Shortly after Hailey accepted the post of education member of the Governor-General's Council the Montagu–Chelmsford (Montford) report was published, provoking a storm of protest from advanced Indians who saw it as a sellout. Progress toward responsible government and dominion status would be very gradual indeed, it now appeared, Parliament would control the pace entirely, and dyarchy would be installed only at the provincial level. The viceroy, Lord Chelmsford, tried to sweeten the pill by enlarging the Indian membership of his council. The education membership therefore went to an Indian and Hailey had to wait for a vacancy.

Meanwhile he was given special duty, charged with implementing the recommendations of the Islington Commission on reorganization of the public services. Having been appointed in 1912 as part of the Morley–Minto reform package, the commission had submitted its report in 1915, when it had been shelved till the end of the war. The central question was Indianization: how many, how fast, how high up? And the proposed solution was decentralization. Many positions in the central departments would be transferred to greatly enlarged provincial services, whose members would be recruited locally whenever possible. For the more senior positions in the Indian Civil Service and the police, examinations would be held simultaneously in England and India, and though color was not supposed to be a factor three-fourths of the appointees were to come from the former.