Inclusive Growth through Inclusive Governance by Mani Shankar Aiyar

POLITICAL FRAMEWORK FOR INCLUSIVE GROWTH

Inclusive Growth through Inclusive Governance

by

Mani Shankar Aiyar

Union Minister of Panchayati Raj, Government of India

University of Stanford, 5-6 June 2008^*

It is with some trepidation that I address this distinguished audience of scholars and academics on a subject dear to my heart: “Inclusive Growth through Inclusive Governance”.

This is because, after barely scraping through my Economics Tripos at Cambridge, I have long come to the conclusion that my idiom is not the idiom of the professional economist. It is more the idiom of the rustic aam aadmi, the common man, the result perhaps of my having participated over the last four years since I became Minister of Panchayati Raj in some 200 Gram Sabhas, around 100 intermediate Panchayat and nearly 50 district Panchayat meetings all over the country, climaxed most recently by a National Convention of District and Intermediate Panchayat Presidents which drew into its fold more than 7,000 participants from virtually every State and Union Territory of our country. It is, therefore, in this rustic idiom that I dare address you.

Economic reforms have led, especially over the last five years or so, to not only accelerated growth but sustained accelerated growth, the saga of which is only too familiar to this audience. This audience also shares with me, I believe, our collective conviction in the thrust of the Eleventh Five Year Plan, summed up in its overarching objective: “Inclusive Growth” – the very title of the document.

Yet, notwithstanding the considerable space given to Panchayati Raj in the Eleventh Plan – please see paragraphs 1.147 and 1.148, as also the long section on “Decentralization” in Chapter X on “Governance” - there still seems to be some reluctance to accept inclusive governance as the quintessential and unique path to inclusive growth. Hence this piece of special pleading that has brought me to Stanford.

There can be no two views that the acceleration of growth on a sustained basis, combined with major tax reforms, has resulted in a miraculous augmentation of Government revenues, particularly over the last four years. Buoyant revenues have resulted in buoyant spending on the social sector. In his address to the National Convention, the Prime Minister estimated the increased spending on poverty alleviation and rural development, including the flagship Bharat Nirman programmes, at “four times” the spending in the last year of the previous government. In absolute numbers, this works out to an exponential increase in nominal terms from around Rs. 34,000 crore in fiscal 2003-04 to about Rs. 1,20,000 crore in the current financial year.

This four-fold increase in expenditure on poverty alleviation and rural development comes on top of an increase in such spending between 1993-94 and 2003-04, in nominal terms, from about Rs.7,600 crore to about Rs.34,000 crore, about a four-fold increase over the decade.

Why then is there such a mismatch between growth in the booming sectors of our economy and the income of the entrepreneurial classes in contrast to the halting, uncertain, sporadic and unsustained amelioration in the condition of the vast majority of Indians? Why is India prospering when most Indians are not?

In August 2007, the Arjun Sengupta Committee reported (see Annexe I) the deeply disturbing, if widely accepted figure of 836 million Indians – that is over 75% of our people, “the poor and the vulnerable” – surviving on a daily average expenditure of under Rs. 20 a day. Rs. 20 a day is the equivalent of what a family of four earns per capita as the daily wage in Tamil Nadu under the National Rural Employment Guarantee Programme. (Incidentally, the NREGP wage rate in Tamil Nadu is just about the highest in the country).

And why are we stuck somewhere in the 120s on the UN Human Development Index? In 1994, we stood 134th on the UN HDI. Ten years later, as the NDA government yielded to our government, we had inched our way up to just the 126^th position. On the UN HDI for the year 2005, published last year, we actually sank from 126^th to 128^th position. True, as Prof. T.N. Srinivasan of Princeton was quick to point out to me, this was largely because the downward revision of death rates from AIDS of children in Botswana catapulted Botswana ahead of India – but surely in an era of accelerating growth we ought to depend less than we seem to do on infant mortality in Botswana to determine India’s place in the sun?

Inclusive growth must surely mean an India of which we are proud less because we just overtook Japan in the number of our dollar millionaires and the fact of the combined assets of our dollar billionaires being second only to those of the billionaires of America than because accelerated growth is leading to a palpable improvement in the living conditions of the vast majority of our countrymen and women. That there has been some improvement is undeniable. The poor have not got poorer. But the rich have got infinitely richer. What Nobel laureate Prof. Amartya Sen, in a recent article described as the “extremely asymmetric development of the global economy” is also reflected in the extremely asymmetric development of the Indian economy. Our widening Gini coefficient is a matter of deep concern, as much to our consciences as to the stability and sustainability of our political system.

