Milan Vaishnav of Carnegie Endowment explains the lack competition in good policy formulation, experimentation and implementation among Indian states in this article. He states: “Federalism, in theory anyway, creates a marketplace for public policy, in which the best policies eventually take hold and are replicated across units, while the worst are relegated to the dustbin of history.”
Excerpts from the article below:
The nature of federal fiscal relations, the concentration of power in state capitals and the absence of a venue for cross-state exchange of ideas are all biased against a more competitive federalism in India. If India’s states are to truly serve as effective laboratories for improving public policy, they must be liberated from these institutional impediments. Institutions are notoriously sticky, yet there are a few signs of hope on the horizon. Notwithstanding incentives to the contrary, India’s states often do manage to spur policy experimentation—but it just is not always clear how these experiments add up. We have Chhattisgarh linking smart cards to the Public Distribution System, Andhra Pradesh evaluating the impact of contract teachers on primary education, Gujarat reforming electricity by linking higher user fees to guaranteed service provision—the list goes on. This demonstrates that state governments can take initiative and ministers are able to carve out space to experiment when the conditions are right. But the next step is much harder: fostering an environment of learning across states. One positive development in this regard is the Planning Commission’s recent proposal to streamline the number of centrally sponsored schemes while increasing the amount of flexibility that states have with respect to programming funds. According to the draft proposal, centrally sponsored schemes would set aside up to 20 percent of allocated funds (10 percent for flagship schemes) for “flexible spending” by the states, which would give them the space to encourage local experimentation.
Inadvertently, the recent reform to allow greater foreign direct investment (FDI) in multi-brand retail could also provide a learning opportunity for states. Although it was characterized as a defeat at the time, the center’s decision to allow states to decide whether to the implement the new FDI regulations will create, as it were, a “treatment” and “control” group. Those states standing on the sidelines waiting to see whether the adopters sink or swim will have a golden opportunity to learn from their peers. If this counts as a policy defeat, India may well need many more like it.