Friday, February 26, 2016

State capability 3.0 - The Finance Ministry veto?

In addition to the standard examples of state capability weakness, reflected in weak public service delivery, there are atleast two other far less discussed forms. One is decision paralysis due to excesses by judges, RTI activists, auditors, and vigilance officials. The second, barely discussed contributor to state capability weakness is the de-facto veto exercised by Finance Ministries. 

Consider the example of financial inclusion. Business Correspondents (BCs) were introduced with the intention of expanding access by taking banking services to the customer's door-step in remote rural areas. Its success was evidently contingent on the commercial viability of the business model as reflected in the income earned by the BCs. But as Sumita Kale points out, this may have been compromised by the hard charging Finance Ministry,
While the Report of the Task Force on an Aadhaar-Enabled Unified Payment Infrastructure had recommended a 3.14% transaction processing charge to the banks, in reality the rates allowed by the central and state governments have been 1-2%. In January 2015, the finance ministry fixed DBT commissions for banks: for urban schemes, at the National Electronic Funds Transfer/Aadhaar Payment Bridge rate; but for rural schemes, the rate was fixed at 1%, subject to an upper limit of Rs.10 per transaction. Detailed costing analysis fromconsulting firm MicroSave in May 2015 shows that 2.63% is the break-even charge: the break-up of this across the three main constituents in the disbursement chain came to about 0.96% for business correspondent (BC) network managers, 0.85% for business correspondent agents, and about 0.82% for the banks. The analysis also revealed that the savings to the government through lower administrative costs and leakages are significant. Clearly, the government can well afford adequate compensation to the banks and agent networks for their role in the disbursements.
The story is the same everywhere, across programs, both in central and state governments. Ministries formulate schemes and proposals after elaborate stakeholder consultations, with detailed costing taking into consideration program sustainability and commercial viability factors, and run them through Finance Ministry to the approving authority (Cabinet or Chief Ministers). As would be expected given the scarce resources and large competing demands, the Finance Ministry cuts down on program allocations. It would have been perfectly fine, indeed necessary, if this was all. 

Unfortunately, in most cases, the Ministry goes far beyond and offers its wisdom on program commercials (a unit rate compensation of Rs x instead of Rs y), procurements (why not through the local government agency or SHGs), financials (why not leverage resources from Corporate Social Responsibility funds or PPP), contracting strategies (one model of PPP over another), and even on manpower deployment (one administrative structure over another, x number of people to do a task instead of y). And each of these prescriptions are drawn from mindless generalization of outlier and misleading thumb-rules and 'best practices'. 

If it were only offering suggestions, the implementing Ministry could have examined 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 Finance Ministry's recommendations are invariably in line with the bureacratically correct practice of lowering public expenditure. Disagreement with it runs the future risk of a malicious complaint or a RTI query or an adverse audit comment and a potential vigilance investigation with its public humiliation.  

Its manifestations are felt across programs, especially at the last-mile of implementation, and become the difference between success and failure. The commonest form of veto is by way of skimping on transaction costs (transportation and storage charges for PDS), remunerations (mid-day meal workers), construction costs (unit costs for ), operation and maintenance expenditures (school and toilet maintenance in SSA, hospital maintenance in NHM), leverage from other sources (CSR, NREGS etc), and so on. Doubtless some of these are unavoidable, forced down by the acute scarcity of resources and political economy considerations that demand the butter be spread evenly and universally. But many others like the one for BCs are plain arbitrary and flippant. 

At a very objective level this is as much a transgression of jurisdiction as kritarchy or tyranny of presumptive valuation. Consider this. A professionally competent agency (the Ministry concerned), with the responsibility of implementation, and democratically empowered, formulates a program following the due process, and circulates for approval. En-route, another Ministry, with neither the contextual knowledge nor the professional competence, and at best, with accounting and budgeting competence, picks apart program components and details, and that too in a manner that seriously undermines its successful implementation prospects. Where else can you have this except in a 'flailing' state! 

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