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COMMENT
Federal Dividends
States’ greater autonomy has helped economic growth, but accentuated regional disparities
JAYAPRAKASH NARAYAN
13 Feb 2009
Over the past 18 years, our federalism has matured considerably. Gone are the days when state governments could blame everything on the recalcitrant ‘central’ government. Four signi-ficant changes contributed to this transformation. First, non-discretionary sharing of revenues between the Union and states led to more balanced and equitable resource transfer. Second, the economic liberalisation process has substantially dismantled the licence-permit raj, and reduced fresh central investments in public sector undertakings. Third, the Bommai case judgement of the Supreme Court has at last made Article 356 of the Constitution a virtual ‘dead letter’, as B.R. Ambedkar had hoped. Finally, the era of coalition governments at the Centre made it necessary for the Union to respect states’ rights and political sensitivities.
Today, the states are pretty much masters of their own destiny. True, the needless rigidities of the Constitution, laws and traditions are inimical to innovation and improvement. But otherwise, states today have a great measure of autonomy, and can shape their economic growth patterns to suit the local conditions. The downside of this ‘localisation’ is growing regional disparities in the country. The per capita income of Maharashtra is almost thrice that of Bihar, and this disparity is growing, leading to massive migration and potential unrest and discord.
But the positive outcome of this diversity is increasing innovation and competition. Maharashtra stands tall despite its decade of bad politics; Karnataka is still better than Andhra Pradesh despite the crumbling infrastructure of Bangalore; Tamil Nadu is one of the better states despite intense political polarisation; and Gujarat is one of the favoured investment destinations despite Godhra. Clearly, long-term trends, the pre-existing institutional and infrastructural base, and contemporary factors are all crucial in growth and competitiveness.
Broadly, there are four issues we need to consider. First and most important, is the nature of politics and quality of political leadership. Illegitimate expenditure in elections, vote buying, liquor distribution, criminalisation of politics and a complete absence of norms in political behaviour — all these have a direct and profound impact on the society and economy. The economic decline of Uttar Pradesh and Bihar, and the relative decline of Andhra Pradesh among southern states are direct consequences of crass politics and failure of rule of law. Gujarat and Himachal Pradesh are two states where elections are relatively clean, vote buying is rare, and criminals have not yet made deep inroads into politics. You can clearly see the correlation between politics and economic outcomes.
Second, the priorities adopted by the states have serious long-term consequences. Tamil Nadu, Maharashtra, Gujarat and Karnataka (apart from Kerala) have focused on school education and healthcare over the years. The result: productivity has gone up, birth rates have declined, people are more skilled and investments are growing. States that built reasonable infrastructure have forged ahead, whereas Bihar, with very poor infrastructure, is perennially in difficulty. Sustainable natural resource development — soil and water in particular — has a long-term impact on competitiveness. States that focus on populist, unproductive schemes and freebies will ultimately lose out in competitiveness.
Third, national missions and programmes for school education, healthcare, and rural infrastructure are well-meaning. But if the basic policies are wrong (no competition and choice, no voice and accountability), and if execution is poor, we will only see burgeoning expenditure with little to show for it.
Finally, if collusive corruption is unchecked and competition is distorted, there is neither efficiency nor trust in government. Good entrepreneurs are deterred in such an environment, and predatory and crony capitalism strike deep roots. In today’s borderless world of rapid capital flows, the entrepreneurs prefer states where the business climate is more predictable and less corrupt.
Certainly, natural endowments and geography make a big difference in economic outcomes. But within those boundaries, the quality of governance — politics, priorities, policies and the perfidy of those in public office — determine the trajectory of growth and competitiveness.
The author is the founder and president of Lok Satta Party
jp(at)loksattaparty(at)com
(Businessworld Issue 17-23 Feb 2009) |
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