(Lecture) People throughout the world elect government at the first place because they expect those governments to deliver certain public goods and services. Here, public goods and services is in fairly broad sense. Each and everyone has his and her own priority. But somewhere down the line, after we have mentioned defense, security, foreign affairs and law and order, we will get down to the things like physical infrastructure; the road, the water, the electricity. We will get down to social infrastructure; the health, the skills, the educations. We will get down to market information and eventually to also perhaps to natural resources and markets.

Purely from an economist’s prospective, there is a certain optimal level of government at which these goods and services can and should be delivered. Anything higher up in that hierarchy leads to dis-economy of scale and scope. Anything below that threshold also leads to dis-economy of scale and scope. So, in that particular sense, there is certain optimal level of government for most of those goods and services.

Quite often we use the expression “governance” and treat it as almost synonymous with the government. It is not synonymous with the government. Had that been the case, people would not have used the term governance. Yes, there have been attempts to define governance, but to my mind, governance is more about the process. Even if one look from the point of view of the process, there is certain optimal level at which you can do that. Beyond that it cannot be sustained. Now what that optimal level is, is difficult to quantify and pin down because it varies from one part of the country to another; it varies depending on whether I am talking about the metro city or whether I am taking about a widely disperse state. But as a rough rule of thumb and no more than that, most public goods and services can be optimally delivered at population sizes between 25 to 50 million. Now don’t misunderstand that figure, as I said, it also depends also upon the geographical tracks. 

The next point is, because of colonial reasons, because of historical reasons, because of the planning process which attempted to centrally control the allocation of resources, over a period of time, India became extremely centralised. Overly centralised. Even if I make comparisons to a country like China, by whatever yardstick, India has been too centralised. Part of it was the organization that was the predecessor to the Niti Aayog; partly it was culpable but not entirely.

To ensure government, to ensure governance, we need to decentralize and devolve. Here, decentralize and devolve is not only in a narrow fiscal sense. There are too much to decentralization and devolution than purely fiscal stuff. Yes we have the seventh schedule, but the seventh schedule we have today is not the seventh schedule we had in 1950. There was creeping degree of centralisation even in terms of that seventh schedule, not very significant but it was there. Items moved from the state list to the concurrent list, from the concurrent list to the Union list, and even worst, the Union government continues to legislate on items that were on the state list. 

Throughout the country, particularly in urban and semi-urban areas, there is an increase degree of countervailing pressure, being exercised by the citizens for better delivery of goods and services. It is more palpable, it is more discernible in urban and semi-urban areas but it is gradually seeping through everywhere. Partly it happens through PILs, partly it happens through citizen charters, partly it happens through civil society pressures, in all kind of different ways. In other words, there is a countervailing pressure from citizens reflecting altered demand situations. But the system is still not in a position to respond to these altered situations of demands because it requires supply side responses, it requires changes in the system that planning works. It requires changes in the way resource allocation is done. And when one is stressing this point about decentralisation and devolution, what one is talking about is not just the fourteenth finance commission, the union finance commission, i.e., devolve a substantial sum of money in the form of untied funds to the state governments, and is also begun to do that a little bit for the Panchayats. The questions really to ask on fiscal domain is “what is going to happen within the states?”

Fiscal devolution from Union to the states in only one part of it. The fiscal devolution also had to happen within the states. What has happened to the state finance commissions? What has happened to the recommendations, in terms of implementation of the state finance commissions that had earlier been set up? Moving to the non-fiscal domain, what has happened to the transfer of the funds, function and functionaries? What has happened to the decentralised planning which is now a mandated part of the Constitution? All of these, I think, will not change until the seventh schedule to the Constitution is amended. 

