Table of Contents

Earlier discussions dealt with the challenges to growth arising out of India’s human resource deficits and unique production structure in farms and factories, and with financing challenges. The last major limitation on India’s growth to be discussed is the state capability constraint, which amplifies the effect of all the other constraints. The conventional argument adduces the pervasive failings of public systems to deliver on even their most basic objectives. However, other debilitating constraints on state capacity have emerged over the past decade in the form of institutional power shifts, which have had the effect of restraining and even paralyzing decisionmaking at higher levels of state and central government bureaucracies. Another constraint on both decisionmaking and effective policy design, thus contributing to implementation failure, is the disproportionate influence exercised by the finance ministries across state and central governments. There are three manifestations of state capability failure—the deficit in implementation, a paralysis in decisionmaking, and the influence of finance ministries.

Implementation Deficit

The inability to implement government programs is pervasive and dominates the public’s perception of weak governance. India’s government-run schools are noteworthy for neglect and apathy. Teacher absenteeism is rampant; learning levels are abysmal; toilets, where available, are mostly nonfunctional; and so on. In healthcare, doctor and nurse absenteeism is very high, and the quality of primary care services is unacceptable. Even when resources and personnel are made available, most large government-run hospitals remain badly managed. In both sectors, well-designed national programs with adequate implementation flexibility have fallen far short of expectations when subjected to the field test of implementation.

Inordinate delays in fixing a leaking pipeline or repairing potholes, let alone building new roads or drilling wells, and slow garbage collection are frustrations familiar to most Indians. The execution of small panchayat (the unit of administration at the village level) works, even when contracted and the money made available, takes months to years. And despite the existence of progressive and comprehensive legislation on social protection, atrocities against lower castes, children, and women continue unabated.

Supervisory systems, even when not compromised, struggle to enforce regulations. The commanding sectors of modern India, infrastructure and urban facilities, are marred by the same malaise. The capacity to design and document projects, manage procurements, mobilize financial resources, finalize contracts, and manage the execution effectively is sorely lacking even at the highest levels of state and national government. It is no surprise that contracting corruption, execution delays, and renegotiations have become quotidian in these sectors.

There failures all have multiple causes, of course. Some causes reach beyond the government and highlight the role of underdeveloped markets, a deficient private sector capacity, social problems, and so on. Some, such as contract design and management capabilities, are deficient even in many developed countries. However, a common thread to all of them in India is an inability to translate policies and guidelines into effective action during implementation. Even capable and well-intentioned public officials struggle to bridge the administrative capability deficit.

There are several reasons for the erosion in state capability. A dominant reason is India’s minimalist state for a country of its size. For example, the Ministry of Urban Development estimated in 2006–2007 that while the country needed around 40,000 town planners, there were just 3,000 registered planners.67 When India grappled in 2015 with packaged food safety concerns, it emerged that the country had food safety standards for only 370 ingredients, compared with the 5,000 to 10,000 ingredients commonly subjected to standards in developed markets.68 The drugs controller general of India said in an interview in January 2014 that the agency had a total staff of 650, whereas its U.S. equivalent, the Food and Drug Administration, has twenty times as many, at 13,000.69 On a related note, whereas New York City has 180 food inspectors for its 24,000 eateries,70 Hyderabad has just four inspectors for many more restaurants. The National Assessment and Accreditation Council, which accredits all the country’s nearly 50,000 institutions of higher education on a five-year cycle, has only seven members. The situation is the same or worse with critical offices such as the Directorate General of Civil Aviation.71

At an aggregate level, the comparison with other countries is stark. As of 2011, public employees’ share of total employment, formal and informal, was just 4.6 percent in India, compared with 15.9 percent in the United States. India had 1,622.8 government servants for every 100,000 residents against 7,681 per 100,000 residents in the United States.72 These numbers drop to very low levels in the country’s poorest states. In 2014, the central government had 3.3 million workers,73 which translates to about 262 people serving every 100,000 people, compared with 859 per 100,000 people in the United States. If those working in railways, defense, or the postal service and telecommunications are subtracted, this ratio drops to 126 per 100,000.