I would like to dwell for a minute on these widening inequalities. Let me share with you two indicators. While over the first decade of reforms (1993-94 to 2003-04), “the marginal and vulnerable groups (with a per capita daily consumption of between Rs.12 and Rs.20) increased from 51.2 to 55 per cent” (Sengupta, “Against the Grain”, Hindustan Times, 21.8.07, emphasis added), here is how the corporate sector benefited in the glowing testimony of the Deputy Governor of the Reserve Bank, Rakesh Mohan:

“Profits after Tax recorded an annual average growth of around 47 per cent per annum over the four-year period ended 2006-07 (soaring up from 21.1 percent in the period 1991-92 to 1996-97 and up from a low of 7.8 per cent in the previous five years, 1997-98 to 2002-03). Profit margins have recorded large gains, while the interest burden has witnessed a significant decline…Another notable feature of the performance of the corporate sector in the recent period is the progressive increase in retained profits, which, as a share of PAT, increased from 30.9 per cent in 2001-02 to 73.6 per cent in 2005-06”

Over the same period, agriculture, on which close to two-thirds of our people depend for their livelihood, collapsed to an annual average of under 2 per cent per annum after having averaged 5.7 per cent per annum over the decade of the Eighties, a whisker above the rate of growth of GDP. One reason for the slow-down in the growth rate of agriculture in contrast to unprecedented growth in the manufacturing and service sectors in a period that has witnessed an inexorable rise in gross domestic savings that has, at last count, touched 33 per cent of GDP, largely fuelled by a steep increase in household savings, is that much of this increase in savings has been pre-empted by the corporate sector to the detriment of public sector capital formation in the agriculture sector. Says Shankar Acharya:

“…declining public investment by cash-strapped States, grossly inadequate maintenance of irrigation assets, falling water tables, inadequate rural road networks, unresponsive research and extension services, soil damage from excessive urea use (encouraged by high subsidies), weak credit delivery and a distorted intensive structure which impedes diversification away from foodgrains.” (India’s Growth: Past and Future, Beijing, 14-16 January, 2007)

That is now being corrected but the leeway to be made up is overwhelming, as is starkly seen in the sharp decline of consumption by the poor and vulnerable of food grains, coarse cereals, and edible oil, leading, in turn, to an actual decline in their per capita calorie intake. The FAO says that from 1995-97 to 1997-2001, “India added more hungry millions than the rest of the world taken together.” To quote Acharya again:

“The share of agriculture in GDP has declined to hardly 20%. But agriculture is still the principal occupation of nearly 60% of the labour force. Thus better performance of this sector is essential for poverty alleviation and containment of rising regional and income inequalities.” (ibid.)

And the Eleventh Plan candidly confesses (para 1.3):

“GDP per agricultural worker is currently around Rs.2,000 per month, which is only about 75% higher in real terms than in 1950 compared to a four-fold increase in overall real per capita GDP.”

That is in the past. What of the future? The well-respected Centre for Development Economics at the Delhi School of Economics has estimated that whereas agricultural sectoral GDP stood at nearly Rs.3,000 billion in 2002-03, it will rise to no more than a whisker under Rs.4,000 billion a decade later in 2011-12 at the agricultural growth rate forecast for the Eleventh Plan. Meanwhile, the combined manufacturing and services sectors would have soared from Rs. 9,000 billion to around Rs. 20,000 billion, widening the gap between the relatively stagnant sectors of the economy and the boom sectors from Rs.6,000 billion to Rs.16,000 billion. Can a house divided against itself stand?

I ask this question in these Lincolnesque terms because our basic political fact is that we are a full-fledged democracy - both the largest and most representative democracy in the world. And the political framework for an economic policy that promotes such sectoral disparities is that the vast majority of our people live in the stagnant economy and yet exercise their vote on the one-man/one-vote principle six times every five years: at the village panchayat level; for the president of the village panchayat; for their member of the intermediate panchayat; for their member of the district panchayat; for their Member of the Legislative Assembly; and their Member of Parliament. Almost every day of the year, there is an election of one kind or another going on in some part or other of the country. Therefore, a viable, sustainable economic policy for our country has necessarily to be an economic policy for a democratic polity.

