Description: In this episode of the Law and Other Things podcast, hosts Vishnu and Hamza speak with renowned author and scholar, Professor Karthik Muralidharan from the University of California at San Diego. Professor Muralidharan provides a brief overview of his recently released book, Accelerating India’s Development, a State Led Roadmap for Effective Governance, and then dives into a deeper discussion of the chapter on “Federalism and Decentralization”. He argues that we must revisit the first principles of Federalism, and align our governance initiatives accordingly. He also gives some implementable suggestions for a progressive decentralization of governance in India. He further argues that delimitation presents both a challenge and an opportunity to revisit our federal structure.

Vishnu: Hello everyone. My name is Vishnu Bandarupalli and I’m an Editor-in-chief with the Law and Other Things blog. I have with me my colleague Hamza. Thank you so much for listening into our podcast. Today, we’re honoured to have with us Professor Karthik Muralidharan. He’s a man who needs no introduction. He’s one of India’s foremost economists, and currently the Tata Chancellor’s Professor of Economics at the University of California at San Diego. 

Today we will be discussing his book: Accelerating India’s Development: A State Led Roadmap for Effective Governance. It is a remarkable book in many ways. Most importantly, what stood out for me was the way it combines academic rigour with practical realism. Instead of just focusing on what is wrong with the Indian state, it offers implementable suggestions as to how to make it better. For instance, in the chapter on justice reforms, Professor Karthik suggests a tech solution to reduce delays by proposing the setting up of a portal on which lawyers can seek adjournments in advance. This would ensure that the court can process these requests parallelly without wasting time that should be reserved for arguments. The book is filled with similar actionable ideas across sectors, from public health care and education to social protection and public finance, all presented in neatly organized bite sized chapters. 

Professor Karthik, thank you so much for joining us today and taking out your time. Before we dive in, I just wanted to share a short anecdote. Recently my colleagues and I were discussing the inspiration behind the name of our blog. It has been borrowed from M.C. Setalvad’s autobiography, My Life: Law and Other Things. However, it serves as a constant reminder for us that the law never operates in vacuum. It is intricately linked with the social, political, cultural, and the economic factors surrounding it. It in that sense, your book very interestingly touches on these other things that shape the law. For instance, your insights on governance theories shows how laws can be crafted to become more effective tools of policy. In that context, could you tell us more about the role of law in policy making? And why this book is particularly helpful for law students and legal practitioners who want to understand and play a role in the shaping of effective governance.

Prof. Karthik: Great. Thank you, Vishnu. Thank you, Hamza. It’s a pleasure to be here and to reach out to the community of law students and lawyers in general. To take a step back, the purpose of writing a book like this is the following. As academic economists, we spend most of our time doing research that shows up in individual papers, but over 20 to 25 years of work, there were enough insights and patterns emerging from this work that could be put together in a book. A book that is written to be targeted to many different audiences, because the ideas are such that any undergraduate in any discipline can understand the book. It’s almost a book that any Indian citizen should be able to read and understand, but there’s also layers and layers of depth for our students, undergraduates, masters, PhDs, and faculty members, because there’s 200 pages of notes and references. So, you can go to the references to get a sense of the underlying research that shapes the overall narrative, but the narrative brings it together in a way that individual papers by themselves don’t. So that’s the meta purpose of the book. 

Coming to law students and the legal community in particular, it’s been very gratifying for me to see some of India’s most distinguished lawyers read and engage with the book. I’ve had some wonderful conversations with many of them. And I would say from the legal community’s perspective, there are two broad messages, about why this is central to understand. 

The first is that in a way law has the same problem as economics, which is we tend to spend a lot of our time theorizing on what governments should do. So, if you look at what many development economics papers will say, government should do this or government should do that. But then we don’t ask the question of how they will do it, or whether the government even can do it. I think one of the most important overarching message of this book is the centrality of state capacity, which is the capacity of the government to implement its programs and policies. And this is something that I think both lawyers and economists don’t pay enough attention to. It’s almost considered a mundane implementation organizational issue. But the point is that that is the central binding constraint. And it relates to many aspects of legal tradition in India, which tends to focus on rights, and try to use the law as a means of securing the rights of marginalized peoples as well as entities more broadly. But the ability to translate the legal protections into practice is again critically constrained by your capacity to implement. So that way the capacity agenda becomes central for any serious social scientist, whether you are an economist or political scientist or legal scholar. 

Because coming back to what is the law. The law really is a codification of what we as a society want to be the rules of the game. So, it’s meant to codify what as a society, individuals can and cannot do, firms can and cannot do, governments can and cannot do. So, in that sense, the law is the way we codify our collective preferences, but then the question is, how do you implement that law? And again, you run into constraints of capacity. 

So those are the two meta reasons for why lawyers should engage with the book, and then more specifically, there are 3 chapters in the book that have direct relations with the law. In fact, more than that. But at least the chapter on federalism and decentralization has direct connections with constitutional law, which we’ll talk about; the chapter on, police and public safety, and the chapter on courts and justice are directly related to the law because both safety and law are the primary duties of a state. When you think about state capacity, you then have to think about state capacity in fulfilling its primary goals. 

I think there is another broad sense in which the book really matters for lawyers, which is even if you look at the chapters on education or health or social protection, the way that progressive movements in India have tried to secure the rights of the poor and the marginalized, is through enacting basic rights and legislations, such as the right to education, or a right to food or to employment. 

So, there are a whole bunch of rights through which progressive movements have tried to codify certain aspects of the state in favour of the poor. A key argument that I make is that the translation of those rights into practice is again critically hindered by the capacity of the state. Therefore, the state capacity agenda becomes central not just for economists, but also for lawyers who care about achieving progressive policy goals. 