The district-level bureaucracy, administered by district collectors, has remained virtually the same, both in structure and in personnel deployment, since independence. During the same period there has been a dramatic expansion in the government’s responsibilities, including development and welfare interventions, as well as in the government’s market regulation mandate. District government agencies today manage several forms of contracting with private agencies. The amount of the resources being transacted at different levels of the district government has risen exponentially. Governments have sought to bridge the gap by hiring consultants and advisers and contracting out services. Without fundamental reforms to strengthen district governments, to include deploying additional personnel, such measures are likely to remain just palliatives.

Other factors contributing to India’s implementation deficit include politicized and compromised bureaucracies, widespread corruption, weakened supervisory monitoring systems, staff indiscipline, a decline in professional standards, and overburdened officials. Falling ethical standards, a poor work culture, and demotivated employees amplify the downward spiral. Public functionaries appear to have lost sight of their original mandate.

A precondition for any sustained economic transformation is that the state be capable of delivering its side of the bargain, which is the enabling condition for the effective functioning of markets. At a minimum, state institutions should be able to deliver basic public goods and services—education, healthcare, water and sewerage management, public roads, extension services, and so on—of acceptable quality across the country. The welfare state should be able to deliver an efficient social safety net. The regulatory state should be able to accredit the large numbers of expected healthcare training and educational institutions credibly, reliably certify the standards and quality of services and products for a rapidly expanding market, and prudently contract tens of billions of dollars of infrastructure projects of varying sizes.

And all this should be delivered at a quality and pace not hitherto seen in India. Economic growth and development at too rapid a pace, unless built on very firm foundations and backed by a state, will invariably bump up against various constraints. Given the sheer size of the challenge—which spans sectors, states, and levels of government—it may be unreasonable to expect such transformations within a short time.

The story of technical education courses in India over the past ten years illustrates this point. As the economy raced ahead in the mid-2000s, the number of seats in engineering courses rocketed up 252 percent, from 499,697 in 2005–2006 to 1,761,976 by 2012–2013, and those for management courses spiked 302 percent from 2006–2007 to 2012–2013.74 But this massive proliferation of seats, concentrated in a handful of states, seriously compromised the quality of instruction in these courses.

It is no surprise that a 2011 survey by the National Association of Software and Services Companies found just 17.5 percent of engineering graduates employable in the IT sector.75 Newspapers report that, according to a study by the Associated Chambers of Commerce and Industry, “barring a handful of top business schools like the Indian Institutes of Management (IIM), most of the 5,500 business schools in India are producing ‘unemployable’ sub-par graduates, earning less than Rs 10,000 a month.”76 A 2013 Federation of Indian Chambers of Commerce & Industry–Ernst & Young study found that 35 percent of all state and 40 percent of all central university faculty positions were vacant.77 To fill seats, universities have had to dilute eligibility standards alarmingly. The situation has now come full circle as nearly 1,422 applications to shut down engineering college departments or courses are pending today before the All India Council for Technical Education and nearly 40 percent of engineering seats are unfilled. It is now estimated that nearly 600,000 of the 1.76 million seats in engineering may have to be eliminated in the coming years.78

Clearly, the rapid expansion of professional colleges happened without adequate regard for regulatory due diligence to ensure quality. Not only were the entry conditions relaxed, but the weak regulatory capability meant that compliance with even the relaxed conditions was not satisfactorily enforced. The regulators were simply not equipped with the requisite capacity and professional competence to regulate these institutions effectively. Furthermore, the resultant demand for trained instructors and professionals to teach at these institutions was simply beyond the market’s capacity to satisfy. Finally, the multiplication of seats meant that admission standards had to be lowered dramatically to fill them, allowing in students with sorely deficient prior learning. The outcomes were unsurprising.

Decisionmaking Paralysis

A subtler and more debilitating constraint on state capacity comes from the trends that have emerged over the past decade in institutional power shifts, which have had the effect of restraining and even paralyzing decisionmaking at the higher levels of state and central government bureaucracies.

These trends include the actions of judges, anticorruption investigators and vigilance agencies, auditors, and Right to Information Act administrators. Their cumulative effect, by shrinking the decisionmaking space available for public servants, including political representatives, has been decision paralysis. Ironically, all these trends have been the unwitting consequences of well-intentioned actions by strong and vibrant institutions. This makes their satisfactory resolution even more difficult.

