The problem of State capacity
A defining theme of India's challenge today is capacity
constraints. Even when an objective is sound (a public good is sought
to be created), and when the resourcing is adequate, the Indian policy
landscape is littered with failure. We are very bad at achieving the
desired objective. To get to sensible outcomes, we need to push on
three things: Focusing the government upon the small class of problems
which are public goods (i.e. doing fewer things), ensuring adequate
resources, and achieving better State capacity.
There is a palpable sense that State capacity in economic policy
has declined in recent years. On one hand, this is about a relative
and not absolute problem: Every doubling of GDP brings
forth new challenges, and requires both new kinds of knowledge and new
kinds of agencies and laws. In India, our stasis on the organisation
chart of government, where we perpetuate laws and agencies designed
for a very different India, has led to a gross mismatch between the
requirements of the country and the existing capabilities of the
government. As an example, there are big problems visible in
is over 75 years old and in
that is 25 years old which have been left unattended. In addition,
the staff continuity at the Ministry of Finance from the early 1990s
onwards was significantly disrupted when Pranab Mukherjee became FM in
2009. These two factors put together have created a serious gap in
capacity.
The role of think tanks
The mismatch between the capabilities of government and the
requirements of the economy has led to a bigger role for organisations
such as think tanks that are outside government. Four think tanks in
Delhi matter -- NCAER, ICRIER, CPR and NIPFP. In the Economic
Times today, I have a column about an interesting
of reinvention that is taking place at these four institutions,
and its larger consequences for the economic reform process, and for
the life of the mind in India.
Hurdles in the next phase of financial reform
In the Economic Times,
Vikraman has a fascinating piece where he takes us back to the
successes of the last 20 years in financial reform, and reminds us
of the role of leadership teams. The achivements of that period
were critically about the MoF team including Dr. P. J. Nayak, the
SEBI team including S. A. Dave, G. V. Ramakrishna, S. S. Nadkarni
and C. B. Bhave, and the NSE team including R. H. Patil, Ravi
Narain, Chitra Ramakrishna, and others. The capabilities of these
three teams, and their ability to work together, was crucial to the
success of
reforms of the equity market.
Shaji says that we are now on the cusp of the next wave of
institution building, as the FSLRC architecture is implemented in
coming months and years. This involves rebuilding RBI towards clarity
of purpose and quality of work, and building six fairly new things:
the Unified Financial Authority (UFA, the regulator of all finance
other than banking and payments), the Financial Sector Appellate
Tribunal (SAT on steroids), the Resolution Corporation (starts from
scratch), the Financial Redress Agency (FRA, starts from scratch), the
Public Debt Management Agency (PDMA, starts from scratch) and building
out the Financial Stability and Development Council (FSDC, which has
to go from tiny to substantial). Shaji says that this will require
inspired leadership akin to that found at MoF, SEBI and NSE in the
1990s.
On this same subject, see
the talk by Chitra
Ramakrishna at the recent FSLRC
meeting
in Delhi organised by the Institute of Company Secretaries.
In many respects, we are in better shape when compared with the
early 1990s
There is no question that we will need all the implementation
capacity that we can find in making this big transition work. It will
require capabilities at MoF and the seven agencies that are quite
different from the behaviour of these organisations in recent
times. To some extent, Shaji and Chitra are right in stressing the
importance of leadership at MoF and at the seven agencies in their
formative years.
At the same time, there are four elements which make me see this
differently:
- The unique difficulties of a startup
- When SEBI was
founded by S. A. Dave, Ravi Narain and others, they were starting
from a blank slate. The very concept of SEBI had to be invented from
scratch. Political battles had to be fought against the Controller
of Capital Issues at the Ministry of Finance who was not keen on
ceding authority on merit-based clearance for raising capital, and
against the BSE that was not keen on having regulation and
supervision.
These issues are all now behind us. Other than one
minor part of Indian finance that is hostile, the bulk of Indian
finance will accept the expanded-and-restructured regulation and
supervision of the draft Indian Financial Code without a
whimper.
And, with the draft Code in hand, the journey does not
start from scratch. The 450 sections of the draft Code constitute a
clear blueprint for what each of the seven bodies has to do. It is
more like building NSDL in 1995 -- where there was full clarity
about the mission -- and less like building SEBI in 1988. - Insourcing vs. outsourcing
- All the staff capacity does
not have to be in the government. While government and regulatory
agencies have weaknesses, numerous other organisations have capacity
of various kinds, which can be pressed into service. This includes
domestic and international consulting firms, think tanks,
universities, industry associations, practitioners, etc. These
choices were not available 20 years ago.
From 2007 to 2013, we
got a paradigm shift in financial economic policy thinking in India,
where the experiences of 1991--2007 were digested and turned into a
program for action through the Mistry, Rajan, Sinha and Swarup
reports, and then FSLRC. This showed capacity of a kind which was
not present in the early 1990s. If an FSLRC-like project had been
attempted in 1992, it would not have been possible to find
146 persons required to man it. - Leapfrogging to IT-driven processes
- In many situations,
achieving the objective is synonymous with
and running a large IT system. By now in India, there is quite a
bit of experience and achievement in building
government organisations. The Indian State does not have, and
probably never had, the ability to run FRA in the pre-computer world
[
if the FRA is an IT-driven process, then implementation is within
reach. This implementation capacity is something that India did not
have in the early 1990s. - Sound institutional design embedded in the law
- Laws in
India have been skimpy in their drafting. As ane example, the
Payments and Settlement Systems Act of 2007 gives RBI power over the
payments industry. It says little else. It does not state regulatory
objectives, it does not establish checks and balances; there are no
feedback loops of accountability mechanisms. Under these conditions,
the individuals who lead regulatory bodies possess power without
matching responsibilities. The behaviour and functioning of each
regulatory agency then changes dramatically based on the individuals
found within it. It is, hence, not surprising that Shaji sees such a
profound impact of the individuals at the helm.
In contrast, the
essence of the draft Code is a framework of institution building for
these seven organisations. For each of these organisations, there is
clarity of objective, there is specificity of powers and there are
elaborate accountability mechanisms. While setting them up at first
will be hard, it is likely that the Code will make them behave as
genuine institutions that are bigger than the individuals that
inhabit them.
Conclusion
Shaji looks back at our glorious past, and bemoans the lack of
heroes. But as Bertolt Brecht had Galileo say, sad is the land that
needs heroes.
The essence of the draft Code is a system of
checks and balances, and a framework for accountability, through which
the seven bodies will deliver results when manned by ordinary public
servants who are not heroes. This is the way regulation works all over
the world, and this is what we should aspire for in India. Let us
financial economic policy an everyday and humdrum process. As
Keynes wrote in Essays in Persuasion in 1931, If economists
could manage to get themselves thought of as humble, competent people
on a level with dentists, that would be splendid.
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