At the outset, let me state my views on Aadhaar and the waiver of farm loans:

I have no serious problem with Aadhaar or a unique identification number or a biometric identification system if it is implemented by knowing and admitting its limitations. However the hype around it, as an instrument that can revolutionise the governance in India, seems to me not so well grounded.

I have a deep concern about the plight of farmers in India. However, I do (like many others) think that the waiver of farm-loans is the least desirable strategy to help them. This is due to the known impacts of such a step: possible changes in the borrowing/repayment behaviour of farmers, impacts on the health of the financial system as a whole and the supply of loans in future, and so on.

What is the connection between these two?

A small-scale industry of research has developed which comes out occasionally with papers demonstrating that Aadhaar has helped reducing the leakages in the implementation of the Employment Guarantee Scheme (EGS) or Public Distribution System (PDS) in India. These are touted as the potential of Aadhaar to facilitate `good’ governance.

Let us consider the waiver of farm loans.  Even the party led by Narendra Modi (a prime minister who stands for economic growth and good governance) cannot avoid this strategy, as evident from the agenda of recently held state-elections. The government expenditure and costs to the economy due to this strategy (by considering direct and indirect impacts) could be much higher than all savings from reducing the leakages in PDS or EGS by using Aadhaar cards.  The latter (the leakage in PDS and EGS) is less likely to create those perverse incentives in the economic/financial system which the waiver of farm loans may generate.

Those governments which are interested in saving some money by stopping the leakage in PDS and EGS may not be interested in avoiding the ill-effects of the waiver of farm loans. This indicates that the improvement in governance is an issue of political economy and not a technical issue that can be solved with an instrument like Aadhaar.

One does not have to take the case of the waiver of farm loans to demonstrate this point. Governments decide the coverage of a subsidy or public-funded program. Who should get the benefit of PDS or the subsidised distribution of other services is a political decision. The financial burden on governments due to these policies is determined more by the conscious choices of politicians and not necessarily due to the leakage at the time of implementation.

The problems in implementation affect whether the PDS or EGS is functioning well in a particular context. There are a number of social contexts where enough employment is not created through EGS or all eligible people are not covered by it or workers may not get their wages in time. Hence the problems in implementation affect the effectiveness of the program and not only the leakage. Whether to implement EGS or PDS well in a context is also a political economy question. Wherever the poor and under-privileged are politically mobilised, there would be greater pressure on governments to implement these programs more effectively.

Are leakages in PDS or EGS or any such public program an unintentional outcome due to the lack of a technical solution? In most cases, the incentives of different actors including local politicians and government officials facilitate such a leakage. The lack of interest on the part of people who are supposed to receive the benefits of these projects creates a conducive environment for the continuation of these leakages. Their indifference may extend to the issues of corruption too. They may not be that bothered about the leakage and the money made by politicians through corruption. Instead they may focus on those small gifts which politicians may dole out during elections and while being in government.

In fact, there may not be anything that can be called a `leakage’ in a public program. Someone is benefiting from it at the cost of others. This is true for almost all kinds of public policies. Even in the case of those public policies which create net positive benefits to the economy and society, there could be some losers. Their power (or lack of it) influences the adoption of such policies. Hence the adoption and implementation of specific policies and their costs and ill effects (including leakages) are driven by the political economy. This is true for the adoption of technological solutions too. These may be adopted where political benefits are higher and/or costs lower. Corruption may continue despite the potential of a technology to make transactions transparent.

What is good governance? There are certain problems in the way some people define `good’ governance. For example, they may see good governance if a government can reduce fiscal deficit and provide adequate infrastructure (roads, ports, airports and so on). Such `good’ governance can be provided by an elite-controlled government since it is not under severe pressure to use public resources for the welfare of the majority. For example, there are state governments in India which could manage to sustain a fiscal surplus but these may not have a good track record in terms of enhancing human-development indicators.

On the other hand, when non-elites start mobilising and asserting their rights through the political process, governments are compelled to use a greater share of public resources for the provision of food and other basic goods and services and also to provide subsidies for an extensive set of items and also to a wider section of the population. This would have certain negative impact on the fiscal situation of these governments and their ability to provide infrastructure. Or there could be some `decline’ in the quality of governance (defined in an elitist framework) as part of the widening of political participation or the deepening of democracy.

However, those who work with this notion of `good’ governance do not see that a sustainable improvement in really good governance happens only through this political transformation. How does it happen? This is discussed in detail in the book titled `Roots of Ill-Governance and Corruption’.

When the majority of population starts mobilizing politically, they would demand more resources from governments. This would force the state to provide a number of services (PDS, water supply, electricity, education, healthcare, etc.) freely or at a heavily subsidised price to as many people as possible. Through this process, a substantial section of society may complete schooling and different levels of post-secondary (including college) education. We may note that the availability of schools per se is not adequate to encourage all people to acquire education. The provision of food, health-care, and other forms of social security would encourage parents to send their children to school (rather than using their labour). Such a spread of education would lead gradually to the creation of a middle class.

It is well known that it is the middle class which has an interest in good governance and controlling corruption. There are anecdotal evidences from India too (say from Delhi and Kerala) indicating that corruption and the provision of quality public goods (including infrastructure) become issues to throw out (and elect) governments in those states where the share of the middle-class is substantial. In the absence of such a pressure from this constituency, corruption and leakages of public resources would continue at higher levels. Or there will not be any notable social demand for good governance in such contexts.

However this middle-class comes to exist through the `populist’ policies of the state where public resources are distributed to meet the needs of the majority of the population.  Hence societies get out of populism on a sustainable basis by going through it!

The middle class is not that decisive in many parts of India. They are concentrated in cities and a few states. For example, despite the dominance of the middle class in Bangalore, their role is not crucial in Karnataka as a whole. Corruption is yet to become a major electoral issue in a number of rural constituencies in the country. There are parts of India where many votes can be bought by paying 200-400 Rupees per person.

The persistence of ill-governance in India has to be linked to the situation wherein more than three-fourths of India’s population are yet to become part of the middle-class despite witnessing an economic growth rate of above five percent during the last 4 decades. There could be a number of reasons for this state of affairs. However, the fact that nearly 50 percent of children do not complete schooling even today, and this percentage was much higher a decade ago, is a clear indication of the limitation of India’s development process in this regard.

In essence, improving governance is not a technical issue. That requires the social and political mobilisation of almost all sections of society. This would force governments to share public resources with a wider section of the population. Though there could be a decline in the quality of governance on certain dimensions as part of this `populism’, it is through this process that a social group which is interested in good governance emerges. That is needed to achieve good governance in a comprehensive manner and also on a sustainable basis.

Though we may think that economic under-development is due to ill-governance, there can be a reverse causation. Improving governance may require broad-based development.