Anticipating the Unintended #84: Factions Are Natural

India Policy Watch: The Indian State — Too Big or Too Small?

Insights on burning policy issues in India

— Pranay Kotasthane

In edition #23, we tried to answer this question: how to think about the Indian state? Closely related is another question: is the Indian State too big or too small? And as it holds true for many other phenomena in India, the answer is both.

I’m sure most readers of this newsletter feel that the Indian state is bloated, overbearing, and huge. Is that really the case? Let’s look at four important parameters.

Size Measured by Government Expenditure: Relatively Small

A government has three instruments at its disposal in any policy issue-area: produce, finance, and regulate. All three instruments require government expenditure. So, one way to judge government size is to measure public expenditure as a proportion of overall economic activity. The higher this parameter, the bigger the government.

In 2018, India’s overall public expenditure as a proportion of its GDP stood at 27%. The US was at ~38%; Russia was at ~36% GDP; Sweden was at ~49%, and Pakistan was at ~21%. Clearly, the Indian state is no outlier on this measure. Have a look at how some selected countries at disparate levels of economic strength stack up.

Essentially, this parameter has been steadily rising for most countries across the world, ever since the welfare state became mainstream. Moreover, there is a strong correlation between government spending and income levels — the richer a country, the higher the government’s expenditure as can be seen in the chart below. This is known as Wagner’s Law in public finance literature.

Note the US government expenditure. The common perception is that because it is a capitalist country, the government would have a smaller role to play in the economy. That’s clearly not the case when measured on this parameter. As the country got richer, there were even higher demands to fulfil on health, education, defence, and infrastructure. Coming back to India, as a low-middle income country, its public spending is relatively small as well. Clearly, the Indian state isn’t at the commanding heights of our economy.

Size Measured by Government Employees: Small

Another caricature of the Indian state is a bloated, overstaffed organisation with a large number of employees. But the Indian state is relatively small on this parameter too. Here are some stats making this point from Devesh Kapur’s must-read paper Why Does the Indian State Both Fail and Succeed?:

“In the early 1990s, the global average of government employment as a percent of population was 4.7 percent. In countries of Asia, it was 2.6 percent. In India, it was 2 percent .. Core elements of the Indian state—police, judges, and tax bureaucracy—are among the smallest of the G-20 countries. Indeed, while the absolute size of government employment peaked in the mid-1990s, in relative terms, the decline in size of central and local governments began much earlier.”

“A comparison between the size of the civilian workforce of the federal govern- ment in India with that of the United States is instructive. Remember, India has a large number of public enterprises and public sector banks that are under the central government. Even so, the size of the Indian federal government is half the size of its US counterpart when normalized by population: specifically, the US federal government had 8.07 civilian employees per 1,000 US population in 2014, down from 10.4 in 1995, while India’s central government had 4.51 civilian employees per 1,000 population, down from 8.47 in 1995.”

Even on this parameter, the Indian state is a relatively small one.

Size Measured by Competence: Too Small

Nothing counterintuitive here. The Indian state lacks competence in fixing the most basic market failures, from law and order to public health and education. The competence gap has only widened over the years as many bright Indians now have the option of taking up a job outside the government, even outside India, with changing times.

Size Measured by Ambition: Too Big

This is really where the Indian state is overbearing. The aspiration of the Indian state has no bounds. Right from the outset in 1947, the Indian state sought to transform colonial India economically, politically, and socially. This revolutionary DNA meant that the Indian state set itself ambitious goals regardless of the capacity to achieve them. Over the decades, new goals were appended to this lofty project.

What Does All This Mean?

So the Indian state is big as measured by its own ambitions. Unsurprisingly, it continues to own airlines and soap factories. As an ambitious democratic entity, it also seeks to frame regulations and laws to constrain virtually every private initiative in every issue-area. The paradox is that on all other parameters, the state is quite small, neither having the capacity to enforce rules nor the ability to anticipate the consequences of policies beforehand.

Devesh Kapur writes that this “precocious” nature of the Indian state has also skewed what Indians expect from their governments in three ways:

“One, precocious democracy tends to militate against the provision of public goods in favor of redistribution. Countries that experienced economic development prior to the transition to democracy also tend to adopt democratic institutions that constrain the confiscatory power of the ruling elite. However, when countries pursue democracy prior to economic development, the democratic institutions adopted enhance the redistributive powers of the state.”

“Second, a precocious democracy with electoral mobilization along social cleav- ages favors creation of narrow club goods. A central puzzle concerning the poor provision of basic public services in India is seemingly weak demand in an other- wise flourishing electoral democracy.”

“Third, an imperfect democracy with noncredible politicians will tend to emphasize the provision of goods that are visible and can be provided quickly, like infrastructure, over long-term investments, like human capital or environmental quality.”

Resolving this high ambition versus low capacity paradox is central to improving governance in India. It must choose to do fewer, more important things, and build capacity to do them well. Trade-offs are inevitable.

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.