Economic policy sans economics

November 8, 2021 was the fifth anniversary of demonetisation. Prime Minister Narendra Modi had announced it in 2016 as an assault on the black economy, going against the official advice of the economists in the Reserve Bank of India (RBI). The government has not produced any evidence of corruption having reduced even five years after the controversial decision was taken. New research (https://bit.ly/3kYxL4Z) out in October 2021, though, gives fresh insights into the rent-seeking behaviours of the bureaucracy.

Amit Chaudhary and Song Yuan of the University of Warwick looked at the economic returns for bureaucrats, specifically the Indian Administrative Service (IAS) - the elite civil service in India - after their reassignment to important ministries. They found that the increase in individual officials' assets is higher after reassignment to important ministries that are more prone to corruption. Positions in some economic ministries or departments such as Finance and Urban Development are known to provide opportunities to make influential policy decisions. Other such departments include those in charge of Excise and Sales Tax, Food and Civil Supplies, Health, Home, Industries, Irrigation and Public Works. Chaudhary and Yuan found that the increases in assets were higher in more corruption-prone states. The researchers found that bureaucrats working in their home states, as against in the central government, accumulated more immovable assets after such transfers. Previous experience in important ministries continued to contribute to the asset accumulation of bureaucrats in these state postings.

The results suggest that after bureaucrats are transferred to an important ministry with the power to make influential policies, there is an increase in the reported value of immovable properties by 53 per cent, and the number of properties owned by 19 per cent. In contrast, when no such powers accrue from transfers, bureaucrats report annual growth rate of 10 per cent in the value of assets and the number of assets is 4.4 per cent higher. These findings are important because private returns due to rent-seeking can reduce the quality of governance.

The average number of immovable properties worked out to 2.4 in the researchers' sample. The mean and median value of immovable properties (the total value of immovable properties for the family of an officer) are Rs 1,15,19,000 and Rs 52,00,000, respectively. In comparison, the average wealth per adult in India was Rs 5,44,000 in 2015. The value is large considering the average family size of 4.8 in India and average annual salary of Rs 9,00,794 in the IAS. The median house price for metros in India is Rs 15,00,000. In underdeveloped rural areas, it was Rs 2,00,000 in 2016. According to the Reserve Bank of India's 'Indian Household Finance Report' in 2017, real estate consists of more than 77 per cent of the total household assets in India.

Bureaucrats are required to make financial disclosures every year about their and their family members' assets such as immovable properties acquired over time, including houses and land. The Department of Personnel and Training (DoPT) checks the reports and compares the submitted value with the market price of the immovable properties to scrutinise for the accuracy of disclosures. The Income Tax Department also examines them for under- or misreporting of assets by comparing them with the tax records of officers. The two researchers used this data - covering 31,000 reports of immovable properties of more than 5,100 IAS officers in all states from 2012 to 2020 - for each individual official, along with their respective career histories from official records of executive record sheet, to track the dynamics of assets before and after transfer to an important ministry and estimate the flow of private returns to public servants after bureaucratic reassignments. The executive record sheet contains comprehensive resume information of IAS officers from 1947 onwards, including the details on the date of birth, allotment year, education, domicile, language spoken, posting history (designation, ministry/department, period, work location, and level of seniority) and training.

Besides broadening and deepening the debate on the merits and demerits of ideas such as demonetisation, the findings also challenge a commonly held myth that is often offered as explanation for poor performance by government. It is said that the set remuneration structures, with no incentives for competence or performance, result in poorly motivated bureaucrats and poor delivery of governance. The researchers' findings add new insights to the conventional view on the incentives in bureaucracies by showing that the private returns of being a bureaucrat are high, and bureaucrats do not face low-powered incentives. Performance-linked incentives are built into non-government salaries. The pay and promotion norms for bureaucrats are quite different than those in the private sector. Compensation paid in government, both perks and salary, does not take into account competence or performance - partly because it is difficult to measure output and apply performance incentives in policy work but mainly because the bureaucracy, being the permanent structure in government, has multi-dimensional objectives, even as the political bosses, and their objectives change depending on electoral outcomes. Bureaucrats play a crucial role in state capacity and public-service delivery, the two permanent functions of government, regardless of the preferences of the political party in office. IAS officers perform the vital functions of civil administration and policymaking.

IAS officers are transferred between posts at the will and discretion of political executives. Sometimes senior bureaucrats push for pliable or agreeable subordinates. A reform being tried out for solving the problem of low quality of governance and policymaking in India is to recruit laterally from the private sector for senior government positions, on par with career bureaucrats.

But this doesn't eliminate the potential for private returns of holding a senior position in an important ministry. It doesn't matter where the appointee comes from - IAS, other cadres such the Indian Revenue Service or the private sector. What matters is that once appointed, anyone can milk the system for private returns. Fixing corruption and the black-economy problems is serious business. Whimsical decisions like demonetisation may turn out well for electoral politics but sound economic policymaking demands healthy regard for technical expertise.

Puja Mehra is a Delhi-based journalist and author of 'The Lost Decade (2008-18): How India's Growth Story Devolved Into Growth Without A Story'