Don’t level down, level up

The wrong way to narrow the rich-poor gap is to put a spoke in the wheels of rich states. It makes them resentful. Keshubhai Patel was ordered to stay home and Vilasrao Deshmukh and S M Krishna disliked playing second fiddle to Chandrababu Naidu. But even without all the heavyweights protesting in Delhi in person, it was clear the 11th Finance Commission’s division of the pie was unacceptable to the country’s most economically powerful states.

There were grumbles about the 10th Finance Commission’s recommendations as well: it is part of the ritual. But many things are different today. Over the last five years more power and responsibility have shifted to the states. In an age when the driving force is competition and the rewards go to the enterprising, it would be surprising for the forward states to voluntarily give up something for the sake of their less fortunate brethren. On the contrary, calling the process of compensating poorly performing states a “perpetuation of poverty”, Naidu stressed the need to freeze population at a cut-off date for purposes of calculating transfers to states. It was an echo of M Karunanidhi’s earlier complaint that redrawing Lok Sabha constituencies on the basis of current population would disadvantage states like Tamil Nadu which had achieved relatively low birth rates. In these hard-edged, pragmatic times, forward states are asserting themselves to ensure they are not disadvantaged politically or financially bythe “backwardness” of poor states.

This `secession of the successful’ is hard to condemn for several reasons. Andhra Pradesh and Karnataka’s performances were not notably good in the decade of liberalisation. Furthermore, the successes are partial; there are areas of neglect and backwardness within forward states on par with what can be found in Uttar Pradesh, Bihar or Orissa. So, leaders of forward states will resist arrangements which could harm the interests of the people of their own states.

Second, rich states are rich only in relation to poor ones. Each of the so-called performing states has a fiscal and financial crisis of varying degrees of severity on its hands. Maharashtra, a good example of a state which does well on most criteria most of the time, suffered the ignominy 18 months ago of a fall in its credit rating and now faces loan repayment problems once again.

Third, public policy should never make the achievement of some desirable goals — lowering the birth rate, for example — a handicap in the pursuit of other desirable goals, building more roads and power stations, for example. Public policy should enable the achievement of those further goals. It is not very encouraging for states who have ordered things better to find A M Khusro and his colleagues coming along and saying, good show, now you get a smaller piece of the pie.

After a decade of falling capital expenditure, all states desperately need massive investment in infrastructure. After a decade of falling social expenditures, all need to invest heavily in schools, health centres and other basic services. Assuming that moral hazard did not complicate the issue, on what basis would the transfer of resources from rich states to poor states be justified? The humanitarian case would be better put to the central government which has 62.5 per cent of the pie, at the minimum, even as its responsibility for development shrinks year by year and the responsibilities of the states grow.

Rich states provide job opportunities for some of the unemployed from poorer states and will go on doing so as long as nothing interferes with their high growth rates and social and political tensions remain under control. But while migrant employment takes some of the pressure off poor states, it holds down labour costs and wages in the better-off states and there is no spur for raising productivity levels. In the long run all states have an interest in seeing wage levels rise and therefore in accelerated growth rates in the poor states.

More resources alone will not haul UP, Bihar and Orissa out of the mess they are in. As Montek Singh Ahluwalia says in his now famous paper on the economic performance of states in the post-reform period, “The simplest growth models — perhaps I should say the simplistic growth models — used to focus on investment as the critical determinant of growth. We know today that… the efficiency of resource use is at least as important as the level of investment. Efficiency in turn depends upon many other factors such as the level of human resource development, the quality of infrastructure, the economic policy environment and the quality of governance”.

Poor states lose in two ways in the post-reform period. They are unable to attract private capital and can no longer expect as in the past to receive compensatory higher levels of Plan assistance from the Centre because the central government is itself strapped for funds and has still to undertake downsizing in a serious way. So what is to be done?

It does not make economic sense to hold down development in the successful states by reducing their resources. The only realistic answer seems to lie in the Centre playing IMF-style lender of the last resort to the backward states, linking disbursements to performance benchmarks. The resources can come from part of the proceeds of disinvestment and also from the sale of the family silver of backward states.

It is not encouraging for states who have performed well to find the finance commission coming along and saying, good show, now you get a smaller piece of the pie.