True, economic history is replete with examples of widening disparities serving as the engine of growth. Economic history also teaches us that in the end it will all be all right. For once everyone is better off, it little matters in terms of social and political stability that everyone is not a Walter Buffet or a Rockefeller. But history also teaches us that it takes centuries for that kind of national prosperity to be achieved. History teaches us moreover that widespread oppression of peoples within and outside the burgeoning economy has been the historical downside of economic growth eventually making everyone so much better off as to marginalize the significance of income and wealth inequalities.

I am not sure that India in the post-Imperium either has the luxury of exploiting her own people or establishing colonies - or would wish to go down that path. We have to make our way forward in a democracy where income and wealth may be unequal but each vote is equal and is cast at least every five years. A democracy in which the terrible poverty of most is pitted against the soaring prosperity of others. A democracy, moreover, in which the deprived vote with much more vigour than the well-off and, numerically, overwhelm the prospering classes politically quite as effectively as the prospering classes overwhelm the poor between elections economically. Hence the peculiar currency of that word in the lexicon of Indian journalism “anti-incumbency”: between two-thirds and four-fifths of all incumbent Indian candidates lose their seats in the next election. (In the United States, unseating an incumbent is as difficult as retaining an incumbent is in India!) The poor have their revenge.

An economic policy for a democratic polity cannot in the short or even medium term be based on any very sensible increase in the per capita incomes of the 836 million poor and vulnerable Indians (including 80% OBCs, 85% Muslims and 88% SC/ST, according to the Sengupta Commission) who subsist on less than Rs.20 a day. Necessarily, the incomes of the poor and vulnerable will move ahead at a fraction of the augmentation in income of the successful Indian.

But an increase in general public welfare can be achieved overnight, or almost overnight, by a sensible increase in the access of the general public, especially “the poor and the vulnerable”, to their entitlements of public goods and services. I stress the word “entitlements” because the public are entitled by Government pronouncement to these public goods and services. Yet, they are substantially deprived of substantive and efficient access to their entitlements by the behemoth of a bureaucratic delivery system that spends so much on the delivery system that only a fraction is left for the beneficiaries. 20 years ago, based on a Planning Commission study, Rajiv Gandhi famously estimated expenditure on the delivery system to amount to 85 paise in the rupee, leaving 15 paise or under to actually reach the intended beneficiaries. Without going into the question of whether this estimate still holds, the fact is that the bureaucratic delivery system has hardly changed notwithstanding the 73^rd and 74^th amendments to the Constitution passed 15 years ago, the very rationale of which was to progressively shift the weight of the delivery system from a distant bureaucracy to an elected neighbourhood body which being representative of the people is therefore responsible to the neighbourhood and thus responsive to the people’s needs.

The key areas in which the general public, and more particularly the 836 million who are poor and vulnerable, desperately need efficient and rightful access to public goods and services are precisely the 29 areas set out illustratively in the Eleventh Schedule to the Constitution for the devolution of powers – Functions, Finances and Functionaries - to the elected local bodies (see Annexe II). These cover primary and secondary education; dispensaries and primary health care centres; drinking water; sanitation; rural housing; women and child development; public distribution outlets; rural infrastructure, including roads, bridges and culverts and other elements of rural connectivity; veterinary centres; the maintenance of community assets; rural industrialisation (never forgetting what Township and Village Enterprises in partnership with local bodies did for China’s Industrial Revolution); and, of course, everything to do with agriculture and irrigation, above all, agricultural extension.

Our people’s position on the UN HDI depends less on what happens with per capita incomes – which I admit can rise only slowly – than with the extent to which their access to their entitlements of public goods and services tangibly improves. Can such access to entitlements improve by continued reliance on the old delivery systems?

The evidence would appear to indicate that the answer emphatically does not lie in dramatic increases in financial outlays, for if that were the case the huge increase in outlays over the last fifteen years, and more particularly the humongous increase in outlays in the last four years, should have translated into commensurate outcomes at the grassroots level. They have not. This is primarily because we continue to rely heavily on a creaking bureaucratic delivery system, fashioned into administrative silos insulated one from the other, that has proved over six decades to be quite unequal to the task of delivering development. The Eleventh Five Year Plan says (para 4.70):

“The DRDAs (District Rural Development Agencies, the bureaucratic arm of the Ministry of Rural Development) in their current form and content do not appear to have the requisite wherewithal to handle a complex issue such as poverty. The current administrative set up at the national level is unequal to a large task such as poverty elimination across geographical and social complexity…”

The Eleventh Plan also notes (para 1.6):

“The delivery of essential social services at the grassroots level is also poor and this is a major causative factor in unequal development. Much higher levels of human development can be achieved within the given structure of the economy, if only service delivery is improved.”

