India’s weak political centralization requires changes in the ordering of centre-state economic relations
A falling economic growth rate and questions about the pace of poverty reduction and job creation are putting pressure on the Union government and the Planning Commission to improve performance.
China, a country larger than India, has undoubtedly done better in managing economic growth and reducing poverty. An explanation often offered for China’s better management of its economy is the strong, unified, political authority of the centre over its provinces. China has also done much better in the last 20 years than Russia, the other giant—successor to a Communist regime—a country that has embarked on pro-market reforms. In their paper, Soaring Dragon, Stumbling Bear: China’s Rise in a Comparative Context published in March, Mark Harrison and Debin Ma say that China has been able to leverage its centre-state relationships much more effectively than Russia.
The authors use the concept of “M-form political hierarchy", based on business historian Alfred D. Chandler’s descriptions of structures of firms. In an M-form hierarchy, the constituents of the enterprise are divided into parts that are given considerable freedom to manage overall targets set by the centre with limited interference in their management. In contrast, in a “functional hierarchy", the centre retains functional authority with functional chiefs—finance, personnel, production, etc.—reporting to the chief executive who seeks to control and manage the performance of the parts through these functional chiefs.
An organization of central functional ministries attempting to improve performance in the states through central schemes is the government equivalent of a functional hierarchy.
In an M-form hierarchy, the centre has powers to reward and punish the units’ managers for their performance. In China, the unified communist party has authority to manage the personal careers of the state leaders, as does the board and the chief executive officer of a large multi-divisional business organization have powers to manage careers of business heads.
Harrison and Ma give several explanations of why Russia has not been able to use the M-form model as effectively as China. The most significant of these is the much smaller sizes of state units in Russia than in China—Russia has 105 regional authorities whereas China has 31 provinces. Another is the historical interdependence of states on each other in Russia through specializations forced on them by a longer, and stronger process of top-down planning, thus making many of them incapable of independent action even if given freedom. In these structural ways, India is much closer to China than Russia.
Though China and India have similar configurations of states, the critical difference between them is the much weaker political authority the centre has over the states in India. It is not in a position to manage the careers of all its state chief ministers—even less now than it was in an earlier age. Thus, India seems to be in a structural trap. Its political structure compels it to operate like an M-form hierarchy with freedom from the centre to the states. But the centre does not have strong levers of personally rewarding or punishing state leaders according to their performance. Therefore, it must find other ways to induce performance improvements in the states.
The Indian political scene has changed, from the more unitary, centralized configuration that prevailed until the 1970s, to a multi-polar configuration with more regional parties, and coalitions at the centre. Economically, too, the states are much less under the sway of the centre. In this changed economic structure, the Planning Commission does not have any “hard" levers to induce significant change in states’ behaviours. Large states generate enough resources for their state plans.
Recently, the Planning Commission approved the 60,000 crore annual plan of Gujarat, funded by the state’s own resources and borrowings. At the conclusion of the meeting, the deputy chairman could add ₹ 60 crore from his discretionary resources to the state’s plan—a 0.1% gratuity. States now resent the ritual of coming to the Planning Commission in New Delhi for approval of their annual plans. The chief minister of a southern state described the charade as the Planning Commission telling the state what to do with its own money.
India is a flotilla of independent, albeit interdependent boats. The captains of the many independent ships need signals to change direction. The centre’s role must be to send strong signals that the states feel they must not ignore in their own interest.
Therefore, national planning requires new tools. Scenarios which the Planning Commission has developed for the first time provide radar images of the weather the economy will encounter. Scenarios also suggest the courses the boats should take to avoid bad weather. The states, even the small ones, do not want lectures on “what" they should improve. They want help with the “how". They want assistance to build their own capacities to produce results.
Therefore, the Planning Commission must change its role from input allocator and controller to strategic guide, counsellor, and coach. It is changing but has to change much faster to develop the capabilities required to perform the new role that changes in the economy and the country’s political configuration demand of it.
https://www.livemint.com/Opinion/PWcQUOP1iZj6FV5rY5MBXN/India-a-federal-flotilla.html" rel="noopener" target="_blank">This blog post appeared on livemint on July 1, 2013.