A GAUGE OF GOVERNANCE

It was the year 2003 when Laveesh Bhandari and I joined hands with india today to rank the states of the country on an annual basis. This product came to be known as State of the States ( SoS). In hindsight, it was quite a successful product, with an annual issue devoted to SoS, and an annual event, with awards. The product has changed a bit now.

Initially, there was resentment and criticism, often from states not ranked high. There were more brickbats than bouquets, especially when we made statements like “half the states are below average”. As we too learnt, we corrected ourselves and said “half the states are above average”. Gradually, the methodology came to be accepted.

Depending on the year, 90- 95 per cent of India’s national income originates in states. Make in India doesn’t happen in Delhi, it occurs in states. Most reform areas ( factor markets) one talks about are in the State List or Concurrent List of the Seventh Schedule. States do, and must, compete on the basis of governance and physical and social infrastructure, not on the basis of fiscal concessions. They compete to attract investments and human capital. They compete to retain financial and human capital. A clichéd point is often made. India has been excessively centralised. It was centralised because of colonial reasons. Post- Independence, it continued to become more centralised because of planning reasons. More than one commission report has underlined this. With the present government, the institutional undermining of this over- centralisation has started. There is the unqualified acceptance of the recommendations of the 14th Finance Commission. There is the shaping of centrally sponsored schemes by groups of chief ministers. There is the involvement of states in GST, Smart Cities and much more. There is a limited point about fiscal devolution. There is a broader point about non- fiscal decentralisation of decision- making too. Indeed, it is more than states alone. There is considerable heterogeneity within states, especially larger ones. One is thus talking about taking public decision- making and allocative decisions down to districts, perhaps even to blocks and gram panchayats. I think we have begun to see the beginnings of this decentralisation too, with the empowering of municipalities and gram panchayats. Rankings of states have proliferated. In this competitive environment, they are desirable sources of information about how a state performs, in comparison with others, and over time. Sometimes, such studies also document best practices that other states can then hope to learn from and replicate. Indeed, these studies often have disparate ends in mind. Some evaluate states as investment destinations, others gauge their human development or social progress, and still others as places to reside in. Each study has its limitations and biases, as SoS also did. However, when collectively, across a range of studies, a state doesn’t do that well, there is a message being relayed. Almost 50 per cent of capital formation now occurs in states. With the 14th Finance Commission, there is greater devolution to states and to gram sabhas. While outcomes don’t always follow public expenditure instantly in causal fashion, and there are still legacy issues ( under- developed transport infrastructure being one), this external scrutiny of efficiency of public expenditure and governance is welcome and desirable. Conceptually, statelevel bad governance is punished by voting out incumbent governments. But since “governance” is such an imprecise term, it is always good to put some numbers to it and quantify it. That’s what SoS started out to do in 2003.

STATES DO, AND MUST, COMPETE ON THE BASIS OF GOVERNANCE AND PHYSICAL AND SOCIAL INFRASTRUCTURE, NOT ON THE BASIS OF FISCAL CONCESSIONS