When Information Disclosure Becomes Detrimental to the Public Good

India’s Right to Information Act of 2005 works on the presumption of mandatory disclosure, except for a few exemptions, and enshrines the fundamental right of a citizen to demand and obtain information from public authorities. It helped shine a light and unleash a giant wave of transparency on the functioning of insular public bureaucracies. Its greatest achievement was to enable citizens to exercise their rights, previously entrapped in the thickets of bureaucracy. It empowered the poor farmer to access his patta certificate (a legal document attesting to land ownership), the harassed employee to know why her promotion was denied, and complainants to see the contents of the First Information Report filed by the police against them. It also allowed civil society workers to obtain information about the considerations that led to decisions at all levels of the government, including those of the cabinet. Apart from a handful of exceptions, vast swaths of government became transparent overnight. This was rightfully celebrated as a triumph of Indian democracy and a major victory for India’s citizens.

But its second-order effects have not all been benign. The most debilitating has been its impact on public decisionmaking. The act’s inclusion of every correspondence made within and by government, including those parts of the “deliberative processes” that resulted in a decision, led to an expansion of transparency beyond what is practiced even in the most mature developed democracies. By contrast, the U.S. Freedom of Information Act protects recommendations and advice that are made as part of the deliberative process leading to decisionmaking. This expansion of scope in India immediately transformed a far less formal and more freewheeling decisionmaking process into an excessively formal one in which opinions are expressed with great restraint.

For example, why would a director or a joint secretary risk going against the strongly held and populist conventional wisdom of auctions and make the case for a (recently tarnished) discretionary process to allot a natural resource in a workshop to formulate the resource allocation policy even if the official is convinced that auctions lead to suboptimal outcomes? Similarly, no official would dare suggest, anytime during a decisionmaking process, a change in a tender specification or contracting process, however good that change might be, if the change is perceived as also favoring a large (and possibly stigmatized) corporate firm likely to participate in the bidding.

In the context of a similar debate on the issue of information disclosure and transparency in the United States, the Harvard law professor Lawrence Lessig in 2009 cautioned against excessive transparency.79 He argued that given its “salience” to the debate and the “assumptions of our political culture,” any accusation that a legislator took campaign donations in return for supporting a legislative proposal would immediately stick. He argued further that the “limited attention-span” of the audience ruled out the possibility of an informed debate on the issue. He wrote,

At this time the judgment that Washington is all about money is so wide and so deep that among all the possible reasons to explain something puzzling, money is the first, and most likely the last, explanation that will be given. It sets the default against which anything different must fight. And this default, this unexamined assumption of causality, will only be reinforced by the naked transparency movement and its correlations. . . .

To understand something--an essay, an argument, a proof of innocence-- requires a certain amount of attention. But on many issues, the average, or even rational, amount of attention given to understand many of these correlations, and their defamatory implications, is almost always less than the amount of time required. The result is a systemic misunderstanding--at least if the story is reported in a context, or in a manner, that does not neutralize such misunderstanding. . . .

You will begin to see the attention-span problem everywhere, in public and private life. Think of politics, increasingly the art of exploiting attention-span problems--tagging your opponent with barbs that no one has time to understand, let alone analyse.80

Moreover, apart from the totemic poor farmer or harassed employee, an increasingly important beneficiary of the Right to Information Act has been the corporate sector. In cases of litigation with the government, corporate lawyers rely on the voluminous file notings and intergovernmental correspondence accessed through the act to strengthen their case by exposing discrepancies and inconsistencies within those records. In complex and long-drawn-out matters involving multiple decisionmakers at the same level over time, it is not difficult to find loose ends that can be selectively subjected to the test of literal interpretation in their favor.