A final point I want to say is that state capacity is not just about saying, we need to spend more money. A critical point that underlines the entire book is focusing on the efficiency of the government, which may be seen as mundane and organizational, but you have to open up the black box of the state to understand why the translation of budgets into outcomes is so poor, and that I think, is the main intellectual contribution of the book, to think about the state not just as an institution, but to think about the state as an organization and how does this entity run? And you need to understand that before you can improve its functioning.

Vishnu: Yes, thank you so much for that introduction. Moving on, in your first chapter you say that this book focuses on ideas to improve governance at the state level, and in fact that is something that’s reflected in the title as well. And you say how this has been neglected in the Delhi-centred public discourse. I found it really interesting how the book takes a bottoms-up approach in suggesting reforms. And that is a theme that we really wanted to discuss. 

Just to give some context to the listeners, India is a federal country with multiple tiers of government. Governments at the national and state level are primarily responsible for legislation, policy making, and program design. The Constitution divides subjects between the Centre and the states. And programs are then implemented by the local governments, which is the 3rd tier at the district, block, and local body levels. So how the three tiers of government interact with each other in formulating and implementing policies has a significant bearing on the everyday lives of citizens. 

It is often said that Indian federalism is at a crossroads. On one hand we have the legacy of colonialism, partition and the vision of nation building that have led to a very centralized federation. On the other hand, the transition into the free market has brought the contradictions of the centralized federal arrangements to the fore. Further, the current political scenario where we have a strong central government which often goes into conflicts with several regional governments with different parties in power, has made federalism an evergreen topic of public discourse over the past 10 years. So, in this context, could you tell us what the first principles of federalism are and then how they manifest in India’s Constitutional structure?

Prof. Karthik: That’s a great question. For your listeners, given that I suspect a lot of the background here comes from what is in the law, I think it’s useful to go back and first think about what is good for citizens. So, let’s take a step back and ask the fundamental question: How does the size of a country affect the quality of governance and the ultimate life of citizens, which is the main role in some ways of the Government? 

The conceptual issues are quite interesting, because it turns out that there are some issues where it’s good to be big. So, there are many benefits of size. Historically, the biggest benefit of being big was economies of scale in defense, and historically, the single biggest threat to any country was the risk of being invaded. If you were a small country, you often got swallowed up by your neighbours. And that was historically one of the big reasons why empires and kingdoms chose to expand, because you protected your core by expanding the physical size of your Kingdom. 

Now, over time, you also see many other benefits of size and economies of scale. So, you get economies of scale in free markets, in the size of the market because typically there are barriers to movement of goods across countries, across borders, but there are much fewer barriers within borders. So, if you have a larger market, it allows you to sustain many more high fixed cost industries, it allows you to cover the fixed costs of different investments and infrastructure. So, there are many benefits of economies of scale.

Similarly, you also see those economies of scale with regard to science and technology and innovation. Because these are very resource intensive and often you’ll see that the large countries historically have had the most scientific advancement because they’ve had the large budgets needed to fund basic research and development. 

You also get this interesting element of what’s called spatial insurance. Imagine that you are a small country that’s hit by an earthquake and suddenly, the entire country is in distress, whereas a large country can absorb that shock easier, because you can both use tax revenue to provide relief to affected regions and people can also migrate from the disaster-stricken area and rebuild their lives in other places. So, these elements of size have been good for people’s welfare over time.

But size also comes with two fundamental costs. One of the biggest costs of size is that you typically imagine the policies for a country to be uniform, but the larger you get, the more you have to accommodate diversity; at some point, the people at the periphery of the country will often not want to live by the policies of the “Center”. This is why historically, secessionist movements have always happened at the periphery of countries. For instance, the Soviet Union had a core that was Russia and then expanded to a bunch of peripheral states that were in the Russian area of influence. But over time, if they did not want to live under the policies that were designed primarily for Russian welfare, you would see this desire to break apart. So, one centrifugal force, that offsets the benefits of size is that you need to accommodate more and more diversity as you grow bigger, and that often becomes too difficult. So, at some point it becomes so diverse that people then say “I’d rather be in my own country.” So, that’s one tension of size. 

The other major cost of size is that it substantially increases the distance between the citizens and the government. So, it reduces the responsiveness of government because the information and the requests from citizens have to travel through multiple layers before it even gets to them. And then you have to take action in a way that is often much less timely. So, the quality of governance often suffers when you have very large countries. 

If you look at the 10 richest countries in the world, 9 out of 10 are very small countries with population under ten million. So, in general, small countries are more nimble and more agile to citizen’s needs. So, the question then is from the citizen’s perspective, how do you balance the costs and benefits of being big? 

The idea of federalism aims to give citizens the best of both worlds. 

So, in a well-designed federal system, what would happen is that the functions that benefit from economies of scale and coordination are done at a higher level. And when I say economies of scale, I’m including benefits of coordination. For example, if you’re building a National Highway network, if each state were to build its own highways independent of the other, you could have highway systems that don’t meet at the state borders, which would make no sense. So, when you have the economies of scale and coordination, these are functions that benefit from being done at a higher level. If you think about defence, if you think about international treaties, if you think about your position of negotiating, then size gives you heft in all of those discussions. So, it’s good to put those functions with a central government.

But functions that need to better accommodate diversity, are better dealt by the lower levels of government. So, in India, for example, there is a reason why states have been not just administrative units, but also linguistic and cultural units. And so, people believe that Indian federalism, and particularly linguistic states, has been a really important aspect of what has allowed the country to stay together. Because it allows people to express their preferences over culture and language and food in a way that is not homogenized, while benefiting from the benefits of scale. 

The functions that need to respond rapidly to information are often best done at the local level, which is why service delivery, whether it’s education or health or, streetlights or sanitation are functions that are often done by local government. That’s because you need a rapid cycle of responsiveness to what the local challenge is. So, if a lamp post falls somewhere, a person is there to see this and can call the local government, saying come and fix this, as opposed to if I need to call somebody from the state government to come and fix it, it is going to take much longer.

