Reform must come from within, not from without. You cannot legislate for virtue.
—James Cardinal Gibbons

When it comes to the formulation and implementation of public policies, especially related to social welfare, the dominant narrative in India has been the fault lies with the state governments. It is made to look that the central government is doing everything it can and yet states do not react positively. The fact that the implementation of various schemes differs across states is used as further evidence that it is the fault of the state governments if schemes are not implemented well. Subsidies and expenditure on various social welfare schemes, often inefficiently implemented, are the main reason why central fiscal deficits remain persistently high.

State governments, in essence, are seen as spoilt brats who do not know how to govern and have little idea about what is good for the people of their state. The central government, on the other hand, is like the responsible parent spending beyond her means to fund the profligacy of its wayward children.

But is this really true? Are state governments really worse than the centre when it comes to managing their finances? Are state governments truly incapable of devising and implementing social welfare schemes?

The evidence suggests a different story.

Take finances first up. According to a study done by Rathin Roy of the National Institute of Public Finance and Policy, or NIPFP (Twin-Twin Deficits, 2014) not only are states better at managing their finances, but also lead the central government in public investments.

“Since 1978-79, the government of India has been running a revenue deficit. This averaged 1.7% of GDP (gross domestic product) between 1979-91, 2.9% between 1991-2008 and 4.1% between 2008-2013. The states have also been consistently running revenue deficits from 1985-86. These grew exponentially from 0.1% in 1986-87 to 3.45 of GSDP (gross state domestic product) in 2001. However, after 2003-04, the macro-fiscal position of the states improved dramatically and the states have been running a balanced revenue budget since 2008-09. If one excludes Kerala, Punjab, and West Bengal, the remaining states have been running fairly healthy revenue surpluses. This is as true for rich States like Maharashtra and Gujarat, as for poorer states like Bihar, Orissa, and UP."

This improvement in state finances is not due to increases in central transfers. In fact, “central transfers as a percentage of GSDP over the past three years have been far lower than in the 1980s and 1990s. Thus, improvements in own revenue performance and expenditure management have led to this turnaround in the macro-fiscal position of the states."

Beyond securing a consistent revenue surplus, the states have also led the centre when it comes to public investment.

“The Centre since 2007-08 has been investing between 1% to 1.5% of the GDP; this includes investment in defence. From 2000-01 the Central Plan capital outlay has declined from 47% of the total plan expenditure to 20.4% in 2012-13. At the same time, the States have been consistently investing 2.5% of their GSDP. Even a poor state like Bihar has been consistently investing 5% of its GSDP since 2007-08."

In sum, the states have shown themselves to be better at living within their means.

The second issue relates to what states do with the money they have. Observers can frown upon Uttar Pradesh deciding to give free laptops to their people and Bihar giving away free cycles to the students just as much as they may denounce giving subsidized food as it is done in Chhattisgarh. But that is a political choice which a democratically elected government is free to make. If the people feel that free laptops are not working for them they can choose another party which gives subsidised food or provides skill training, etc. That choice is a result of a process of democratic maturity and can only happen when states, and indeed their people, are allowed to make their choices.

The important thing then would be to take a step back and start by asking if the central government should be in the business of devising pan-India social welfare policies in the first place. Would it not be better, for the most part, if the central government could leave each state to devise its own social welfare policies?

The key reason why central policies are implemented shoddily is the lack of ownership of such policies at the state level. For instance, the governments in Uttar Pradesh, whether led by Samajwadi Party or Bahujan Samaj Party, did not buy into the idea of rural employment guarantee, as embodied in the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) and as such UP’s performance in MGNREGA implementation suffers. On the other hand, Sikkim, one of the most difficult terrains to implement a labour scheme performed remarkably well primarily because the political leadership, and the state administration, saw MGNREGA as a way to improve the lot of its people. On the other hand, Gujarat reformed its administrative efficiency without any push from centre and Chhattisgarh implemented a right to food even before the central government thought of it.

The truth is that states know better than the centre about what works for the people. A big reason for this is that they are closer to the people and can be held directly responsible for mismanagement. Of course, there will be cases of corruption and badly designed policies at the state level. But there is evidence of that at the national level as well. Moreover, there is evidence of efficient policy implementation when the state government has full ownership.

As such, the central government should stop legislating for virtue. Evidence suggests that the central government cannot ensure implementation without a state buying into the programme. Evidence also suggests that state governments can efficiently implement the most ambitious of social welfare schemes—Chhattisgarh’s near universal right to food is a good example—without much central allocation or guidance.

By moving away from sustaining big social welfare schemes, the Narendra Modi government would not only improve its finances, but also allow for genuine ground up policy making to emerge at the state level. Moreover, come election time, there will be no room for obfuscation about who, between the centre and the state governments, is responsible for the lot of the people if welfare policies do not work.

The centre should in turn focus on issues and policies which are truly national in character, apart from promoting inter-state relations.

Policy Puddle comments on public policy developments every Thursday.

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