Judicial Redress for Judicial Overreach

Judicial activism, manifested as judgments on public interest litigations, has been around for nearly four decades. It was welcomed as a healthy response to address both executive excesses and inaction. Several landmark judgments, such as those that came down hard on corruption, safeguarded democracy, protected the environment, and restored the rights of the underprivileged, have become not only causes célèbres but have also contributed enormously to the public welfare. In fact, it is safe to say that but for rulemaking through judicial activism, or its constant threat, India’s environmental standards would have been far less protective. In the recent past, even as executive action was not forthcoming, the courts, especially the newly constituted National Green Tribunal, swung into action to address the worsening environmental pollution problems in the National Capital Region of Delhi.

While largely laudable, this activism has not been exempt from its share of excesses. Instead of interpreting the law as laid out in a statute, judges have often delivered their subjective interpretation of justice. Such reinterpretations of law, divorced from context, have resulted in contracts being abrogated for matters that go far beyond the scope of the contractual terms. In a recent judgment, the National Green Tribunal imposed an environmental tax on commercial vehicles entering New Delhi in addition to the existing toll tax, directed investments by toll operators over and above their contractual obligations, and even fixed the toll collection charges for the operators.81

This activism has extended even to issues of social and religious concern. The Supreme Court in January 2016 adjudicated on public interest litigation concerning the traditional bull-taming sport Jallikattu, played in parts of Tamil Nadu during Pongal celebrations, and is hearing another on the age-old ban against the entry of menstruating women into the Sabarimala temple. Questions that have to be addressed by society and developed through deliberations among members of society cannot be settled by judges, just as they cannot be legislated by governments. Such rulemaking by judges borders on the ancient practice of kritarchy—governing by judges, based on a concept of natural law, that runs counter to the democratic impulse.

A number of reasons exist to argue that such judicial pronouncements, while immensely popular, cannot be a substitute for executive action. This discussion is concerned only with their corrosive effect on incentives. To start, two wrongs, executive inaction and judicial excess, do not make a right. But more important, because of such judicial activism, courts have vastly expanded their functional jurisdiction and in the process have encouraged litigation. Private litigants, especially well-heeled ones, find the cost of litigation disproportionately small compared to its potential benefits. Public litigants, who never bear any personal cost and are most likely to be hauled up by an auditor or vigilance commission for causing loss to the exchequer by not contesting the decision, prefer to appeal on the pretext of protecting the public interest. Appeal therefore becomes the default option. The willingness of courts to accept such appeals merely amplifies the incentives.

Article 136 of the constitution empowers the Supreme Court to “grant special leave to appeal from any judgment, decree, determination, sentence or order in any cause or matter passed or made by any court or tribunal in the territory of India.” Its sweeping nature, institutionalized in the form of special leave petitions, evidently means that it has to be exercised in cases involving a substantial question of law or a gross miscarriage of justice. But this extraordinary jurisdiction appears to have been reduced to a regular appellate one: 34,500 special leave petitions were filed in 2014, of which 43 percent were admitted in a Supreme Court with a caseload of just over 60,000.82

The effects of such snowballing litigation can be profoundly inimical to economic efficiency and economic growth. Consider the example of the Competition Commission of India, a regulator established in 2009. A 2015 newspaper article that consolidated information accessed from government sources reported that 97 percent of the total penalty amount imposed by the regulator since inception has been stayed by the courts or appellate authorities.83 Certainly the commission cannot absolve itself of its share of the blame for the quality of its orders. But it cannot be so bad that 97 percent of its orders not only are contested but continue to remain in litigation.

Another example of the courts’ tolerance for snowballing litigation comes from the fate of tribunals. A few years ago, tribunals were initiated as a progressive step to minimize litigation and reduce the caseload of the higher judiciary. Accordingly, numerous tribunals were established as part of state and central government legislation. But unfortunately, instead of helping to clear the backlog of pending cases, tribunals have become another institutional layer of litigation, since the losing party invariably ends up entering an appeal before the courts. The courts have tended to entertain even petitions ostensibly on procedural issues in cases being heard by the tribunal and go beyond points of law in appeals of tribunal decisions.

The Tyranny of Presumptive Valuation

Article 149 of the constitution empowers the Comptroller and Auditor General (CAG) of India to exercise such powers as entrusted to it “in relation to the accounts” of central or state governments or public entities. Such powers would include a financial audit of all public revenue and expenditures and the accounts of public entities. But in recent years, as with other institutions, the scope of the CAG’s activities has expanded dramatically to encompass performance audits and assessments of policies. This functional expansion, however, has not been accompanied by the acquisition of requisite competence. The results have been systemically damaging.