So, broadly speaking, a well-designed and executed federalism can give citizens the best of both the worlds, by saying let’s get the benefits of size where it benefits us, but let’s also get the benefits of being small, when it makes sense to be small. And that’s the theoretical basis of federalism. 

Now the problem in practice is that it also creates a bunch of tensions. Because what you’re saying is that there is a piece of territory over which multiple governments have certain jurisdiction. If I’m in a city, that city is part of my city, it is a part of my state, it is a part of my country. So, who has the final say on what happens in that city becomes the fundamental source of tension. Then you get into issues of turf and power where each level wants to exert authority. Therefore, when federalism done well, it works beautifully for citizens, but federalism when done badly can make things worse, because then you spend a lot of time in jostling for power and passing responsibility, passing the buck, and nobody takes responsibility. 

There are two key concepts to highlight here. The first is the Constitutional arrangement. So, one of the ways in which the Constitution deals with the issue of turf is to delineate different topics in the central list, in the state list, and in the concurrent list. But even that frankly, is a bit of a shorthand that doesn’t always work. Because if you look at a sector like education, there are some aspects that make sense to have at the national level, because there will be economies of scale. 

If you just think about where should fundamental research and development be funded, it makes sense to happen at the level of a National Research Foundation, because there are economies of scale in funding the best ideas across the whole country. Whereas language policy, medium of instruction, all of that should be decided at a state level because education in India is meant to accommodate that variation in languages and culture. But where should accountability for teachers and teacher attendance sit? That should sit with the local government because you can immediately take action, if the teacher has not shown up for work. 

So, even in the same subject, it might make sense for different functions to sit at different levels of government. So, that’s one key insight, which again, for lawyers is important, because you tend to think about things as what does the Constitution say about the delineation of topics. I think it is a useful counterpoint to keep in mind as to what is good for citizens. Within the same sector, you can have different functions making sense at different levels. 

The second key insight which is related to that is we often tend to think about federal government systems as a hierarchy, where the Centre trumps the state, and the state trumps local. But I think from the citizen’s perspective, it’s important to think about this not as a hierarchy, but differentiation by functions. There are some functions where the local government should have primacy, there are some functions where the state should have primacy, and some where the national should have primacy.

I think that is what the first principles of federalism should be like. Now it turns out, of course, that India is incredibly overcentralized, and we can talk about that further as to why we are that way. But this is just coming to the first principles of federalism and how you should design the government to maximize the welfare of citizens.

Hamza: Thank you, professor for that answer. When I was reading the book, I found a lot of themes and ideas that were intersecting with what we had studied earlier in our classes, but with a new lens. For instance, when you were discussing about federalism, we have studied in our constitutional law classes the fact that Indian Constitution is overly centralized. We studied the Union list, concurrent list and the state list. We studied in history too why the Indian Constitution is overcentralized, maybe in the aftermath of the Partition and other things, but what this book adds to that discussion is a clear analysis of comparatively how overcentralized we are, because when we study it in class theoretically, we do not understand the quantum of the problem. So, the interesting take from the book for me was the comprehensive data regarding comparison with other countries such as the USA, Brazil and China, and how much local spending they do compared to what we do. 

Further, regarding the harms of over centralization on a practical level, rather than the harms theoretically, or the negative effects legally. So, I would request you to elaborate for our audience the comparative over-centralisation that we see in our Indian structure and further on what harms that poses to us as citizens. That would be helpful.

Prof. Karthik: I’m glad you found the data valuable. In fact, even writing the chapter on federalism was a lot of fun because it took me out of my normal comfort zone because there’s diverse stuff there. There’s economics, there’s politics, there’s history, there’s law. And like you said, the data was quite striking even for me, which is when you can look at measures of over-centralisation. 

The other important point in India is most of the discussion on federalism focuses on Center and state and not enough on state and local. But if you look at the distribution of public expenditure, one measure of decentralization is how much of your total public spending happens at the local government level. And this is a metric on which India is by far the most overcentralized country in the world. Countries like the US and Indonesia come in at about 25% of spending happening at the local level. But the extremes, which is interesting are India and China, which in some ways are the two most relevant comparisons because these are the two largest countries in the world, of comparable population. I think for many Indians, we tend to think about China as this strong overcentralized state, the Communist Party controls everything. Now that might be true in terms of the party as the final authority, but what’s interesting is in practice, how decentralized Chinese governance is. So, in China over 50% of total public expenditure happens at the local government level. And in India, like as of at least 2015, when we have the numbers, that number was about 3%, which means China that we think of as the strong overcentralized state is about 17 times more decentralized than India when it comes to actual public expenditure. And the key reason for that is many of the key service delivery functions like education and health and all the local municipal services, are all controlled by the local government in China. 

If you think about what citizens want from their government more: yes, you want defence, and defence needs to happen at the national level; you want good foreign policy, and that happens at the national level. But if you look at most of the essential services that citizens want from the government: education, health, sanitation, sewage, garbage, cleaning, streetlights, all of these are local government functions. So, the high allocation of total spending in China reflects that; whereas in India, most of those functions are with the state government. So, in fact, in many ways the over-centralization in India is less from state to Centre, but more from local to state, and that’s the margin where we probably need to do a lot more work. Now we can talk about why we are that way. But I think just putting those facts out there is really important. 

Now you asked a very important second question, about explaining the ways in which this hurts governance. And I think one of the simplest examples is the problem of, teacher and doctor absence in public schools and public clinics. This was my original study; my first study as a PhD student in 2002-2003 was a nationwide study across 20 states in India, just doing surprise visits to over 3,000 schools and about 1,500 PHCs and just measuring teacher and doctor absence, and we found that on average about 25% of teachers were absent in in government schools and about 40% doctors were absent in clinics. 

