Incentives do matter and it does work at the level of the State governments in nudging them to adopt reforms, the Prime Minister Narendra Modi’s latest blog post has showed.
Modi wrote that the Centre’s move to nudge States to implement four significant reforms for them to avail the benefit of additional borrowing during pandemic times has worked like a charm. This Centre-State bhagidari (partnership) – pushed by the incentives – had helped the States raise an extra ₹1.06-lakh crore in 2020-21, the Prime Minister highlighted in his blog post, which was posted on LinkedIn, titled “Reforms by Conviction and Incentives”.
‘New challenges’
Modi said that the Covid-19 pandemic has come with whole new set of challenges to governments across the world in terms of policy making. In the backdrop of the fFinancial crunch seen across the world, the Indian States were able to borrow significantly more in 2020-21, he wrote. Explaining the Centre’s move, to link the permission for additional borrowing to States agreeing to implement four new reforms, Modi said that in May 2020, as part of the Athmanirbhar Bharat package, the Centre had announced that State governments would be allowed additional borrowing for 2020–21.
“An extra 2 per cent of Gross State Domestic Product (GSDP) was allowed, of which 1 per cent was made conditional on the implementation of economic reform,” he wrote. “ Firstly, each of the reforms was linked to improving the ease of living to the public and particularly the poor, the vulnerable and the middle class. Secondly, they also promote fiscal sustainability.”
“This nudge for reform is rare in Indian public finance. This was a nudge, incentivising the States to adopt progressive policies to avail additional funds. The results of this exercise are not only encouraging but also run contrary to the limited takers for sound economic policies,” Modi said.