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Do state-led interventions work?

PRADEEP S MEHTA | Updated on March 08, 2018

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The NITI Aayog must develop a credible way of assessing government actions. There is no clarity now

Jeremy Bentham’s philosophy of Utilitarianism says that a measure is right or wrong depending on whether it ensures the greatest happiness of the greatest number. In a manner, it echoes Narendra Modi’s saying: sabka saath, sabka vikas. Over time, state-led interventions have been guided by these principles, when unregulated private transactions fail the Bentham test.

State-led interventions

States typically intervene in private transactions in a society when such transactions have the potential to benefit a few at the expense of many. For instance, in an intractable debt situation between lenders and borrowers — when lenders faced difficulties in recovery of debt, or borrowers were up against unpleasant actions from the lenders — the government set up debt recovery tribunals (DRTs) to aid in speedy recovery of debt, while following due process of law. This was meant to balance interests of all the relevant parties.

Similarly, when developers intended to set up projects potentially harmful to environment, the government put in place a mechanism requiring such developers to obtain its approval before setting up of projects, to balance developmental and environment needs.

However, such interventions did not seem to visualise impacts on society in the event of the designated state agencies not executing their assigned tasks.

Costs of such oversight have been huge. While the debt recovery legislations require DRTs to dispose of matters within six months, matters linger for almost four years.

Consequently, assuming that a fourth of amount pending is recovered every year, the opportunity cost of delay in recovery of ₹. 1.41 lakh crore (amount pending at DRTs on March 31, 2014), is close to ₹25,000 crore.

Similarly, the opportunity cost of delay in environment clearances, and the consequent delay in commissioning of one (just one) coal based power plant by merely 30 days, has been recorded to be more than ₹150 crore.

Lost opportunities

Opportunity cost is usually understood as the benefits foregone, which could have been avoided by taking alternative steps. As state-led interventions tend to alter the natural behaviour of affected persons, they impose costs.

Alterations in behaviour can be justified only when their benefits outweigh costs and consequent net impact on society is positive. Borrowing from Bentham, state-led interventions must result in greatest benefit of greatest number.

Consequently, it could be reasonable to posit that had the debt recovery or environment clearance mechanisms, as proposed by the state, worked efficiently, their benefits (in form of saved opportunity costs) should have superseded the net benefits of the no-change scenario. Unfortunately, no government sponsored study is available in public domain to prove this hypothesis. This begs the question: did the government undertake an in-depth assessment of the impact of its proposed interventions? The answer seems to be in the negative.

This approach to policy making is very risky, and must be avoided. It is absolutely essential to estimate impact of state-led interventions (in whatever form: legislations, regulations, rules, guidelines, policies) for two prime reasons: the selection of the most optimal state-led intervention will result in greatest utility; it should put in place mechanisms to ensure effective adoption and implementation of such intervention. As highlighted above, failure to consider the above results in imposition of unreasonable costs on stakeholders.

Assessing impacts

We utilised the Regulatory Impact Assessment (RIA) tool to estimate the impact of relevant legislations. RIA is an internationally recognised tool to estimate costs and benefits of proposed and existing state-led interventions.

Correct definition of the problem and comprehensive stakeholder consultation are fundamental to ensuring that RIA is reliable.

While the first determines the scope of RIA, the latter prevents it from being biased, increasing acceptability of the selected intervention. Correctly implemented, RIA has shown benefits in several jurisdictions.

The One-in, Two-out Policy of UK, which mandates removal of £2 of costs for imposition of £1 of costs via state-led intervention, has resulted in net reduction £836 million in costs to business between 2010 and 2013.

There have been instances of unsuccessful adoption of RIA as well, like Sri Lanka and Vietnam, from which other jurisdictions must learn.

RIA has been recommended for India by several expert committees. These include the erstwhile Planning Commission’s Working Group on Business Regulatory Framework (to which CUTS acted as a Knowledge Partner), Financial Sector Legislative Reforms Commission, Damodaran Committee Report and the Tax Administration Reform Commission.

The Pre-Legislative Consultation Policy of the Government of India, introduced in 2014, also requires government departments to conduct partial RIA of proposed legislations.

However, lack of political will, capacity constraints and limited awareness amongst other stakeholders are impeding its application. Experience in other countries has shown that a top-down approach is necessary for successful adoption and institutionalisation of RIA.

Consequently, there is a need to convince the government of the utility of RIA, and build its capacity. Our studies are a step in this direction. A dedicated Impact Assessment Office must be set-up and attached to the NITI Aayog to work on adoption and institutionalisation of RIA.

Indeed, RIA is the right tool which can aid states in achieving their utilitarian objective of greatest good for greatest number.

The writer is Secretary General of CUTS International. With inputs from Amol Kulkarni

Published on April 16, 2015

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