It goes on to say (para 1.147):

“It is absolutely critical for the inclusiveness of our growth process that these large numbers of elected representatives in our PRIs (Panchayati Raj Institutions) are fully involved in planning, implementing and supervising the delivery of the essential public services.”

The Kazakh economist, Kamiljon Akramoy, has succinctly summed up the “common arguments in favour of decentralization”:

“[I]t promotes more efficient allocation of public resources and creates opportunities for more accountable government. Making expenditure decisions at lower levels of government can raise the efficiency of public resource allocation because local governments are closer to the poor people, and probably more informed about local problems, than higher levels of government. This closeness between resource allocation decisions and their beneficiaries can thus help to correct government failures in service delivery.” [“Reducing Poverty and Hunger in Asia”, ed Nurul Islam, March 2008].

Recent evidence adduced by Rosa A. Abraham and K.S. Kavi Kumar in their ranking of States on an index of “Multidimensional Poverty and Vulnerability” (Vmd) would appear to provisionally validate the hypothesis of a positive correlation between effective Panchayati Raj and the reduction of susceptibility to Vmd: two of the best Panchayat Raj States, Kerala and Karnataka, zoomed in their rankings from 14^th to 2^nd position and 13^th to 1^st position respectively between 1993-94 and 1999-2000 when major governance reforms at the grassroots promoting effective devolution to institutions of local self-government were steadfastly pursued in these two States.(Economic and Political Weekly Special Article, 17.5.08)

Not bureaucratic development but participative development – that is, grassroots development through grassroots democracy - is our imperative need. The path to such development was charted through the 73^rd and 74^th amendments to the Constitution, which resulted in the present Part IX (‘The Panchayats’) and Part IXA (‘The Municipalities’). In these two Parts of the Constitution we have the key to Inclusive Growth through Inclusive Governance. For Inclusive Growth, we need to hitch the horse of accelerated growth to the wagon of participative development.

To appreciate the political framework in which the need for participative, as distinct from delivered, development is required, let us first place in perspective the nature of what, in many ways, is our unique democracy.

While all developed democracies started out with democracy at the local level and slowly evolved - often over centuries (and, in the case of Britain, over an entire millennium from the Magna Carta to the 20^th century!) – to full-fledged democracy based on universal adult franchise at the provincial and federal levels, we became a full-fledged democracy on the day we became Independent. Over sixty years, we have been among the very few countries that came to liberation of one form or the other in the last six decades to have translated independence for our country into freedom for our people. It is our single biggest national achievement. But because our democracy flowered at the highest branches, unlike the developed democracies where democracy was nurtured at the roots, our democracy has followed not the path of evolution from the grassroots but devolution to the grassroots.

This is proving quite as tortured and time-consuming a task as evolution in the other direction did in the developed democracies. Yet, the successes are impressive. Local level elected self-government, backed by the world’s only surviving example of Athenian democracy – the Gram Sabha (without, however, the disenfranchised slaves!) – has been made, over the last fifteen years since the Constitution was amended, ineluctable, irreversible and irremovable. We have nearly 2,50,000 elected local bodies to which we have democratically elected some 3.2 million representatives, about 1.2 million of whom are women (eat your heart out, Hillary Clinton!). There are more elected women in India alone than in the rest of the world put together! So reassuring has been the performance of women in our panchayats that Bihar, followed by Chhatisgarh, Madhya Pradesh, Rajasthan and Himachal, have increased the reserved share for women in our panchayats to 50%. Sikkim has raised it to 40%. On their own, there is a substantially larger share of women elected to local bodies than the reserved quota. Moreover, the Scheduled Castes and Scheduled Tribes are assured election in proportion to their population at every tier of the Panchayati Raj system. In the Fifth Schedule areas where there is a substantial tribal presence, the Scheduled Tribes have the further warranty of the Provisions of the Panchayats (Extension to Scheduled Areas) Act of 1996. The enabling clause in the Constitution has also resulted in reservations for the Other Backward Classes in several States. This is social and political empowerment without precedent in history or parallel in the world. Next only to the proclamation of a Constitution that has endured is the deepening and widening of democracy through devolution. We have entered the 21^st century, as Rajiv Gandhi the author of Constitutional Panchayat Raj would have wished, not only as the world’s largest democracy but also the world’s most representative democracy.

