A senior factor in Rajasthan’s ruling party responded to my question on handling the burden of unsustainable borrowing for their recent decision on civil servant pension with “the bill due in only 25 years”. My follow-up question about the unfairness of 60 per cent of Rajasthan government budget allotted to 5 per cent of the state’s population said “You don’t understand politics”. I think questions about electricity in Punjab will get similar answers. The recent decision to discount extrabudgetary borrowing from government borrowing limits reminds prime ministers that they are the predecessors of good policy by replacing stimulants, painkillers or placebos with sustainable drugs — five structural interventions that create high-paying jobs.
The modern state is a welfare state. Human life was “dirty, brutal, and short” before there were democratic governments that could tax and borrow. In a summary of the history of equality, the economist Thomas Piketty suggests that “the world of the early 2000s, no matter how unfair, is more equal than 1950 or 1900, which were…more equal than 1850 or 1780”. But how the welfare state is financed matters. Angela Merkel warned of the unsustainability of Europe for being 8 percent of the world’s population, 25 percent of its GDP, and 50 percent of its social spending. If Indian state governments were able to print money or borrow money without limits, some would have financial resources similar to Sri Lanka’s money.
Adjusting the state’s borrowing limits for its off-budget loans leads to transparency because they are routinely hacked through vehicles for plans that are billed in the future. Confiscation of future spending—interest payments crowding out expenses and revenue expenditures crowding out capital expenditures—important because our prosperity problem is productivity and wages, not jobs. Unemployment is a poor measure of the labor market because self-exploitation is inserted into the three shock absorbers of low wages – agriculture, waged informal employment and self-employment. But five structural interventions by state governments can create higher paying jobs:
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Reducing Regulatory Cholesterol: States control 80 percent of India’s employer compliance ecosystem of over 67,000 compliance cases, 6,500+ files and 26,000+ criminal sentences. Raising wages requires a larger population of highly productive firms that access capital and valuable talent, use technology, and care about corruption (transition losses between how the law is written, interpreted, practiced, and enforced). State governments that rationalize, decriminalize, and digitize their ecosystem of compliance will reap less corruption and higher formalities.
Public School Reform: Government government skills missions have taught us that we cannot teach children in three months or three years what they should have learned in 12 years. The most powerful tool for social mobility and employment is free and quality school education. Interventions to reform primarily public schools have included smaller class sizes, teacher salaries, teacher qualifications, and toilets. This is useful but not sufficient. State governments that overhaul school performance management (fear of falling and teachers hoping to rise) and governance (allocation of decision-making rights over resources and employment) will create an unfair advantage in human capital.
Education and Employment Convergence: State governments have often expanded and reinforced India’s traditional walls between degrees and skills. This division makes no sense for the new world of work, organizations, and education. States should establish skill universities that create qualification pattern (between certificates, diplomas, advanced diplomas, degrees), delivery flexibility (online equivalent, apprenticeships, on-site and on-campus classes), and prayer to one God of employers. Degree innovators innovate at the intersection of employment, employment, and education. State governments that remove barriers in their path will see that their number of educated workers exceeds the number of full-time educators.
Transfer of money and power: Cities lead to productive job creation – New York’s GDP is higher than that of Russia. Cities achieve social justice – The father of an IAS friend traveled from his village to Jodhpur to have his hair cut because the village barber refused to serve his caste. It took 70 years after 1947 for 28 states to override the budget of the central government. The combined budget of the state governments now exceeds Rs 45 crore, but 2.5 of the municipalities and panchayats have a budget of only Rs 3.7 crore. Governments that move money and power from state capitals to their towns will avoid the curse of megacities and create the competition that has driven China’s growth (it has 375 cities with more than a million people versus our 52).
Civil service reform: Opportunity infrastructure needs better public schools, primary health care, police, and infrastructure. State governments should sell more than 1,500 loss-making public sector units, cut civil service compensation to less than 40 percent of budget spending, and replace spending with capital expenditures. Moving from expenditures to results needs a new human capital system for civil servants through seven interventions; Structural, staffing, training, performance management, compensation, culture and human resource capabilities. The tone from the top “Do nothing so we can do a better job” refers to the desire to create more high-paying jobs than advertisements.
Only an idiot would suggest that our prime ministers don’t work hard at tough jobs – elections are won by a complex set of factors that I don’t appreciate. But Nobel laureate James Buchanan said that any state has three versions – the protection state (the police, rule of law, defense, courts), the productive state (common goods such as roads, energy, health, education, etc.), and the redistributive state. . Too many state governments accept the status quo in the first two and ‘innovation’ in the third. It’s time to shift resources to the first two.
On a recent visit to my hometown of J&K – my first after receiving my citizenship certificate – an elderly but wise resident suggested that the political dynasties of J&K had forgotten to distinguish between jagir (the property that allows you to do what you want) and amanat (a temporary duty to hand over what you got). It is for the next generation in better condition). He also noted that nothing could make a person’s future better than a high paying job. Irshad, Hajj Sahib.
This column first appeared in print on May 21, 2022, under the title “The Wealth of Nations.” Writer with Teamlease Services