When the history of the scandals that erupted in India in recent years is written, the headline number will be the presumptive loss, as estimated by CAG at INR 1.76 trillion, caused by the allocation of the 2G spectrum when politicians and government officials vastly undercharged mobile phone companies for licenses. It heralded the arrival of the activist auditor, scrutinizing government decisions and highlighting egregious excesses, as one more critical check on executive abuse. This doubtless exposed several scandals, and the CAG should be given credit for having played the most important role in exposing the deep-rooted rot in the central government.

But there have also been unintended consequences. In the real world, with its numerous uncertainties, constructing counterfactuals is at best unwise and most often impossible. Controlled experiments are possible only in natural sciences. In real life and in policymaking, the context is never a constant, though it is an important variable in decisionmaking. The same is true of the resultant presumptive calculations. It is misleading to attribute the loss caused in one situation by simplistic extrapolation from another unrelated context. By the same logic, a decision to cancel a project run as a public-private partnership that would have yielded lease and royalty payments to the government and to leave the land vacant, however compelling the reasons, would make the officials concerned vulnerable to charges of having caused presumptive loss to the government.

It makes even unintentional omissions and errors liable to be interpreted as having caused presumptive loss to the government. This situation distorts the incentives and encourages officials to delay decisions or maintain the status quo, in the hope of passing on to their successors the burden of making the decision. It is a chain reaction.

In the matter of resource allocations, for example, the possibility that officials’ decisions can be subjected to such ex post facto extrapolations and presumptive loss assessments even several years later encourages officials to avoid decisions involving asset or resource valuations. When forced to make a choice, the bureaucracy reflexively prefers auctions as the method for discovering price, irrespective of the context or sector. This overlooks the fact that in imperfect markets, with the moral hazard of renegotiation afoot, auctions very often distort the incentives and generate suboptimal outcomes. Developers bid aggressively to bag the resource block or the contract, knowing that they can renegotiate later. The result is that the tyranny of discretionary allotments has been replaced by the tyranny of auctions.

Financial market transactions offer another example. Banks are struggling to address the issue of rising levels of nonperforming assets, which threaten to cripple the banking sector and stifle economic growth. The most common strategy globally to address nonperforming assets is to auction them off to private asset reconstruction companies (ARCs) after writing off a share of the loans. But this runs up against the likelihood that at least some of the assets may generate windfall gains for the ARCs, thereby raising the possibility of later attribution of presumptive loss to the public exchequer by auditors. This, with the attendant disciplinary and other proceedings, encourages bankers to postpone the recognition of bad assets, which in turn increases the cost and exacerbates the problem of nonperforming assets.

Much the same logic of presumptive valuation can be applied ex post facto to assess the financial consequences of any decision involving an application of judgment to prefer one policy against another or to change certain elements of an existing policy. In light of the uncertainties involved, more often than not, the policies would deliver less than expected. In fact, across the world, very rarely do ex post facto assessments of the benefits of a public policy exceed ex ante estimates. Such trade-offs and implementation gaps are a feature of most public policy decisions. Bureaucrats cannot therefore be faulted for having become risk averse in their policy choices.

Ex Post Facto Assessments of Decisionmaking

Once an issue becomes public through a Right to Information Act application or by a CAG audit, it attracts the attention of a plethora of anticorruption agencies—the Lokayukta, anticorruption bureaus, vigilance directorates and commissions, the Central Bureau of Investigation, and so on. After a high-voltage media trial come disciplinary proceedings under the Prevention of Corruption Act of 1988.

Here, the role of the much-discussed section 13(1)(d)(iii) of the Right to Information Act assumes significance. It rules that an official is guilty of “criminal misconduct” if the official, “while holding office as a public servant obtains for any person any valuable thing or pecuniary advantage without any public interest.” It does not mandate the need for a mens rea, or criminal intent, decision before implicating anyone under this section of the act. Since any decision, especially in processes related to procurements and resource allocations, by definition would involve benefiting one party at the expense of another, officials become vulnerable to being accused of “criminal misconduct.”  