The point is that the community where they’re supposed to be there has absolutely no power on this. Because the only entity that can take action is a District Education Officer, and even that person often is powerless. The action taking authority sits with the state, which means that it becomes impossible for the higher authorities to verify the attendance. Remember, it’s not enough just to hear that you’re absent, you need to prove in a court of law that the absence is chronic enough to warrant action. Whereas if you’re in the community, this is something you observe every single day, and you can take action. So, that I think is a very visceral example of where the over-centralization hurts governance and service delivery. 

And this is a problem now. Multiple Chief Ministers I have met in the aftermath of the book have told me how much they struggle with this issue. They are trying to solve the problem in top-down ways of saying we’ll do better monitoring, we’ll do biometric attendance, we’ll do stuff like that. But frankly, the ultimate stakeholder as far as service delivery is concerned is the citizen. So, you can do a bunch of top-down stuff, but a more sustainable long-term way would be empowering local communities to be able to hire their own staff. Now, that comes with other challenges which we will talk about, but I think a direct cost of the over-centralization is this.

A second cost of over-centralization is the complete lack of discretionary budgets for local leaders to take action in a way that represents what is optimal for their own situation because the policies are made often at a national level, but even a state is often too overcentralized. Think about it: states in India like I show in Chapter 8 could be among pretty large countries. The top 15 states of India by population would be in the top 20% of countries by size. So, a typical Indian state is larger than an average European country. So, even that is too large for making uniform policies with regard to spending. 

We see the cost of this over-centralization most dramatically in two ways. One is in customizing expenditure for what the local needs are. Second is in empowering communities to hold service providers accountable because nobody can take action even though they might not be showing up and not be working the way the community wants.

Hamza: Having discussed the quantum of the problem and the harms of over-centralization, I think where this book is distinguished from other studies on federalism and other blogs that we often read is that it provides concrete solutions that can improve the situation. And this theme and this structure is followed throughout the chapters of the book, where in the first part of the chapter, we understand the problem and in the second part, we try to see practical solutions that can help alleviate this problem. So, what can be the concrete suggestions regarding decentralization of governance in India? What steps can be taken and how we as citizens can contribute to this decentralization?

Prof. Karthik: Thanks for asking and picking up on this because this is one of the key cross-cutting themes across every sector. You really need a lot more decentralization. But before we talk about that, let’s take a couple of minutes to understand why we are so centralized, because it’s important to understand that so that the solutions we propose are nuanced and reflect the uniqueness of the Indian situation.

If you compare the Indian Constitution with the US, the US is a very decentralized Constitution. There are three reasons why India was overcentralized and maybe you’ve studied all of this in the law schools but let me just do this quickly. The first is the political one, which is in the post-partition movement, the biggest concern of the founders of the country was that the country would fall apart, and which is what gave the Union government so much power, including Article 356, which is unheard of in most other federal democracies, that a central government can dismiss summarily an elected provincial government. That was the political reason.

There was an economic reason for the overcentralizing, which was this belief that you needed heavy state led investment to drive industrialization and development. It was believed that only the central government had the scale to marshal and mobilize the resources needed to make those heavy investments. 

But I think the third reason for the over centralizing is perhaps the most unique to India and the most important to keep in mind when we think about decentralization, and this has to do with the social reasons for over centralizing. The framers of the Constitution, especially Dr. Ambedkar, really did not trust local elites to provide services like education. This is because you were essentially constructing a modern state on a social history of feudalism and patriarchy as well as a strong history of discrimination on caste. So, to the extent that the goal of service delivery was to make sure that everybody got access to education or welfare programs like NREGA (which didn’t exist then), or ideas like land reform, the concern was always that that local elites would essentially not provide services to the marginalized segments of society. 

That’s why the modernizers of the time of the Constitution, including Pandit Nehru and Dr. Ambedkar believed that you needed a modernizing state to counteract a traditional society. That’s why they gave so much more power to higher level bureaucrats rather than lower-level elected officials. 

You see this tension between a modernizing state and a traditional society even today, so much of this is captured nicely in the web series Panchayat, where you have a modernizing state which says you need to reserve seats of the Gram Pradhan for women, but in practice it will often be the husband of the elected official who’s calling the shots. In the 8th episode of the 1st season, when the Collector comes and then they have to put on a show, and in doing that the elected lady gets a little bit more power. This is very important to understand.

The US Constitution was a very bottom-up decentralized Constitution and that’s because it was not trying to do social justice, it was a very conservative Constitution. The moment the US tried to do so in the civil rights era, tried to abolish slavery, tried to get voting rights, it turns out that you need federal intervention to overcome the resistance of the local elites who are benefiting from that exclusion and marginalization of vulnerable groups. So, there was a very good reason for why we were so overcentralized.

I’ve talked to many senior IAS officers who would say that land reform would never happen in a strongly decentralized setup and even with that it became very difficult. Look at a more modern example like NREGA. We have tons of studies showing how local elites and landlords try to resist the implementation of NREGA, and so if you were to completely decentralize the implementation, then you would be legitimately worried. A decentralized implementation of NREGA would not work because the local elites would not let it work. 

These reasons are important to keep in mind because given this history, we cannot just blindly decentralize and say, “hey, I’m going to take all of these powers and give it to the panchayat”, because then you get into the problems of the local power structures and local elites, which is why when I talk about decentralization, I’m talking about a very nuanced decentralization that has to understand our own historical reasons for why we are overcentralized, but then recognize that there are costs of that. So, how do you then design structures that balance these costs and benefits? We cannot give a slogan like “decentralization will sort every governance problem.” You really have to think carefully. 

With that background in mind, now let me give a few very concrete ideas. So, the first part is just fiscal. How do you improve the fiscal capacity of local governments, so they have the resources to be able to design intervention, simple things about: Do I prioritize building a water tank? Do I prioritize widening a road? Do I prioritize building some green space? Do I prioritize building a park? These are all decisions that are best done at a local government level, that reflects the preferences of the community. But today, local governments don’t have resources at all. 

So, there are two ways in which you mobilize the resource base of the local governments. The first is we rely on the Finance Commission. The Finance Commission institutionally, only allocates resources between Center and the state, so constitutionally, the local government is not even in the constitutional scheme of things. But what the Finance Commission is able to do is to provide some grants from the central quota that goes directly to the local government and provide certain conditional grants that create incentives for state governments to make sure that they’re devolving a little bit more. 

Personally, I think one way forward for this is to reform the GST itself. Right now, the GST proceeds go 50-50 to Center and state. But even if we were to put a modest 5% or 10% directly for local governments, the share of the Center and state both goes down to 45%, and the remaining 10% goes to local government. The number could be smaller, but that would be one way of institutionalizing an automatic way of fund flows to local governments that will then empower local governments. 

There’s another chicken and egg problem here; the chicken and egg problem is that if you decentralize too much too fast, the local government doesn’t have the capacity to do the planning and utilization of those funds. Reason it’s chicken and egg is, I don’t build the capacity unless I have the funds, but if you don’t give me the funds because I don’t have the capacity, then I’m stuck in this low-level equilibrium, where I will never build that capacity. 

So, you need to start with baby steps, and maybe have a sliding scale, in the GST itself, you pass an amendment that says over the next ten years, we will progressively increase the share of local government by 1%, so, you can plan for that and build the capacity. I think that’s one place where you can concretely strengthen local governments.

The second part is strengthening property taxes. This is especially important for urban bodies because if you look at where most of our financing needs in India are, going forward, urban infrastructure is one of the biggest areas where we need a lot more investment, where we don’t have the resources, and property tax is a good tax in many ways. I talk elaborately about this in Chapter 7. 

When I’m talking about the first principles of effective revenue and quality of revenue, the reason property tax is a good tax is that it can be a virtuous cycle because if you use the property tax to improve the value of the local amenity, which then can increase the valuation of the property, because people value property better when the amenities around it are better. So, property tax is a good tax for many reasons, one is it can be a virtuous cycle. 

The second is that from economic principles’ perspective, land cannot move but capital can move, and labour can move. The first principle of economics is that you tax factors of production that are more inelastic and don’t respond to taxation. You already see this in stories in the media of how many of wealthy Indians are leaving for Dubai and Singapore because they feel that relative to the taxes they pay, they’re not getting the quality of service, so, you can’t tax labour too much. You can’t tax capital too much because these are mobile factors of production. If you want to be able to tax without undermining the tax base itself, you need to be thinking about immobile factors of production. 

So, land and property, therefore, are one of the most appropriate candidates to tax, but the other reason that’s a good tax is that it’s also politically a good tax. Why is that? The political principles of taxation are that people are more willing to pay taxes when they see the connection between the taxes they pay and the services they receive. So, when you pay all your taxes to a distant Central government, you don’t see that connection. But when you pay the taxes to the local government, there is a direct connection to the services that you observe in your own area. 

Since the property taxes accrue to local government, I think one of the best long-term ways of building the capacity of local governments is to increase the capacity to levy property taxes and that requires certain technical support in terms of mapping, assessment, and automation. There’s a lot of work that should be done on that, that can improve both revenues mobilizing as well as the capacity of local governments. Those I would say on the fiscal side would be two ways of boosting decentralization. 

On the policy side, we need pragmatic ways of balancing these trade-offs that I talked about. Ideally what would happen is that all teacher recruitment and hiring should happen with local government, so that if a teacher is absent, then they basically lose their job. The problem today is there’s a concern that then this local sarpanch will appoint his or her nephew, and you will lose quality. 

One of the things I’ve suggested in terms of balancing the benefits of today’s exam-based recruitment with accountability is the following. The advantage of today’s recruitment is that it is more objective; to be fair, that is also not free of corruption. As you see, there’s been many public sector recruitment scandals, that’s a separate issue; but assume for a moment that this exam-based recruitment is more objective than just local appointing of whoever you want. But then you can balance the two by saying that you need to pass a government exam to meet a certain standard to be empanelled to be appointable as a teacher, but that doesn’t guarantee you the job. The job belongs to the local community and is advertised by the panchayat or the local body, which then gives you the job. And that way if you’re not showing up, you can be replaced. 

The absence problem is partly because in many cases, the teachers themselves are living far away in cities or district headquarters and traveling up and down to the schools. This way you provide more control to the community. In fact, I remember somebody in Maharashtra once told me that one of the reasons teacher absences in Maharashtra is much lower is that the elected Zilla Parishad chair has certain authority along the District Collector and the DEO, and that provides a little bit more local accountability. If you look at Kerala, it tends to have much lower teacher absence. Hence, the states that have empowered communities more with regard to accountability, seem to be doing better. So that’s another dimension whereby you can start decentralizing. 

I think the most important dimension is frankly political, and this is one of the hardest dimensions, because no chief minister wants to give up power, and have more empowered mayors and more empowered local body officials. This is one of the biggest structural fault lines of Indian democracy. It is the reason why the Indian democracy despite the legitimacy and representativeness, is not doing better in service delivery. It is because the legislator is elected to pass laws, but what the citizens want are better constituency services over which the elected MLA has no direct authority. 

So, what ends up happening is that the MLA then seeks to influence postings and transfers, and have control over the machinery, because otherwise, the MLA has no way to hold that official accountable. But then you get into this highly sub-optimal situation where you are elected to do something, but what your voters want is something else. You are not given the tools to deliver what your voters want, and then you try to do that by interfering with what is supposed to be a more objective civil service posting system. 

I think the best way to solve this dysfunction is to have more empowered mayors and more empowered local body governments that are empowered for service delivery, and part of that empowerment is the empowerment about appointments. If you need to deliver to get your job and keep your job, then that automatically keeps you more accountable. I suspect many MLAs today in India would prefer to be empowered mayors of their constituencies, where they have full executive authority over the staff so that they can deliver better, and that will better align what the voters want with what the elected representatives are empowered to deliver. 

