Amid the ongoing demonetization debates, a critical missing ingredient is that of state capacity. Would things have been much different if demonetization was planned out in detail and then executed?

We would be inclined to argue to the contrary and claim that the Indian State currently does not have the capacity to execute such a project involving national mobilization on a sustained basis without serious deficiencies and failings. In other words, planning would not have made enough gains on execution efficiency to offset the loss from leakage of information.

In our just-released report on India’s economic growth prospects, we outline a comprehensive framework for analysing India’s less-discussed state capacity failings and suggest a set of measures to address them.

Broadly, state-capability failure manifests itself in two ways: implementation deficit, and decision-making paralysis. Factors contributing to implementation deficit are familiar. They are rampant corruption, badly managed public facilities, poor quality of public-service delivery, and pervasive failures in the bidding and management of various types of contracts.

Decision paralysis is a consequence of debilitating, but less-discussed, institutional power shifts of recent years. These trends include the actions of judges, anti-corruption investigators and vigilance agencies, auditors, and right to information administrators. By shrinking the space available for public servants, including political representatives, they have induced decision paralysis.

The prescriptions on overcoming implementation deficit are well known. These include reforms to procurements and personnel deployments, extensive use of information technology applications and data analytics, performance-management measures, decentralization of functions to promote accountability and recruitments to bridge acute deficiencies, especially in important regulatory positions.

Addressing decision paralysis requires action at multiple levels.

First, it would help to pass the proposed amendments pending in Parliament to Section 13(1)(d)(iii) of the Prevention of Corruption Act that introduces means to implicate officials for “criminal misconduct".

Second, since the Right to Information Act, 2005 has reached its 10-year anniversary, this may be a good time to review its implementation. Exempting communications related to deliberative processes in the government, which are exempted even in the US Freedom of Information Act, must be considered.

Third, a committee should examine the methods and processes used by auditors and investigative agencies. Auditors should confine to their constitutional mandate of examining whether public money has been spent in accordance with prevailing rules and whether due process has been followed in decision making. They should refrain from passing judgement on the merits of departmental decisions or policies.

The UK’s National Audit Office, for example, specifically refrains from commenting on the “merits of the policy". Performance and policy audits should be done by independent and professionally competent third-party agencies, not by auditors.

Fourth, investigative processes have to be reformed by equipping investigators with professional expertise in scrutinizing cases involving financial and other domain knowledge complexities. Once it is established that the decision has been made by a competent authority following due process, investigations should cease. Both investigators and auditors would do well to bear in mind the principle that their findings should clearly distinguish between genuine errors and mala fide actions.

Fifth, reforms to restrain judicial overreach and snowballing litigation are both urgent and important. It is a worry if imagined riots by the highest court in the land become a basis for its intervention into an executive decision.

One intervention could be to gradually phase out tribunals and replace them with sectoral benches in the higher courts. Principles and rules that limit the range of a judge’s individual discretion and draw the line between judicial activism and judicial excess, especially on the issue of entertaining public interest litigation need to be laid down.

Perhaps, a committee of ex-judges appointed by the Supreme Court itself is best positioned to do that. The Supreme Court should then require that all courts across the country—itself included—follow those guidelines.

The struggle with effective implementation of demonetization is a cautionary tale for the other major project involving similar mobilization, the rollout of the goods and services tax.

Indeed, one of the consequences of the demonetization exercise is the spotlight it has shone on the difficulty of sustained mobilization of the state machinery on a nationwide basis at short notice.

The short-term economic costs and hardships that have arisen out of the sudden and massive demonetization will have been worth it, if hurdles to enhancement to state capability begin to be addressed too. Importantly, its adversarial attitude towards economic offenders will be acceptable only if the State augments its attitude and capacity to accommodate genuine economic aspirations and activity.

(This column is based on the authors’ joint work, “Can India Grow?" published by Carnegie India Ceip.org/2g3EFlN)

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