The implications are far-reaching. A decision by definition involves an exercise of judgment. In even a rules-based regime, the very decision to finalize rules would invariably benefit one party at the cost of another. It is fallacious to presume that following the rules amounts to an algorithmic application of those rules. It betrays an inability to appreciate the complex dynamics of, say, public resource allotment decisions—after all, the finalization of the technical and financial eligibility specifications of even an open-competitive bid document involves the exercise of considerable subjectivity, which often benefits one party or category of prospective bidders at the cost of another or others. As the Economic Survey 2015–16 by the Government of India notes, “Since the law does not require the public servant to have had any improper motive, even a benefit conferred inadvertently is sufficient to be prosecuted.”84 This reasoning, taken to its logical conclusion, makes every decision liable to be questioned.

Its impact can be deeply debilitating. For example, it is a fundamental principle of contracting that risks be allocated to those that can bear them the best. In many infrastructure contracts, this also means that the government bears the burden of all residual risks that cannot be diversified away. In an environment in which private contracting, apart from improving efficiency, is widely seen as a mechanism to shift away public sector risks, it was thought that absolving private partners of risks that cannot be mitigated could be seen as favoring them at the cost of the taxpayers. No official would be willing to stick his or her neck out and caution against such risk allocation for fear of being accused, in any subsequent inquiry, of having caused loss to the government if the risks materialized. It is no surprise that infrastructure contracts in India are characterized by an asymmetric allocation of risks against the private party.

Similarly, in case of delayed projects, decisions involving the apportionment of responsibility for delays inevitably require an exercise of judgment. Officials prefer to play it safe and to lay the blame on the concessionaire by default, and let the concessionaire seek legal redress. Much the same applies to all cases involving a reference made to a ministry to adjudicate a difference of opinion between an agency under that ministry and a private provider engaged by it. The ministry officials invariably prefer to lean toward the public agency, even when the evidence favors the private contractor, to avoid making a decision that would be perceived as having favored a private party at the cost of the government. The private party is left with no option but to seek arbitration or litigation. All these incentive distortions apply with equal relevance to all spheres of policymaking.

A related issue concerns safeguards against frivolous and malicious allegations. Section 19 of the Prevention of Corruption Act of 1988 requires prior sanction of the government before public servants can be prosecuted for alleged offenses committed while discharging their official responsibilities. Furthermore, section 6A of the Delhi Special Police Establishment Act required that the investigating agency seek approval of the central government even to investigate officers of the rank of joint secretary to the government of India and above. This offered some protection against frivolous and motivated allegations, likely against officials whose policymaking duties demanded the exercise of personal judgment in decisions with large public resources at stake. But in 2014, much to the consternation of officials, the Supreme Court struck down section 6A on the grounds that it violated the principle of equality before the law.

Investigators and disciplinary authorities must be able to distinguish between erroneous and mala fide (bad faith) decisions. They should acknowledge the very strong likelihood of policy choices not playing out as expected, even engendering rent-seeking mechanisms. Not even the most farsighted and enlightened policymaker can anticipate all the emergent dynamics in a complex policy environment and design a policy that mitigates all possible failure pathways. In fact, in large-scale projects, renegotiations and periodic course corrections are par for the course. The challenge lies in being able to scrutinize the decisionmaking process to distinguish between legitimate and inevitable deviations from due process and mala fide actions.

Binding Decision Paralysis

The unintended cumulative effect of jurisdictional and other excesses by these institutions, however unwitting, is a deep reluctance among senior officials to exercise judgment and make decisions. It is unsurprising that they feel vulnerable to being accused of having caused loss to the public exchequer and to being excoriated in public through a humiliating media trial. The result is that decision paralysis has gripped the higher levels of the country’s bureaucracy, at both state and central government levels. This structural incentive problem is independent of the government in power and is not amenable to being addressed through executive or legislative actions. At its worst, it may have left indelible scars on a generation of bureaucrats.

