

The Indian economy changed visibly in the first decade of the 21st century. It is fast growing with a rising share of modern services. Food is a much smaller share of an increasingly diversified consumption basket. Our economy is more open; we are saving at rates comparable to East Asia, and our private corporate sector is investing heavily in manufacturing and communication, as distinct from real estate. Our government is getting smaller and abjuring its claims on private savings. Finally, to meet the concerns of equity, a growing part of our budget is being set aside for redistributive subsidies and schemes.

So it appears that the elephant is not only moving, but positively sprinting. For evidence, just look at the numbers.

Over 1999-2000 to 2007-08, while the share of manufacturing has remained unnaturally stable at around 15% of output, with a slowly falling share of the unregistered segment, the share of primary activities in the national output, mostly agriculture, has declined by 7.5 percentage points and that of public services by 2.2 percentage points. Conversely, the share of construction has risen by 1.5 percentage points and that of services by an astonishing 7.8 percentage points; the share of telecommunications and information technology (IT) alone grew by 6.4 percentage points. Private telephony grew 10-fold and the IT sector threefold. Such shifts in the composition of activity rarely occur so quickly (see chart 1).

The economy is a lot more open. The trade ratio has near-doubled, driven in part by oil refining for export, with the share of exports and imports rising from 11.7% to 20.2% from 13.6% to 24.6%, respectively, in 2007-08 (chart 2).

Also See Where Is The Economy Headed? (Graphics)

The share of roti, kapda and makaan in the average consumption basket has dropped by at least 11 percentage points; food alone by more than 9 percentage points. Consumption has diversified, with the share of miscellaneous goods rising by 4.4 percentage points, consumer durables, transportation, health and education by 4.8 percentage points, and that of communication alone rising by 2.1 percentage points.

Concomitantly, we are saving more; up to 37.7% of income IN 2007-08 from 24.8% in 1999-2000. While household savings have risen, and corporate savings as a share of output have doubled, the really big news is the reduction of dissaving by the government. Government administration, which dissaved 5.1% of output in 1999-2000, has stopped doing so completely (chart 3)!

Gross fixed capital formation is up to 32.2% of output, from 23.4%. At least three-fourths of this increase is from the private corporate sector, half in machinery and equipment, and a quarter in construction. The share of manufacturing in investment has jumped from 31.7% to 39.5%, with over two-thirds of the increase coming from the registered segment. Even without the crisis, real estate had lost share heavily, down from 16.8% to 10.9%. Among others that lost share were agriculture and public utilities, that is electricity, gas and water supply (chart 3).

As indicated by the drop in dissaving, government became relatively smaller; the final government expenditure dropping to 9.8%, from 12.9% of output (before the crisis-induced blip). The share of Union and state governments in output fell from 2.4% and 2.8% to 1.7% and 2.0%, respectively, while that of local governments and quasi-government bodies remained stable at 0.4% and 0.5%, respectively (chart 4).

An affordable but increasing part of this growth is being redistributed. Subsidies have risen to 4.4% of output, from around 3% in the first half. This redistributive nature of the state is also reflected in the Union budget, where the share of subsidies and expenditure on schemes like the National Rural Employment Guarantee Scheme (NREGS) and Sarva Shiksha Abhiyan (SSA) have risen from 23.9% to 34.3% (before the increase in global fuel prices in mid-2008). This was partly possible because the share needed for interest payments—to service the national debt—fell by 8.9 percentage points (chart 4).

Yet, even as foreign capital floods into India to hitch a ride on this rampaging elephant, there is a sense of unease at home. Electoral campaigns based on the premise of prosperity are regularly rebuffed, whether nationally, as with the National Democratic Alliance in 2004 or at the state level, as in Haryana this year. Is this just the curmudgeonly Indian voter or do these figures mask a deeper truth? After all, a fast moving elephant can be an uncomfortable experience. Those not on the elephant and trying to climb on are terrified of being trampled underfoot, while those on it are afraid they will fall off. Is it this discomfort that pervades India today?

Much of this decade’s growth can be attributed to the unshackling of private energies, which harnessed latent idle resources. The state had to remove itself as an obstacle, rather than act pro-actively. However, it is unclear whether such a passive state will continue to suffice.

