Competitive federalism is working

Competitive federalism is working
Progress by states will have a much greater impact on India’s economic future than what happens in Delhi
The world constantly debates the question of whether the Narendra Modi government has met the high expectations for economic reforms. The passage of the goods and services tax bill certainly gave a boost to the government’s image. But in reality, India’s 29 states collectively have a much larger impact on India’s business competitiveness than the federal government. The Modi government’s moves to encourage states to strengthen their own business environment are helping create a new dynamic. States have an unprecedented level of understanding of their own competitiveness, and new tools to improve. And a few forward-leaning states are racing ahead.

The concept of getting states to compete for investment is not a novel idea. Some of my early work on US-India commercial ties was in organizing a series of conferences across India involving regional chief ministers. These included the “Emerging East” in Kolkata in 1997, the “Dynamic South” in Chennai in 1999, and the “Progressive West” in Mumbai, also in 1999. Around that time, with the explosive growth of India’s information technology services sector, we did see a few state leaders, primarily in Andhra Pradesh and Karnataka, actively pursuing investors to help build out their main technology hubs of Bengaluru and Hyderabad. But the departure of both Andhra Pradesh chief minister Chandrababu Naidu and Karnataka chief minister S.M. Krishna in 2004 seemed to have undercut this nascent competitive dynamic.

With this recent history in mind, I was sceptical of the Modi government’s ability to find appropriate measures to help stimulate such competition. States manage critical inputs like electricity, water, most land acquisition, and a majority of licences, among other factors. The central government has limited ability to directly intervene in these areas. But I have been pleasantly surprised at the types of lathis and ladoos the Modi government has created to drive competition among states.

Chief among the Modi government’s steps to increase states’ competitiveness is the Department of Industrial Policy and Promotion’s (DIPP’s) 98-point Assessment of State Implementation of Business Reforms. This under-appreciated assessment is the best guidebook for those states that want to increase their relative competitiveness. And it will be improved when NITI Aayog releases a wider survey of the business environment of the states later this year. Of course, highlighting those states that are leading versus lagging does not automatically trigger action. Some states simply focus on short-term political gains, at the expense of improving their economy. But other states are taking advantage of this new set of policy tools.

Other key measures to help states become more competitive include initiating the power sector bailout programme Ujwal Discom Assurance Yojana (UDAY), and redesigning the operations of the former Planning Commission in the form of the NITI Aayog. The latter has engaged state leaders as a consultative body, and is now starting to develop model laws for Indian states to consider.

Of course, initiatives such as these are merely setting the table for states to move ahead. Ultimately, businesses need to see states take advantage of these opportunities. A few states have been taking the lead in reforming their own business environment. