State Capacity, Fiscal Capacity, and the Social Sector in India
MINISTRY OF FINANCEGOVERNMENT OF INDIA
1
Module 12
Contemporary Themes in India’s Economic Development and the Economic Survey
Arvind SubramanianChief Economic Adviser
Overview
• State Capacity in India: The reality & the puzzle
• Fiscal Capacity in India
• Social sector in India• Maternal & child health• Primary education in India
2
State Capacity in India: The Reality & the Puzzle
3
Institutions are the Key Determinants of Long Term growth
Institutions Matter
7.5
8
8.5
9
9.5
10
1 2 3 4 5 6 7 8 9 10 11
Econ
omic
Dev
elop
men
t(L
og p
er c
apita
PPP
GD
P)
Democracy Index
4Source: Acemoglu, D and J.A. Robinson, “Why Nations Fail: The Origins of Power, Prosperity and Poverty”, Crown Business [2012]
Role of Public Institutions in an EconomyCREATE MARKETS:
Protecting Property rights, sanctity of contracts, providing law & order.Hence, the need for Police & Judiciary
REGULATE/CORRECT MARKETS:
Correcting market failures from monopolies, externalities and asymmetric information etc.Hence, the need for TRAI, CERC, CCI, FSSAI, NGT
LEGITIMIZE MARKETS: Instituting mechanisms for social protection and redistributionHence, the need for strong & vibrant Democracy and redistributive State (pension for old and poor, effective bureaucracy)
STABILIZE MARKETS:Ensuring low inflation, macroand financial stability
Hence, the need for Central Bank (RBI), SEBI, etc.
COMPLEMENT MARKETS:Providing essential services such as health & education and public goods such as roads, parks etc. Hence, the need for Competent bureaucracy
INSTITUTIONS:5 key economic functions in a
market system
5
Indicators of State Capacity: Contrary to Popular Belief the Indian State is Not Big Enough
0
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Source: Vaishnav and Swanson (2013)6
Indicators of State Capacity: Police Force
Source: Vaishnav and Swanson (2013)7
Number of Police Officers Per Capita in India is Far Below the Median for G20 Countries
Indicators of State Capacity: Armed Forces
Year Army Navy Air Force
2012 10100 2054 573
2013 9590 1748 635
2014 8455 1540 394
2015 9642*(As on 1.1.2015)
1322(As on 31.1.2015)
152(As on 2.2.2015)
8Source: PIB, Release ID :117200, March 17, 2015
Shortage of Officers in the Armed Forces
Indicators of State Capacity: Judiciary
Sanctioned strength
Working strength Vacancies Vacancies
(% sanctioned)
Supreme Court 31 25 6 19.4%
High Courts 1041 599 442 42.5%
District Courts 21017 16135 4882 23.2%
Total 22089 16759 5330 24.1%
Source: Supreme Court of India, Court News9
Vacancies as Percent of Sanctioned Strength in Indian Judiciary
...Backlog of Judicial Cases Hence Natural
59,595
38,91,076
2,76,52,918
0
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Supreme Court High Courts District Courts
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)
10Source: Supreme Court of India, Court News
What then is the Puzzle of the Indian State?
“State capacity” in India varies greatly, successfully managing complex tasks:
• Conducting elections for 800 million + voters
• Sending a mission to Mars, 100+ satellites in one mission
• Conducting census for 1.2 billion + people
• Organizing the largest temporary city in the world during the KumbhMela….
11
But… (and you knew a but was coming)
• ...but failing in relatively simple ones:- primary education- public health- water & sanitation
• While it is politically effective in managing one of the world’s largest armed forces…
• …it is ineffective in managing public service bureaucracies
12
Fiscal Capacity in India
13
The Premise and the Key Question
• State capacity is related to Fiscal capacity
• Does India tax too much or too little?
14
Why is taxation important ?
•Taxation and voting are duties of citizens
•Tax paying and political participation are important accountability mechanisms wielded by citizens.
15
Simple Cross-country Comparison Shows that India Under-taxes and Under-spends
Note: *-Expenditure in health & education. Source: OECD, World Bank, IMF databases and Ministry of Education, People’s Republic of China 16
ShareaspercentofGDP
Country Total Tax
Total Expenditure
Expenditure
in human capex*
Income tax
Individual
Income tax
Property tax
Indirect Tax
China 19.4 29.7 7.2 5.3 -- 2.0 12.7
India 16.6 26.6 5.1 5.6 2.1 0.8 10.1
Brazil 35.6 40.2 11.0 7.3 2.3 2.0 15.7
Korea 24.3 20.0 8.4 7.1 3.7 2.5 7.5
Vietnam 22.2 28.0 8.8 8.4 -- -- --
South Africa 28.8 32.0 10.7 15.0 -- 1.4 10.2
Turkey 29.3 37.3 7.2 5.9 4.1 1.4 13.5
Russia 23.0 38.7 7.2 7.2 -- 1.1 7.1
UK 32.9 41.4 13.4 11.7 9.1 4.0 10.8
US 25.4 35.7 13.3 12.0 9.8 2.9 4.4
EMEs Avg 21.4 30.9 7.5 7.4 2.2 1.0 10.8
OECD Avg 34.2 42.8 11.6 11.5 9.5 1.9 11.0
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Tax
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DP
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8 9 10 11 12Log GDP Per Capita
But Relative to its Level of Income it Does Not Tax Too Little
17Source: Survey 2015-16 calculations
But…
• It is not enough to control for the level of economic development.
• There is a well-known regularity that democracies tax and spend more as they face greater pressures to redistribute
• Acemoglu et. al. ("Democracy, Redistribution and Inequality", NBER, 2013).
• Democracies by extending franchise often create pressures of redistribution. The appropriate question therefore is: whether Indian fiscal capacity is weak controlling for both the level of economic and political development.
18
Even Controlling for Democracy, Does the Government Tax Enough – Still Too Little
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-2 -1 0 1Log Per Capita GDP Controlling for Democracy
coef = 5.8702214, (robust) se = 1.1759435, t = 4.99 19Source: Survey 2015-16 calculations
But History is Important...
• “War Made the State and the State Made War”: Charles Tilly
• India has not experienced shocks of large magnitudes (compared to world wars) that created pressures to enhance state capacity.
• Also, Western democracies have had longer periods of political evolution.
20
Path of Tax Ratios- India and US (2 periods)
0
5
10
15
20
25
30
35
t t+10 t+20 t+30 t+40 t+50 t+60
Tax
Rev
enue
as
Per
cent
of G
DP
US (1870-1910)US (1930-1990)India (1951-2011)
Independent India
Post Civil-War America
Post Great Depression America
21Source: The World Wealth and Income Database, J. J. Wallis ('American Government Finance in the long Run: 1790-1990', JEP, 2000), and IPFS
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0.5
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1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Voting age populationRatio of taxreturns to voting population (RHS)
Voting age population (million) and ratio of tax-returns to voting population (Per cent)
0
20
40
60
80
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160
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Number of taxpayers to voting age population (Per cent)
For its Level of Economic and Political Development Does India Have Enough Tax Payers –The Data Says NO
22Source: Data on India’s voting age population is from IDEA
The Missing Taxpayers – There should Have Been Additional 1.65 Crore Taxpayers (Additional 39.5 Percent) In 2012-13
Taxpayer to Voting age population and Log GDP Per Capita
Taxpayer to Voting age population and Log GDP Per Capita Controlling for Democracy
23
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ing
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popu
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-2 -1 0 1log per-capita GDP controlling for democracy
Source: Survey 2015-16 calculations Source: Survey 2015-16 calculations
As Opposed to China, India has Consistently Raised the Exemption Threshold
24
Exemption limits and per-capita income (Rs. current prices)
Source: Survey 2015-16 calculations
How to increase tax collection in India ?
25
• Refrain from raising exemption thresholds and allowing natural growth in income to increase the number of taxpayers
• Prioritize spending on essential services such as public infrastructure, law and order, less pollution and congestion, etc.
• Reducing corruption because it undermines legitimacy
• Subsidies to the well-off (amounting to about Rs 1 lakh crore as documented in Economic Survey 2015-16) need to be scaled back
• Property taxation needs to be developed
The Social Sector in India
26
Maternal and Child health
27
Does India Under-Spend on its Social Sector?
Controlling for level of Income, India does not under-spend
Controlling for level of democracy, India does under-spend
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-1.5 -1 -.5 0 .5 1log per-capita GDP controlling for democracy
Source: Survey 2015-16 calculations Source: Survey 2015-16 calculations
Health and economic growth – Is there a relationship ?
• Economists agree that human capital— physical health, education, skills and broader capabilities—is a key determinant of a country’s growth potential.
• Macro economic relation between maternal and infant health is intriguing
• Countries with better maternal and infant health “at take-off” grew faster over the subsequent 20 years.
28
A compelling evidence to invest in early-life exists
29
Source: World Bank and Demographic and Health Surveys
Maternal Health
• India women are too thin when they begin pregnancy
• They do not gain enough weight during pregnancy• 7 kg on average compared to 12-18kg recommended
by WHO for underweight women
• Resources only part of the reason. Social norms play a big role
30
Maternal Health
31Source: Demographic and Health Surveys and Rapid Survey of Children
Pregnancy weight gain with respect to similar countries
Early Life is an Investment
• A life of “capabilities” is a moral debt the haves owe to the have-nots.
• Purely utilitarian view: investment in early life provides the greatest bang for buck.
• Overwhelming evidence that the “first 1000 days” matter a lot in life outcomes.
32
Returns to early age human capital investment are huge • Returns to investment appear highest for programs that target young children and in-utero health
• Programs targeting younger children also appear relatively cheap in comparison to investments made in older children eg. iodine supplementation
Source: Survey calculations.
In the words of James Heckman “skill begets skill”• Early life conditions affect cognitive developments• Human capital is the key• Healthy mother Healthy baby Learns better & stays
longer in school
Young adult: Schooling and other inputs
Demographic Dividend &
Growth
Human Capital Accumulation
Early life investment:
birth to 5 years
Pregnant mother’s
health, Disease externality
34
The state of (Child’s) Play In India
35
• Height is a good proxy for early- life conditions
• Improvement over time in both urban and rural India
• Persistent rural-urban height gap which has not closed over the past decade • India remains a negative outlier—our children are on average 2 standard deviations shorter than the
healthy average.
Source: National Family Health Survey (NFHS-3) and Rapid Survey of Children 2013-14
Urban Rural
Open Defecation has Private Costs• Open defecation makes growing children sick – diseases
such as diarrhoea
36
Rural Open defecation (2015, Per cent)
GDP pert capita (2013, World Bank)
India 61.3 1,498
Nepal 37.5 694
Pakistan 21.4 1,275
Afghanistan 17.4 665
Bhutan 3.8 2,363
Bangladesh 1.8 958
Sri Lanka 0 3,280
Open defecation in India from the South Asian perspective
Source: Hathi et al (2014)
Open Defecation has Social Costs: Importance of Swachh Bharat
• Some research evidence of child stunting in villages where a higher percentage defecate in the open
37
Private benefit
Social benefit, maximised as open defecation is eliminated
Source: Rapid Survey of Children (2013-14)
High-impact Interventions to Improve Maternal and Early-life Health Need to be Encouraged
Source: World Bank
§ National Food Security Act provision of Rs 6000 for pregnant mothers holds immense potential
§ Can help reduce maternal as well as infant mortality.
