The imperative of collective reforms in a federal system
PremiumRajasthan’s recent attempt to reverse a fiscally reformist pension shift from defined benefits to clear contributions should cue the need for a federal dialogue mechanism for reforms.
The process of furthering economic and institutional reforms in India is facing some unexpected challenges at this juncture. As these reforms have to deal with complex political and social contexts, the decisions needed are fundamentally political and shaped by political settlements. Though we must take politics seriously, crucial changes to economic institutions need to emphasize the underlying economic gains and highlight the virtues of patience as these changes takes decades to pay off. There are some signs of states and political parties getting restless and trying to undo past reforms. One such example is the case of pensions.
Prior to India’s pension reforms, the civil services pension scheme was designed as pay-as-you-go defined-benefit scheme. Studies and various panel reports showed that this scheme of pension and provident fund arrangements in Central and state governments would strain future public finances and could lead to a fiscal crisis. Discussions culminated in policy reforms, leading to the discontinuation of defined benefit (DB) schemes and a shift to a defined contribution (DC) scheme. All new Union government recruits after a date in 2004 were enrolled in the National Pension Scheme (NPS), state government followed suit, and in 2007, public sector banks also moved to the NPS under its corporate plan. Regulated by the Pension Fund Regulatory and Development Authority (PFRDA), the NPS is now open to all citizens.
As pension reforms have almost reached stability, the Rajasthan government’s recent announcement of implementing the old pension scheme for state employees appointed on or after 1 January 2004 comes as a show stopper. Calls for a return to the old pension scheme are slowly gathering support in other states. Recently, a political party made a similar promise related to the old scheme in its election manifesto for Uttar Pradesh. This presents a classic case of a nationwide reform being undone by some states after having agreed and completed a significant portion of it. Such back and forth could jeopardize our new institutional reforms.
Reforms on issues such as pensions touch upon many aspects of people’s lives. This often makes it complex to push these reforms and implement them. It is here that we must recognize the importance of joint initiatives between states and the central government, so that we achieved better outcomes. Both the Centre and states can learn a lot from each other through an exchange on key aspects of these reforms that can develop into expertise on how to fix the system. Importantly, such mechanisms can facilitate the implementation of reforms and compliance with them.
Rajasthan’s decision raises larger issues of sustaining reforms in a federal system. Some important questions crop up. First, have state governments identified their priorities among desired outcomes? States must allocate resources accordingly and adhere to these allocations, as fiscal slippages could prove costly in this recovery phase of the economy. Second, it raises an issue of the levels of expenditure that states can afford in the short, medium and long term. Some expenses in the short and medium terms cannot be sustained in the long term and so pruning them is necessary. Third is the level of commitment by states to the cause of reforms. The level of political stability and its implications in turn for electoral cycles often decides the level of political commitment to economic, institutional and governance reforms.
In the current recovery phase of the Indian economy, states and the Centre need to work hand-in-hand and utilize forums for dialogue to identify significant areas for reforms. State- level institutions could be catalysts for the implementation of agreed reforms. We need reform accelerators. This could be done keeping in mind the political economy factors that have impeded reforms in the past.
Such an approach could be built on four pillars: (i) Tailoring: Issues can be identified at the state level and solutions provided to tackle them directly; (ii) Prioritization and sequencing of reforms, which could include combining gradual reforms with longer term structural changes, and their translation into clear, achievable and measurable targets; (iii) Transparency: Both targets and the process can be made public to increase participation and shared commitments; and (iv) Flexibility: This can ensure that the process allows for adjustments if targets are not reached and also create space for innovation.
Going back and forth in reforms within a federal system sharpens political competition that can result in tensions over the federal bargain between national and state governments. Successful reforms at the state level are not only about technical capacity, knowledge and targets. It is also about the imperative of creating a sense of accountability and infusing a process of shared responsibility across a coalition in support of change. This poses challenges for short-term political opportunity spaces and efficient resource utilization. To sustain reforms at the state level, top political commitment is necessary. State governments can either create political momentum for reforms or capitalize on the existing momentum to support change.
We must replace blame assignment with a culture of finding solutions by doing, and, eventually, empowering stakeholders and supporting them in outcome delivery. This requires a move from ‘thinking politically’ to ‘working differently’.
These are the author’s personal views.
M. Suresh Babu is advisor to the Prime Minister’s Economic Advisory Council and professor of economics at IIT Madras