A manifesto for a limited state
The government must pick and choose what to do if it wants to do things effectively, write REUBEN ABRAHAM AND VIVEK DEHEJIA
T his month marks the 25th anniversary of the 1991 devaluation of the rupee, widely seen as the first salvo in a barrage of economic reforms which unshackled the Indian economy from the twin burdens of socialism and central planning.
While the reforms initiated in 1991 have swept away the worst excesses of central planning, one major lacuna has been the absence of any major effort to downsize the state, or indeed to ask questions about the proper role of the state in a liberalised India. Central government expenditure in 2014-15 accounted for 14% of gross domestic product (GDP); add in state governments, and that comes to around 27%; finally, as estimated by economist Debraj Ray, adding implicit subsidies brings us to around 33% of GDP. That’s a third of what the nation produces in a year accounted for by the state, broadly defined.
A clear manifestation of this inability to downsize the state is the continued importance to the Indian economy of public sector units (PSUs) across a range of economic activity — everything from the behemoths in the petroleum and natural gas sector to firms manufacturing photo film and watches.
Further, the state continues to interfere in a range of private activities. Last month, the government notified matrimonial website providers that these could no longer be used for “casual hookups”, but only by those with a serious intention to marry. Similarly, the state continues to keep on the statute books archaic laws limiting the sexual choices of consenting adults.
This heavy hand of the state in private economic and social activity sits uneasily with Prime Minister Narendra Modi’s 2014 campaign mantra of “minimum government, maximum governance”.
One could credibly argue that the Modi government has made progress on “maximum governance”, by making existing government projects and schemes function more efficiently, with less waste and corruption. But one is hard pressed to see progress towards “minimum government”. This is disappointing.
We would like to stress that this is not a matter of ideology, some sort of a priori libertarian assertion that government is inherently bad and has no role in the economy. In fact, we believe a strong (but limited) state is the best guarantor of our liberal values. Instead, it is a much more pragmatic belief that, like any of us, the government functions best if it performs a limited and well-defined number of achievable tasks to which it is well suited and has the requisite capacity. Thus, trained as we both are as policy analysts, we would not be terribly good at being gymnasts or orchestra conductors, much as we might enjoy taking on these activities in addition to our day jobs. This is a matter of efficiency and practicality, not ideology.
People tend to conflate government with governance. More government does not mean more governance but more than likely means less governance, especially given low state capacity.
Another way to think about this is in terms of a budget constraint, which is about as non-ideological a ground reality as any individual or any government could face. Thus, there is a finite limit to how much any government can tax — the peak of the Laffer Curve — and therefore a limit on how much it can spend, unless it wishes to run a deficit perpetually.
It follows that, with a limited budget, any government will perforce have to prioritise how to spend its finite resources. In other words, it will need to have a criterion of some sort to decide that activity x and activity y are worth doing but activity z is not, and therefore best left to the market. Given unlimited resources, it may be possible to do all three, but we do not live in an unconstrained world. It will also have to reckon that losses incurred by PSUs, purely as a matter of accounting, come out of the same pool of money from which it must spend on activities x, y, and z. This is the opportunity cost of resources, nothing more.
Everyone except anarchists will agree that core activities of the state must minimally include national defence, law and order, and public health and safety. Controlling its outer perimeter and ensuring safety of persons and property within this perimeter are defining features of a nation-state, without which it cannot exist. These are basic goods which the market cannot efficiently provide and where the state must be the monopoly (or at least the principal) provider.
But beyond this, there is scope for legitimate disagreement, where ideology will likely influence selection criteria, even if unknowingly. And that’s perfectly fine.
Classical liberals, such as the present authors, and social democrats, to the left of us, would argue that the state should provide basic primary education and health care. Dyed-in -the -wool libertarians, to the right of us, might argue that these are better provided by the private market and, at best, subsidised to some extent by the state.
But this is for individual governments to decide. We have no desire to be prescriptive, but merely wish to point out that, on efficiency grounds alone, the government cannot do everything, and must pick and choose what to do, if it is to have any hope of doing things effectively. The fewer unnecessary things the state tries to do, the greater the likelihood it can effectively provide the absolute necessities any wellfunctioning state must provide. As a bonus, everyday corruption, which works around an intrusive and grasping state, will reduce, if not disappear.
This is, in other words, a pragmatist’s manifesto for a limited state, the first half of Modi’s mantra of “minimum government, maximum governance”.