This is a very powerful way of seeing this. If you look at the past 10-15 years, which is the party and the government that has done the most in terms of campaigning politically on public service delivery, it has been the Aam Aadmi Party in Delhi. They have done the most in terms of campaigning, not just doing education and health but campaigning on education, and health, and making that the cornerstone of their entire governance. 

You may say that this is because the party has a different philosophy and that may be partly true, but I think a simpler explanation is that they often complain that the Chief Minister of Delhi is a very weak Chief Minister because they don’t have full authority. That is true. But the positive way to look at that is the Chief Minister of Delhi is the most empowered mayor in India. Delhi is effectively a large city and because you have control over education, over health, in a way that a typical mayor in many other cities does not, you are able to deliver in a way that others may not. 

I would say the fact that the Delhi government has focused on service delivery tells us that this is democracy working well because they are the issues that they have control over, and therefore those are the issues they focus on, which seems to be benefiting citizens at least by seeing the re-election rates. 

Similarly, I would say that if we move towards recognizing that the first principles of federalism are that service delivery should be with the local government. The way you do that is by aligning funds, functions and functionaries to the level at which the services must be delivered, and also aligning the political accountability. I think that’s the direction in which we need to move. 

It’s not easy to do this wholesale, but what I would recommend is a lot more local experimentation, whereby certain experiments and pilots are done at the level of constituencies or cities. The Delhi example points us to one way in which you improve service delivery and also improve the alignment of incentives for politicians to focus on that.

Hamza: Just a follow up on that, as you rightly pointed out, one of the major reasons behind centralization was the fear that the community and social ties would make the local elite capture the resources that are there on the local level. Do you think that in the urban settings, these community ties or community prejudices might be mitigated to a certain extent and so, this decentralization might start firstly, with the urban bodies and then slowly and gradually with the rural bodies?

Prof. Karthik: I think that’s absolutely right. The two big things that have changed from the time of the Constitution adoption and independence: one is our education and literacy rates have raised from what used to be under 20% to over 75%, which means that it’s harder to oppress the marginalized the same way because people have much better education. The second thing, which goes closely with that is much better access to information. In a world of smartphones where everybody has information and can complain, it becomes much harder to sustain this local oppression. This is not to say that it won’t happen, but we have a lot more countervailing forces today; the combination of education, smartphones and information makes it possible for at least a few representatives of marginalized groups to be empowered to push back;  it’s not the same level of oppression that we would have to worry about in 1950s. 

But then the second point which you raise is also really important that in urban areas, these issues are likely to be even less salient, partly because you have broken down these historic enclaves of caste and community. Urban India is still very spatially segregated but not to the same extent as rural India, also by construction, people in urban areas are more aware, interact with a lot more people, and therefore have more information, more education, more initiative and are more likely to stand up for their rights. This is why I think thinking about this at the urban body level is a perfectly sensible place to start.

Vishnu: Thank you so much for detailed and structured answer, especially for the previous question. I didn’t know fiscal federalism could be broken down in such simple terms because it’s the module that we dread the most in law school; that we just find it so difficult to grapple with. So, it was really amazing to hear you break it down in such simple economic language on why we even have it and how we take it forward.

Moving on to the next question, you end your chapter with a very insightful discussion on a deeply political issue which is delimitation. Essentially delimitation means that there will be a population census and the number of seats that each state has in the Parliament would be determined by its population. While this makes absolute sense in ensuring that every person has an equal vote, it adversely affects or in fact punishes the states, especially the southern states, which have successfully implemented population control measures over the years. Could you tell us why delimitation is such an important issue from a governance perspective and how do we overcome this tension between electoral democracy and the principles of federalism?

Prof. Karthik: Yeah, it’s a great question. Frankly, I think it is the single most important issue for India as a polity to grapple with in the coming years. I think we’ve not discussed it enough. The core issue is very simple as you’ve outlined, at the time of independence, the seats in Parliament were proportional to population and then this readjustment kept happening every 10 years based on the census. 

In 1976, Indira Gandhi was trying to promote population control, and she wanted to make sure that states that control the population would not be penalized in terms of representation and therefore passed a Constitutional Amendment for 25 years to freeze parliamentary representation based on the 1971 census population. When that came up for renewal in 2001, some of these divergences had already started showing up and it was a coalition government. The Southern states strongly opposed it; therefore, a further constitutional amendment of 25 years was passed. 

I would say, this is one of the biggest fault lines of Indian democracy, which is that the representation is frozen in 1971. But the reality in the ground 50 years later is now very, very different, where if you were to redo the delimitation, one number I saw was if you held Kerala as the base of 20 seats, because Kerala since 1971 is the state with the lowest population growth. So, if you keep Kerala at 20 seats, but expand the other states proportionately, I believe those estimates show that UP would increase from 80 to about 140. Bihar would increase from 40 to 80. So, you’re effectively doubling in the share of the faster growing, more populous states. 

I think this is a very, very deep tension for India, because now what happens in countries like the US is there you have states like California and New York and the coastal states where the population is growing. But there, the states with the growing population are also the richer states. So, to the extent that the broad federal compact requires a certain amount of redistribution, that becomes fiscally and politically more sustainable because you have the larger states as the richer states, and so to the extent you’re compensating based on other measures, that it is manageable. 

The challenge for India is that the richer states are also the states with the smaller population, and so then they get penalized in every way. You get penalized politically; you get penalized economically. The other important thing to highlight is that I think it’s a mistake to say that they controlled their population. I think what they really did was invest in girl’s education and invest in human capital. When you say control population, it sounds like they did this coercively, and that would be a mistake. In fact, they reduced their fertility rates in the most democratic way possible. You invested in girls’ education, which over time has been the single biggest predictor of declining fertility, and so, it really would be a triple whammy.