§ Money to be transferred directly to the bank accounts of pregnant women
38
Stage Intervention Reason
Pre-pregnancy Folic acid suppliment Improves maternal nutrition, reducing low-birth weight and neo-natal mortality
During pregnancy Calcium suppliment
During pregnancy Protein suppliment
Pre-pregnancy Compulsory iodising of salt Reducing stunting
Post natal Encouragement to breast-feed
Reduces neo-natal and post neo-natal mortality
Post natal Vitamin A suppliment
Post natal Zinc suppliment & treatment of diarrhoea Reduces infant mortality
Post natal Deworming Reduces stunting and wasting
Social Sector in IndiaPrimary Education in India
39
School Inputs are Improving – A Majority now have Access to Drinking Water, Useable Toilets, Library and Mid-day Meals
72.7
47.2
32.9
62.6
84.674.1
68.761.9
75.5
87
0102030405060708090
Drinking water available &
useable
Toilet available & useable
Girls' toilet available &
useable
Library Midday meal
% Selected school facilities: All India (rural)ASER 2010 to 2016
2010 2016Source: ASER Reports40
Almost Every Child Is Enrolled in School; Between 2006 & 2016 Enrollment has increased In Nearly Every State Of India
Source: ASER Reports
J&K
HPPB
UK
HRRJ
UP
BH
AR NL
MN
MZTR
MG ASWBJH
ORCG
MP
GJ
MHAPKAKE
TN
86
88
90
92
94
96
98
100
102
86 88 90 92 94 96 98 100 102
Enro
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Enrollment 200641
8.99.39.710.2
12.917.4
19.922.0
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51.652.1
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71.7
0 20 40 60 80Odisha
Tripura
Bihar
Chhattisgarh
Madhya Pradesh
Arunachal …
Mizoram
Andhra Pradesh
Himachal …
Telangana
Nagaland
Uttar Pradesh
Meghalaya
Manipur
In fact, private school enrollment rising steadily, though stagnant lately; high variance across states
Source: ASER Reports Source: ASER Report 2016
% Children enrolled in private schools (age 6-14) % Children enrolled in private schools (age 6-14)
0
5
10
15
20
25
30
35
2006 2010 2016
42
Children’s attendance on a random day in
school
Number of states State
Above 85% 8 Himachal, Mizoram, Gujarat, Maharashtra, Karnataka, Kerala, Tamil Nadu, Sikkim
80 to 85% 4 Uttarakhand, Haryana, Nagaland, Andhra Pradesh
75 to 79.9% 4 Punjab, Meghalaya, Odisha, Telangana
70 to 74.9% 4 (Jammu & Ladakh), ArunachalPradesh, Tripura, Assam
60 to 69.9% 3 Rajasthan, Jharkhand, Chhattisgarh
Below 60% 5 Uttar Pradesh, Bihar, Manipur, West Bengal, Madhya Pradesh
71
71.4
70.7
71.3
71.4
70.2
70.4
70.6
70.8
71
71.2
71.4
71.6
ASER 2011 ASER 2012 ASER 2013 ASER 2014 ASER 2016
Std 1-4/5 Govt schools: % Enrolled children attending (average) – All India (rural)
Student attendance high at about 70 percent but stagnant with large variance across states observed
Source: ASER Reports Source: ASER Report 2016 43
Source: Muralidharan et al (2014) show teacher absenteeism rate of 23 percent in 2010; ASER Reports
0% 20% 40% 60% 80% 100%
TamilnaduPunjab
MaharastraChattisgarh
OrissaKerala
GujaratHaryana
West BengalUttaranchal
Andhra PradeshRajasthanKarnataka
AssamMadhya Pradesh
BiharHimachal Pradesh
Uttar PradeshJharkhand
India
Govt. teacher attendance rates (rural)
2010 2003
Teacher attendance also high at 70-85 percent and similar across states
Std 1-4/5 govt schools teacher attendance rate (per cent)
44
87.2
85.5
85
85.4
83.5
84
84.5
85
85.5
86
86.5
87
87.5
ASER 2011 ASER 2013 ASER 2014 ASER 2016
Source: ASER Report 2016
But, learning levels are poor and stagnant
25%
27%
24%
25%
26%
27%
28%
Read Std. 2 level text Can atleast do subtraction
% All India (rural) Children in Std III who can: (2016)
Children enrolled inStd. V who can do division (%)
25.9
0
10
20
30
40
50
60
HP
MN
HR PB KL AP UK
BR TG WB RJ
MZ
OR
IND JH CG
UP
TN NL
MH TR KA MP
AR GJ
AS MG
45
20
25
30
35
40
45
50
55
60
2008 2010 2012 2014 2016
% Children reading Std II level text % Children who can do division
…sharp decline in % Std 5 children learning levels from 2008 to 2016
46Source: ASER Report 2016
LEARNING?
Status of education inputs are good, students and teachers are in school
but…… why is there no learning?
47
Recommended Readings• Economic Survey 2015-16
• Bloom and Canning (2000) and Deaton (2013)
• Coffey, Diane, Reetika Khera, and Dean Spears. ”Women’s Status and Children’s Height in India: Evidence from Rural Joint Households”. Princeton University working paper, 2013
• Barro, Robert (2001). “Human Capital: Growth, History and Policy-A Session to Honor Stanley Engerman,” American Economic Review
• Kapur, Devesh , Pratap Bhanu Mehta and Milan Vaishnav. “Rethinking Public Institutions in India”, 2017
• Annual Status of Education Reports (ASER) published annually by Pratham48