The increasingly intrusive role of the media exacerbates the decision paralysis. As the legal scholar Lawrence Lessig noted, anything that appears incriminating is enough to slander and defame anybody who is even perceived as being involved through high-voltage media trials in which the public’s attention span is limited to the headlines. This trend nudges institutions such as the judiciary and CAG to indulge in occasional grandstanding. The intense media trials make officials extremely risk averse, and they tend to dig deeper into their default positions.

A significant proportion, possibly even the majority, of so-called stalled projects reached that status as the result of decision paralysis. For example, a delayed project necessitates decisions on what and who was responsible for the delay, permissions for a time extension and cost escalation, and often a revised scope of work. These decisions are frequently viewed from a social cognitive perspective, whereby such contracts are perceived to have been allotted to private parties on the presumption that they were best positioned to bear all risks and on the presumption that these firms invariably play ball to palm off some of those risks and wrest more concessions from the government. Because of this social narrative, each of these decisions is liable to be criticized as benefiting the concessionaire. Officials therefore prefer to play it safe and either penalize the contractor by default or delay making the decision. This sets off a cascade of events that further delays the project and eventually makes it commercially unviable.

None of this is to advocate that Indians should restore the status quo ante and be deprived of the enormous benefits from such institutional vitality. It is just that the externalities arising from such activism have had a debilitating effect on decisionmaking and therefore on state capability with consequences for economic activity and growth. Worst affected are policymaking and contracting in infrastructure and related sectors, areas that have first-order effects on economic growth. What one can hope for is awareness of and sensitivity to these considerations on the part of judicial and quasi-judicial authorities. Over time, such awareness and sensitivity should result in better rules that preserve the integrity of decisions even as they allow decisions to be made in the first place.

The Finance Ministry Veto

In the public bureaucratic system, at the level of both central and state government, ministries formulate schemes and proposals after elaborate stakeholder consultations, with detailed costing that takes into consideration program sustainability and commercial viability factors, then run them through the law and finance ministries to the approving authority (the cabinet or chief ministers). As might be expected, because of scarce resources and numerous competing demands, the Finance Ministry reduces program allocations. It would have been perfectly fine, indeed necessary, if this were all it did. 

Unfortunately, in most cases the Finance Ministry goes far beyond the step of cutting resource allocations and makes prescriptions concerning program economics (a unit rate compensation of INR x instead of INR y), procurements (why not go through the local government agency or self-help groups?), financials (why not leverage resources from corporate social responsibility funds or a public-private partnership?), contracting strategies (preferring one model of public-private partnership over another), and even on manpower deployment (preferring one administrative structure over another, or calculating x number of people to do a task instead of y). Each of these prescriptions is typically drawn from generalizations about outliers and from misleading rules of thumb and so-called best practices.

If it were merely offering suggestions, the implementing ministry could have examined the suggestions and taken necessary action. But in India’s bureaucratic rules of the game, such prescriptions assume the force of a veto. This is all the more so since the Finance Ministry’s recommendations are invariably in line with the bureaucratically correct practice of lowering public expenditure. Disagreement with the ministry risks a malicious complaint being lodged against one or a query under the Right to Information Act or an adverse audit comment and a potential vigilance investigation with its public humiliation.

The Finance Ministry’s veto power is felt across programs, especially in the last mile of implementation, and can make the difference between success and failure. The most common form of veto is to skimp on transaction costs (transportation and storage charges for public distribution systems), remunerations (the midday meal for workers), construction costs (unit costs for buildings), operation and maintenance expenditures (school and toilet maintenance in Sarva Shiksha Abhiyan, also known as the Education for All initiative, and hospital maintenance in the National Rural Health Mission), leverage from other sources (corporate social responsibility and the National Rural Employment Guarantee Scheme), and so on. Doubtless some of these refusals are unavoidable, forced by the acute scarcity of resources and by political economy considerations that demand the resources be spread evenly and universally. 