What makes this such a vexing problem is now you have two fundamental principles in conflict with each other. There’s a democratic principle that would say one person, one vote; and there’s a federal principle that says each state should have a certain special status in a complex federal polity, so that it is not completely overwhelmed, by states with larger population. 

I think it’s important that we have this discussion on how we navigate this tension in the coming years. This idea that large federal structures have certain checks and balances to protect the interests of minority states from being overwhelmed by the majority states is a very well-established tradition. The US is a perfect example of this where you have two Houses of Parliament where the House of Representatives is delimited every census to go with the population, and that reflects the one person, one vote principle. But the Senate has always had 2 senators for every state. People argue that it’s undemocratic because Wyoming has 50 times senators per capita than California. But that reflects the federal principle that there is a body of governance, where every state has an equal voice.

Similarly, if you look at the European Union, the European Union also has provisions, whereby some of the smaller states get a disproportionate vote. It is a well-established principle, therefore, that federal polities have to balance these 2 principles of one person, one vote, and I don’t want to say one state, one vote, but something that represents states more equally. 

What I’ve outlined therefore, going forward is that there are two or three broad approaches we can take. One approach is to follow a little bit of the US model whereby the Rajya Sabha is representing the states. In practice, we have completely diluted the state orientation of the Rajya Sabha because we removed the domicile requirement for being elected to the Rajya Sabha. The most striking example of this was when Prime Minister Manmohan Singh got elected from Assam which he had very little direct connection to. We’ve broken the idea of the Rajya Sabha as really representing the interest of the state. 

One way to approach this is to come back and say that we should do the population-based delimitation in the Lok Sabha, but you should think about the Rajya Sabha as the countervailing entity that represents states in a slightly more equal way. That’s one way of approaching this. But again, it may not work for us for a variety of reasons, because in the end, the Lok Sabha is still much more powerful when it comes to fiscal decisions and money bills in particular. So, you may need to be even more nuanced. 

Another approach might be to say that the US has survived for a very long time with unequal representation and this current equilibrium is working. So maybe we continue the delimitation in the political sphere, but you acknowledge that the fiscal transfers should start reflecting more of the population. So that way the better off states would subsidize and support the less well-off states, but at least would not lose their political influence. 

But I think the 3rd and frankly to me, the most important conversation we need to have in terms of how we resolve this is revisiting the VII schedule of the Constitution itself, go back to the first principles of federalism. Because if you’re going to the problem of delimitation for India, the reason it’s an existential threat is that if you’re changing the representation in Parliament so much, it would not matter if we were not so overcentralized. If you then went back to the first principles of federalism and said that, let’s think about the functions that really should sit with state and local Government, the delimitation may have less implications for the lives of a citizen in Tamil Nadu, if it’s not going to affect education or health or most of the local things that they care about or language; if it really matters only for defense and foreign policy and national infrastructure projects and the things that truly demand economies of scale. 

Since you are lawyers, one really important constitutional issue that I would urge lawyers and law scholars to really examine is when we think about the VII schedule, we think about what should the meaning of the concurrent list be. The central list is obviously with central government, state list is with the state, but because over time there has been an expansion of items put in the concurrent list, it has de facto led to a much greater centralization. And why? Because the way we have interpreted the concurrent list is to say that when the Centre and state disagree, the Centre will carry the day, so de facto, you have moved it to the central list because you’re saying that whenever there’s disagreement, the centre shall hold sway. And I think that fundamentally, this is violating first principles of federalism.

The way I would recommend that we rethink what the concurrent list should be is going back to the principles of economies of scale. Let’s take a case like education, there are functions within education that require coordination, and that should sit at the national level. But any function that is purely within the boundaries of a state, the default should be to give the state primacy. The spirit of the concurrent list should be that. The reason education sits on the concurrent list is that there are aspects of education that have national implications and then those should be sitting with the central government, but there are many aspects of education that sit purely with the state governments and those aspects should sit there. 

There was a judgement by Justice Nariman, that I think reflects this in the cooperatives case. This was a case where there was a central government legislation to pass laws on cooperatives, and I think the Court ruled that the jurisdiction of the central government to do that, (given that cooperatives was on the concurrent list,) was that if the cooperative was purely within a state, then the Central government would not have the jurisdiction. But if these were multi-state cooperatives, the Central government would have jurisdiction.

So, I think that we really need to go back to first principles of federalism and the process of delimitation also needs to be accompanied by really thoughtful reimagination of the federal compact, and reforming the VII schedule, which I think is really important. Particularly, the concurrent list is going to be an important complement to the political and economic aspects of the delimitation discussion. 

This is why I call that section: The Delimitation Challenge and Opportunity because at one level it’s a very vexing challenge, but at another level, it also gives us an opportunity to go back to the first principles of federalism and re-architect, not just the constitutional aspect, but also how we think about things in a way that reflects citizens’ interests. How should we organize functions of government in a way to best benefit citizens as opposed to thinking about who has control, which is how the political discourse happens. But I think it’s important for the scholarly discourse in economics and political science, and especially in the law to really focus on what are the first principles, what’s good for citizens and use that as a basis to create a national conversation on what is a very complex topic.

Vishnu: Thank you for that. So, in this podcast, we focused our discussion on only one Chapter of the book on federalism and Decentralization. But I’d just like to tell the readers that there are 17 more such super engaging chapters, and I would strongly encourage all of you to read the book. 

On that note, I’d like to end with one final question: So, at NALSAR, ours is an interdisciplinary BA, LLB. Honours degree, so, we have subjects like economics, sociology and political science. Naturally, many of us find public policy work very interesting and seek to pursue careers in them. Based on your years of field work, research and teaching on public policy, could you tell us how law students and lawyers are placed to contribute to public policy work, and what career paths would you suggest for those of us who are really passionate about working in the intersection of law and policy?