Infrastructure is seen as a key bottleneck to growth today but the real nub may be elsewhere. Industry segments that have seen rapid growth, such as IT and construction, have seen skill premiums rise sharply. The composition of our exports has become much more skill-intensive (chart 2). While physical capital such as infrastructure can potentially be rapidly accumulated when savings are high, the accumulation of human capital takes longer—this is constrained in India by low initial levels, poor public and private service providers, and the relative lack of financing. But, without it, not only will many of India’s millions not be able to ride the elephant, they even try to slow it to avoid being trampled. Without broader participation, the ability to redistribute may vanish.

There is also a need to mediate among the people on the elephant, those thrown off it and those trying to get on it. The growing link between economic and political power—most visible in transactions over land, as in special economic zones, mineral resources and large infrastructure concessions—has been restrained by the prior rhetoric of aam aadmi and garibi, but the state’s role as an arbiter and its broader willingness and ability to dispense justice is increasingly in question.

Unfortunately, inclusive growth is seen primarily in redistributive rather than participative terms. Not only is attention to participation missing from the state’s actions, it is, perhaps even more disturbingly, absent from its rhetoric. NREGS, much as one accepts the boldness of the concept and the need for its existence, is only ameliorative.

While the state has withdrawn from a number of areas it should not have been in the first place, it has yet to get into areas where it should be. The Indian state needs rightsizing—not as a euphemism for downsizing, but a deliberate managed expansion and reform. India has fewer government employees than the US, which has around one-fourth of our population. As of 2005 (more recent Indian data is hard to find!), India had around 12.2 million government and 5.8 million quasi-government employees, while the US had around 18.3 million full time-equivalent employees. Compared with 6.5 million public school teachers in the US for around 50 million students, India has just four million for over 133 million children.

Even as the aggregate gross fiscal deficit of the states dropped from 30.7% of expenditure to 13.3%, the share of education —despite or due to SSA—saw the largest fall in this decade, from 21.4% to 17.6% of total state-level expenditure. Health, water supply and sanitation were among other losers. Conversely, spending on energy, urban development and transport and industry went up, as did redistributive expenses on social security, housing and pensions.

In the next decade, the government must refocus, from redistribution to participation. It is imperative that the workers on NREGS sites be able to see a substantially different future for their children.

One such effort for post-primary education is the Rashtriya Madhyamik Shiksha Abhiyan (RMSA), but, like other such problematic schemes, it targets universal access only by 2017 and universal retention by 2020. Progress is still tentative, even though every year of delay adds many millions to the rolls of those who cannot participate. One can question whether the state should be in education, given that it performs so poorly, but evidence that the private sector does better is slim. If so, our energies must be focused on understanding how to improve educational outcomes, even as we explore alternative delivery methods within the public sector, as well as ad hoc skill development—moving away from the strait-jacket of Central schemes like SSA and RMSA.

Another area of substantial consensus and little action is strengthening the police and judiciary—though this assumes that politics is itself still not criminalized enough, and hence hasn’t created a coalition that delays justice. Our civil police, just over a million strong, are neither trained nor equipped for modern challenges. Neither do we have enough judges. Numerous reports address these issues, but we continue to be in a situation where judicial capacity is rationed and some types of crime need media attention to be sent to the front of the queue.

Rebuilding the Indian state is fraught with doubt, since we remain confused about its role. Nevertheless, if the Indian story is to move from contested redistribution to genuine participation, these rebuilding efforts and others that traverse more contentious terrains—compensation for land acquisition, the form and type of urbanization and nature and control of higher education—need the urgency, visibility, funding and political support that NREGS gets and the media attention investments in infrastructure get. Though many of the necessary decisions are not those of the Centre, glib pronouncements that simultaneously delegate and relegate these issues to the states should be resisted. A working mechanism for continuous engagement on federal-state issues, such as the one for harmonizing value-added tax earlier this decade, is essential to focus on participation.

It is unclear what may prod the state in this direction; whether the pressures released so far are inexorable or whether vested interests can stifle them. In the noughties, new rents from mineral resources and infrastructure concessions have conveniently replaced the old. How demands for more participation will affect these rents remains untested, but we may not have that long to wait to see these effects.

Partha Mukhopadhyay is a senior fellow at the Centre for Policy Research, New Delhi. Comment at

Graphics by Ahmed Raza Khan / Mint

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