Panchayati Raj Institutions: Issues and Challenges

Structural interventions by state governments that can create higher-wage jobs


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 2- Structural interventions by State for creating high wage jobs


The recent decision to deduct off-budget borrowings from state borrowing limits reminds chief ministers to be good policy ancestors.

Financing welfare state

  • In A Brief History of Equality, economist Thomas Piketty suggests that “the world of the early 2020s, no matter how unjust it may seem, is more egalitarian than that of 1950 or 1900, which were… more egalitarian than those of 1850 or 1780”.
  • But how the welfare state is financed matters.
  • Changes in state borrowing limits: Adjusting state borrowing limits for their off-budget borrowings leads to transparency because they are routinely breached through vehicles for schemes whose bill comes due far in the future.
  • The confiscation of future spending — interest payments crowd out expenditure and revenue expenditure crowd out capex — matters because our prosperity problem is productivity, wages, not jobs.

5 Structural interventions that can create high wage jobs

1] Reduce regulatory hurdles

  • States control 80 per cent of India’s employers’ compliance ecosystem of 67,000+ compliances, 6,500+ filings and 26,000+ criminal provisions.
  • State governments that rationalise, decriminalise, and digitise their compliance ecosystem will reap lower corruption and higher formality.

2] Fix government schools

  • The most powerful tool for social mobility and employability is free and quality school education.
  • State governments that undertake a significant overhaul of school performance management (the fear of falling and hope of rising for teachers) and governance (the allocation of decision rights around resources and hiring) will create an unfair advantage in human capital.

3] Converge education and employability

  • States should set up skill universities that create qualification modularity (between certificates, diplomas, advanced diplomas, and degrees), delivery flexibility (equate online, apprenticeships, on-site and on-campus classrooms), and pray to the one god of employers.
  • Degree apprentices innovate at the intersection of employment, employability and education.
  • State governments that remove barriers in their path will see their population of employed learners exceed full-time learners.

4] Devolution of money and power

  • Cities drive productive job creation — New York City’s GDP is higher than Russia’s.
  •  It took 70 years after 1947 for the budget of 28 states to cross the central government’s budget.
  • The combined budget of state governments now exceeds Rs 45 lakh crore, but 2.5 lakh municipalities and panchayats have a budget of only Rs 3.7 lakh crore.
  • Governments that devolve money and power from state capitals to their towns will avoid the curse of megacities and create the competition that drove China’s growth (they have 375 cities with more than a million people versus our 52).

5] Civil service reforms

  • State governments must sell their 1,500+ loss-making public sector units, cut civil service compensation to less than 40 per cent of budget spending, and replace expenditure with capex.
  • Moving from outlays to outcomes needs a new human capital regime for civil servants via seven interventions; structure, staffing, training, performance management, compensation, culture, and HR capabilities.

Shifting resources to protective and productive  version of states

  • Nobel Laureate James Buchanan said any state had three versions — the protective state (police, rule of law, defence, courts), the productive state (common goods like roads, power, health, education, etc.), and the redistributive state.
  • Too many state governments accept the status quo in the first two and “innovate” in the third version.
  • It’s time to shift resources to the first two.


Chief Ministers ought to create high wage jobs, and not borrow money future generations will have to repay.

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