Prof. Karthik: Great question and thank you for asking that. I think, the first place to start frankly would be to read the book because like you said, every chapter has elements that are exactly at these intersections of the law with regard to the rights of what we’re trying to provide citizens and then the capacity of the government and how do you think about policy in a holistic way. So, I would say the book is probably like the easiest place to start and at least think in a different way, expanding the thinking of a standard law student across these dimensions. 

The second point I would make, and this has to do as much with the design of curricula in law school, is that even in law schools, I remember talking to some very distinguished senior judges and lawyers that even when you study economics or sociology in law school, they are often taught as a siloed subject and not fully integrated with the law. So, you don’t really see the linkages when you take an economics class that says, here’s micro, here’s macro, here’s statistics or econometrics. You really need to design courses that are at the intersection of economics and the law, that are at the intersections of politics and the law. 

Now, maybe that happens, but what I have not seen enough of in Indian legal scholarship is the economic analysis of the law. What I mean by that is that every law has consequences. Starting by even the most basic analysis of saying, what would it cost to implement this law? And is the law accompanied by a corresponding increase in resources to meet the obligations implied by that law? This is a really fundamental issue. And I’ll tell you why this is so important. 

So, in my chapter 3 on the bureaucracy’s burden, one of the things I talk about is this idea that Lant Pritchett and others came up with what they called premature load bearing, which is when you impose more expectations on a state than it has the capacity to deliver, you can often further worsen outcomes. And I think where lawyers really and the legal community needs to do some deep examination is the extent to which laws are often counterproductive, or how the idea of providing justice to an individual can often come at the cost of further dysfunction in the system.

Let me give you a very concrete example. Many education secretaries in India tell me that they spend about 30% of their time in court cases. Most of these court cases are brought by teacher unions on different aspects of service rules and rights and promotions, etc; and there are other cases brought by rights groups saying that the government has not done things that are in the law and legislation. 

And so, what happens is that because the judicial approach to justice in the courts is to think about providing justice to the individual claim, the individual plaintiff.  We don’t think at what cost is that coming and in particular, if the constraint is one of capacity. Then what you’re doing is you’re just moving resources from one place to another and occupying an enormous amount of resources in that transaction. So, that 30% of time that the education secretary spends in courts is then time spent not doing policy, not doing governance, not doing monitoring. 

One of these things I talked about is when I say that in India we often have, government as legislature passes laws that are beyond the capacity of government as executive to implement, and then you have government as judiciary holding government as executive in contempt of government as legislature. Each actor is doing what they think is their job, but collectively, they are tying the system in knots. 

The most important intellectual movement we need in the legal community is what I broadly call the empirical analysis of the law. No law, no entitlement is costless. So, it has to come with the corresponding assessment of the resources needed, at the level of the individual, at the level of firms, at the level of the government to say, what does it cost to do this? And then once you have that, then you have to make sure that the resources are in fact allocated, and if they’re not, then you need to think through what might be the consequences of passing a law that is not adequately resourced. There are some really striking examples in the book about how well-intentioned laws that are not implemented can make outcomes worse.

For example, there’s this really striking paper, which has now been validated in another setting. My colleague Prashant Bharadwaj is a professor at UC San Diego, who wrote this incredibly important paper on the perverse consequences of well-intentioned legislation, with the example of child labor laws. We might all agree that morally child labour is disturbing and abhorrent, and we may want to pass a law against it just to send a signal. But the problem is that in practice, if you think about why child labour happens, it happens not because parents don’t care about the welfare of their children. It happens because they are so poor that they need that income to meet a certain minimum level of consumption. What the paper shows is that when you have the child labour bans that are imperfectly enforced, effectively the jobs from the factories go away because those can be measured, but a lot of those jobs then move to the household where you can’t be monitored, but the problem is the productivity in the household is lower than the productivity in the factory. So, the wage is in fact lower. And perversely, what ends up happening is that child labour increases because the wage has gone down, and so now you need more labour to meet that minimal sustenance. This is a very difficult example, so obviously sometimes it makes sense to pass laws just to send a signal of the values that we hold as a society. But it’s also an important example to grapple with about doing empirical analysis of the law. 

I think that would be my single biggest exhortation to students, to professors, to the broader Indian legal community, it is to really build an intellectual tradition of empirical analysis of the law. I guess in the US, this would be what people like Richard Posner famously did. And so that I think, will automatically build the linkages between the aspirations and our law, and the constraints of the resources that we face as a society and force you to think about the economics, about the governance, about the efficiency and give you a more holistic view. So that’s intellectually what I would encourage people to really think much more about. 

Practically in terms of career paths, I would say, once you’ve exposed yourself to some of these ideas, I think there are now increasing number of legal think tanks that are working on policy drafting, entities like Daksh and Agami and Vidhi, these are some of the organizations I know. And then there are also groups, XKDR people like Ajay Shah that are looking at law and regulation, and doing the economic analysis of the law in the context of, a bunch of infrastructure procurement, electricity. 

So, the law is everywhere. But if we then analyse the consequences of the law, analyze how that law is implemented, I think that’s the most important way for law students who care about policy to both teach themselves and then find useful things to do in that space. And I think for people doing PhDs, I would love to see a lot more analysis. I mean, even just looking at the patterns of delays in courts, which are the statutes that are creating the most litigation, how much of this is because of imprecision in the statute, the way it is written, how much of this is because of admission of what would be frivolous lawsuits, if we had a tighter filter. So, there is just so much work to be done in doing more empirical analysis of the law. And I wish there would be thousands more young legal students and scholars in India, who work on this because, it’s an absolutely essential topic for national progress.

Note: The Podcast has been conducted, edited and transcribed by Vishnu Bandarupalli and Hamza Khan, and published by Abhishek Sanjay and Baibhav Mishra from the LAOT team.