But while the institutions of local self-government are in place, the empowerment of these institutions, in terms of functions, finances and functionaries, has been uneven, fitful and subject to reversal. This is inevitable given that the very Constitution which confers Constitutional status on Panchyati Raj also leaves it exclusively within the jurisdiction of the State to determine the nature, direction and pace of devolution.

Over the last four years since the establishment of the Ministry of Panchayati Raj, considerable progress has been made towards evolving a national consensus on the nature, direction and pace of devolution. A series of seven Round Tables in 2004 involving the Central and State Ministers of Panchayati Raj resulted in a Roadmap, adopted by consensus, on approximately 150 action points covering 18 identified dimensions of Panchayati Raj. This was reinforced by a series of State-specific Memoranda of Understanding or Joint Statements of Conclusions between 22 Chief Ministers and the Union Minister to take matters forward. The critical requirement of Activity Mapping to place the devolution of functions, finances and functionaries among the three tiers of the Panchayati Raj systems on a scientific footing has gone substantially forward in many, indeed most States and Union Territories. District Planning Committees have been established in conformity with the Constitutional provisions in all but one or two States. An Expert Group has expanded the ambit of participative district planning to Sixth Schedule areas and other areas exempted from the application of Parts IX and IXA of the Constitution. Another Expert Group has made specific proposals, now being processed, for a grant of approximately Rs.8,000 crore over a four-year period to bring e-governance to every Panchayat Ghar in the country via cyber connectivity and satellite. The special problems of backward regions, comprising a little under 1/3^rd of the districts in the country, are being addressed through the Backward Regions Grant Fund, the sine qua non of which is participative district planning.

While the Constitution leaves it, of course, to the States to determine the nature, direction and pace of devolution, the Centre could greatly accelerate and rationalise this process by adapting the guidelines of Central Sector and Centrally Sponsored Schemes, the principal source of funding for PRIs, to ensure the centrality of PRIs in the planning and implementation of these schemes in conformity with the letter and spirit of Parts IX and IXA of the Constitution. This task, already being addressed by the Renuka Vishwanathan Committee, will be greatly assisted by the observations and recommendations in paragraphs 10.11 to 10.22 of the Eleventh Five Year Plan on “Centrally Sponsored Schemes”, “District Planning” and “”Empowering Panchayati Raj Institutions” under the general rubric of Chapter 10 on “Governance”.

A second crying need is to incentivise the States to further empower their PRIs, as also to incentivise PRIs to be transparent and accountable in their transactions, besides steadily contributing an increased share of their expenditure from resources that they themselves mobilise. Hence the key significance of the following passage from the Eleventh Plan:

“The Eleventh Plan recognises that there is a need to build in incentives that will encourage the States to devolve functions, funds and functionaries to the PRIs. In order to capture the extent to which this process and empowerment of PRIs has actually progressed in a State, a suitable devolution Index will be developed and will be called the PRI-Empowerment Index.” (para 1.148).

The World Bank would appear to be interested in extending IDA support to the Panchayat Empowerment and Accountability Incentivisation Scheme (PEAIS).

Third, is the imperative need to make available untied block grants to the PRIs so that they have an adequate reservoir of financial resources which they themselves, without let or hindrance from outside, can plan and implement for neighbourhood economic development and social justice, as envisaged in Parts IX and IXA, in particular Article 243 G read with Article 243 ZD. The 13^th Finance Commission has a golden opportunity to build on the tentative beginnings of its predecessor Commissions by raising, I hope, block untied non-Plan grants, particularly for the maintenance of community assets and improved service delivery, by increasing the 12^th Finance Commission grant to the local bodies of Rs.20,000 crore for the entire cycle of its recommendations to at least Rs.20,000 crore a year.

I speak for the inconsequential Indian, the unsuccessful Indian, but also for the Indian who crucially determines the outcome of the democratic process. If governance reform at the grassroots does indeed become the handmaiden of economic reforms, as hinted at in sections of the Eleventh Plan, we might hope to preserve the stability and sustainability of the democratic process. That is a political imperative. It is also, I trust, an ethical imperative that we will respect.

Thank you.

^*(This was to have been delivered as a dinner address at Stanford on 5 June 2008, but as the Minister was unable to travel at the last minute he sent this for inclusion in the proceedings of the Conference.)