Anticipating the Unintended #42: Baithe Baithe Kya Karein?

This newsletter is really a weekly public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

India Policy Watch #1: An Unmissable Opportunity to Build State Capacity

Insights on burning policy issues in India

— Raghu Sanjaylal Jaitley

In Political Order and Political Decay, Francis Fukuyama argues successful societies stand on three pillars – a strong state, rule of law and democratic accountability.

The key is to get the sequence right. A strong state must come first. States that democratise first, without building adequate state capacity, struggle. The government gets overwhelmed by the competing demands from different groups. It either succumbs to majoritarianism or gets consumed by internecine strife. This explains the failures of democracy in many countries that won their independence post WW2.

Does that mean countries should hold off democracy till they build state capacity? That’s difficult to sell to people who have been denied representation and share of power for ages. Also, how does a state become strong? We have countries that owe their state capacity to history. China has a long history of strong dynasties that centralised power to keep the many tribes in its periphery under check. South Korea and Japan built state capacity over years of monarchy or dictatorship before embracing democracy. There’s a strong path dependence to building state capacity. History matters.

So, is history destiny? Fukuyama believes states that got the sequence wrong – democracy first without a strong state – have needed shocks, like wars, to accelerate building of state capacity. The Civil War and the reconstruction that followed helped the US, while the two World Wars built capacities in western European democracies.

War minus shooting

How does India fare on the three pillars? Fukuyama contends India does well on democratic accountability and rule of law but lacks state capacity. This is not about big or small government. It is about a strong state being effective and doing things well regardless of the number of things it does. India has the sequence wrong. It became democratic while its history of fragmented princely states or a rapacious colonial ruling power didn’t offer any legacy of a strong state. There are exceptions to this history which explains pockets of better governance like Kerala, Mysore, Goa and parts of north-east.

Over the years, the state got bigger, not better, searching for that elusive capacity. It made matters worse with the license permit raj of the 60s and 70s setting India back by decades. India went through a period of reforms trying to get the state out of areas that markets could manage better. But this didn’t mean a secular, planned retreat from many areas and diverting capacity to a narrow list of priorities. Instead, while the state weakened in areas it quit, regulators with untrammelled powers replaced it. In other areas, the state continued its overarching and ineffective hold.

The current pandemic, like wars, is the kind of shock that Fukuyama cites for building a strong state. Kelkar and Shah in their book, In Service Of The Republic, also make a similar point:

In the early history of many successful states, the leadership focused primarily on two problems: raising taxes and waging wars. Learning-by-doing took place through the pursuit of these two activities. State capacity in the early days in the UK and in Sweden was learned by building large, complex organizations which raised taxes and waged wars.

The learning-by-doing that took place was not just about the narrow problems of raising taxes and waging wars. The learning-by-doing that took place was about larger ideas about how to organize the state (emphasis ours). The general capability of public policy and public administration was learned in these two areas, which was then transplanted into other areas… (contd)

…. If we live in a country with low state capacity, how does this change our thinking? In the international experience, waging war was an important pathway to developing state capacity. That pathway is not open to India, given the nuclear deterrent.

Well, for India, the war pathway opened up with the pandemic. This is a war-like opportunity to build effective state capacity that’s long-lasting and widely accepted in the society. So, how have we done so far?

Failing to plan, planning to fail

The past three months have exposed the planning deficit of the state. The severity of the lockdown, its duration and the chaos in lifting it when the curve has anything but flattened, place India in a league of its own. While it is easy to dismiss this line of criticism by asking for the counterfactual, there’s growing evidence we will have worse of both lives and livelihoods by the time we are done with this. Some part of this deficit can be attributed to a strong leader who trusts his instincts. But there’s no denying the large part played by India’s poor administrative capacity. This has meant a series of failures – lack of a wider consultation before announcing the lockdown, poor data analysis and response mechanism, patchy coordination between union and states, a bungling bureaucracy that floods us with circulars, clarifications and retractions and the usual distrust of seeking help from the private sector in managing the response.

