Do state-led interventions work?

Business Line, April 17, 2015

By Pradeep S Mehta

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. Read More >>

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

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