Yes, amending the Constitution is a long haul but I personally think that only way to do this is not by depending on voluntary action by the state governments but by making it mandatory by changing the seventh schedule so that we have a union list, a state list and a local body list. Having said this, we now turn to the organization that was the predecessor to the Niti Aayog: the Planning Commission. Through the Planning Commission, funds used to be devolved to the states. It used to be devolved to the states through central sector schemes and centrally sponsored schemes. Where were those central sector schemes and centrally sponsored schemes devised? It were devised in Yajana Bhavan. And they had very rigid templates. So if, for example, the chief minister of Chhattisgarh felt that dictates and demands of the public distribution system in Chhattisgarh required that he distribute salt instead of food, he could not do that.

There was something called the Pradhan Mantri Gram Sadak Yojna (PMGSY) which was related to the construction of roads in rural areas. What did the templates of the PMGSY say? It said you could use the central funds to built roads. If I’m in the state of Jharkhand, I build that road. But in the middle of that road I want to build a bridge. Did the PMGSY’s template allowed me to do that? The answer is no. Under the Rajiv Gandhi Grameen Vidyutikaran Yojana, I could have two-phase transformer. If I wanted three phase transformer, could I do that? I could not. There are countless examples like this to state the obvious. 

India a very large country. India is a very heterogeneous country. The states differ. There is a great heterogeneity within the states. What I may want to do to bring down infant mortality in Kerala may be completely different from what I want to do to bring down infant mortality in Bihar. For that matter, what I want to do to reduce infant mortality in one district of Kerala may be totally different from what I want to do to reduce infant mortality in another district of Kerala. That is the reason it is important to decentralise and weaken those templates. Three sub-groups of chief ministers have now been set-up to specifically examine the centrally sponsored schemes, skill developments and Swatchh Bharat Mission. In other words, the shape and contour of what is required in the form of public expenditure will now be determined by the chief ministers. 

People often ask me Niti is totally irrelevant. There is no money that goes to Niti unlike the Planning Commission. And my response is that we are delighted that no money goes trough Niti. We don’t want the money to go through Niti. We don’t want a situation where, like in the form of Planning Commission, chief ministers had to queue up in the Yojana Bhavan. We want a situation in which Niti goes to the states. We want a situation in which Niti not only goes to Raipur, but goes to the districts, goes to the villages.

Quite often, in international negotiations, we are confronted with a situation where we are being asked as a country to have higher environmental standards, higher labour standards. And what is our response? Our standard negotiating respond is that different countries are at different level of developments. You are talking about the norms that makes sense when the per capita income crosses USD 15,000. You are country which has per capita income of USD 25,000 if not more. Here is a country India with the per capita income of USD 1,500 to 1,600. We are not ready for those standards. We are not ready for those norms. Studies show that people’s priority change as we move up the development ladder. By the same token, different states in India are different. We are at different levels of development. The premium on land in Chhattisgarh or Orisha or Jharkhand will be totally different from the premium on land in the national capital region. The price of land will be completely different. The price of labour will be completely different. All natural resources will be completely different. So, why are we enacting legislation sitting here in Delhi which tries to impose uniform standards throughout the country?

I realise I am provoking some of you but I am talking indirectly or I am referring indirectly to some legislations that has been enacted by the Parliament in recent years which, I personally think, is the domain of the states and should be the domain of the states. I am not talking about the legality of the law. I am talking about the spirit of he law. So, therefore, we need to decentralise and dissolve, not only from Delhi to the state capitals but within the states. Take it down to the districts. Take it down to blocks. Take it down to villages. We have six hundred thousand villages. Out of those, today around hundred thousand villages, despite almost seventy years after independence, have no judicial redressal today. Around the hundred thousand villages have no primary health centers. Around the hundred thousand villages don’t have schools. Around the hundred thousand villages don’t have electricity, don’t have roads. Around the ninety thousand of those villages, as per the 2001 census, have the population sizes less than 200 people. Please do realsie these are villages in difficult terrains. They are on top of hills. The cost of delivering the public goods and services, that we often tend to assume for granted in metros, is completely disproportionate to the cost of delivering per unit of public goods and services in those villages. As a principle of development, that is what we should target, as government interventions, as public expenditure programs.