A state whose constitution leans towards centralisation and a government with the strongest PMO in history should have started with an advantage in planning and coordinating the emergency response. It didn’t.

Incentives, incentives, incentives

The other area that stands exposed is how the incentives of state-run institutions work at cross-purpose with the policy objectives. The RBI and the finance ministry worked in tandem to cut rates, change reserve ratios and infuse liquidity into the banking system. PSU banks that account for 75 per cent of the market didn’t play ball. The excess liquidity remained parked at RBI at overnight repo rates. The fear of 3Cs (CVC, CBI and CAG) has distorted the incentive to take decisions among bankers. The bankers have seen the pendulum swing from ‘phone-banking’ model of giving loans (receive a call, clear the file) to being hounded by 3Cs for even a legitimate decision.

Even after FM made specific assurances about 3Cs and the ministry announced a package with government backstops, the actual disbursements have been meagre. Reports suggest older loans being renewed at newer rates instead of fresh disbursements to businesses affected by COVID-19. MSMEs, small businesses and specific sectors like food, hospitality and travel continue to struggle for liquidity.

Banking isn’t an isolated example. The inability of state-run organisations to scale the manufacturing of test kits, the low level of testing in many states to keep the numbers low and project control, the blame game between the rail ministry and states on running the shramik special trains and the inability to support migrants because, as the FM said, the state has no database; all lead to a simple conclusion. State-run institutions don’t have their incentives aligned to co-operate and solve problems during a crisis. Blaming others or private sector is easier.

Stop, or, I will shoot

While the state has come up short on enabling, it has outdone itself on stopping things. Bans, curfews, fines, price caps, arbitrary rules to regulate inter-state movements have all been part of its arsenal. Early on during the lockdown, we wrote about India being a ‘Republic of No’. Two months later, we have been surprised by our prescience.

The Indian state, like all states, is coercive. Its power of coercion though works best when it denies something; when it says no. The executive capacity isn’t geared to enable the rights of citizens. But it is very effective at curtailing them. A state derives its legitimacy when it recognizes the ‘reasons of belief’ of its citizens and then exercises its monopoly of force over the citizens in a way that doesn’t repudiate those beliefs. In India, this is easy. The one strong belief among its citizens is that of the state as a ruler with unlimited powers. The Republic of No follows from here.

The strong state paradox

Fukuyama pitted his strong state argument against the ‘orthodoxy’ of the Chicago school of neoclassical economics favouring a limited role of the state that dominated American policy for the most part of the last four decades. This crisis, like others in the past, has shown the markets can’t do all the heavy lifting. A strong state can intervene and move mountains at crunch time. But there’s a paradox inherent there. The sine qua non for a state that’s not all-controlling is a strong state that knows how to get there. You need to be strong to not be overbearing.

For Fukuyama, this is a balancing act that smart leaders have achieved. Leaders who get most big decisions right and those who build consensus than polarise. Applying these conditions – strong state, smart leader, non-polarised polity – provides a good framework to understand which countries got their COVID response right. The usual axes of authoritarian-democratic, welfare-market, or woman led-man led don’t explain it. The countries that got the health and the economy response right are those that tick all the three boxes – a strong state, a smart leader and a society in harmony with its differences. US, UK, China (no propaganda can wipe away its failure in containing this), Russia, Brazil and India fall short. South Korea, Germany, Japan, New Zealand and Australia do well.

Leadership matters

In last three months, the Indian state has gotten bigger and more intrusive with quiet acquiescence from people. But not more effective. This is a pity. India doesn’t tick the boxes on a strong state and a society in harmony. On smart leader, let’s just say, the jury is still out. The pandemic shock is an opportunity for PM Modi to build an effective and less controlling state capacity, free up markets and unite the country to face a common adversary. A smart leader with an eye on his place in posterity would not let this go. The other goals of aatmanirbhar Bharat or being a vishwaguru would follow.

The clock is ticking for him.

Read the full edition here.

Disclaimer: Views expressed on Anticipating the Unintended are those of the authors’ and do not represent Takshashila Institution’s recommendations.