One recent example is the fixing of commissions for banks and business correspondents in the implementation of direct benefits transfer schemes. While the Task Force on Aadhaar-Enabled Unified Payment Infrastructure recommended a 3.14 percent transaction processing charge to banks,85 the Finance Ministry fixed direct benefits transfer commissions to banks in rural areas at 1 percent, subject to an upper limit of INR 10—this despite detailed costing by independent agencies showing the breakeven charge to be 2.63 percent.86

At an objective level, such vetoes are as much a transgression of jurisdiction as is kritarchy or the tyranny of presumptive valuation. The following scenario is now commonplace. A professionally competent agency (the ministry concerned), democratically empowered, with implementation authority, and following due process procedures, formulates a program and circulates it for approval. En route to approval, another ministry, with neither the contextual knowledge nor the professional competence, at best with accounting and budgeting competence, picks apart program components and details, and in a manner that seriously undermines its prospects for successful implementation.

Clearly, any authority with discretionary power to allocate scarce financial resources would be tempted to scrutinize expenditure proposals thoroughly, and it is justified in doing so. However, given the absence of domain competence even among the relevant officials, the Ministry of Finance stepping into domain matters is egregious. Turf wars and ego clashes are guaranteed to generate suboptimal outcomes.

The state capability constraint is serious, pervasive, and endemic even as the role of the state remains indispensable to achieving economic prosperity and social stability. A root-and-branch reform of the administrative process, including on appointments, is long overdue. Paradoxically, induction of talent and experience in adequate numbers from the outside may well be the trigger for the overhaul of the administrative machinery. But that makes it a catch-22 situation. Who will bell the cat?


67 Shirish Sankhe et al., “India’s Urban Awakening: Building Inclusive Cities, Sustaining Economic Growth” (New York: McKinsey Global Institute, April 20, 2010),

68 Amy Kazmin, “India Food Watchdog Leaves Foreign Groups Wary,” Financial Times, August 27, 2015,

69 Nivedita Mookerji, “Why Do Indian Health Authorities Keep Quiet on Pharma Firms’ Failings?” Business Standard, December 5, 2014,

70 Glenn Collins, “Restaurant Grading Begins in New York,” New York Times, July 27, 2010,

71 Saurabh Sinha, “US FAA Downgrades DGCA Over Aviation Safety Fears,” Times of India, January 31, 2014,

72 Praveen Swami, “Figures Bust Myth That India’s Bureaucracy Is ‘Bloated,’” Hindu, January 30, 2012,

73 Government of India, Report of the Seventh Central Pay Commission (New Delhi: Government of India, November 2015),, 41.

74 All India Council for Technical Education, AICTE Approval Process Handbook 2015–16 (New Delhi: All India Council for Technical Education, 2015),

75 Harsimran Julka and Pankaj Mishra, “Only 25% IT Graduates Readily Employable: NASSCOM,” Economic Times, April 7, 2011,

76 “Only 7% of MBA graduates employable, rest earn 8-10k: Study,” Indian Express, April 30, 2016,

77 Federation of India Chambers of Commerce and Industry (FICCI) and Ernst & Young (EY), Higher Education in India: Vision 2030, FICCI Higher Education Summit 2013 (Kolkata: Ernst & Young, 2013),$FILE/EY-Higher-education-in-India-Vision-2030.pdf.

78 Prashant K. Nanda, “AICTE to Cut Number of Engineering College Seats by 600,000,” LiveMint, September 25, 2015,

79 Lawrence Lessig, “Against Transparency,” New Republic, October 8, 2009,

80 Ibid.

81 Aneesha Mathur, “Commercial Vehicles Entering Delhi Ordered to Pay ‘Environment Tax,’” Indian Express, October 8, 2015,

82 Alok Prasanna Kumar, “The True Worth of a Senior Advocate,” LiveMint, September 16, 2015,

83 Amritha Pillay, “Most of CCI’s Penalties Are Stuck in Courts,” LiveMint, December 14, 2015,

87 “The Chakravyuha Challenge of the Indian Economy,” in Economic Survey 2015-16, ed. Department of Economic Affairs (New Delhi: Ministry of Finance, Government of India, 2015),

85 Aadhaar is the national unique identification number that captures an individual’s biometric and iris features. More than a billion citizens have been enrolled under the Aadhaar, making it easily the largest national citizen identification system in the world.

86 Sumita Kale, “Enabling Direct Transfers through JAM,” LiveMint, February 11, 2016,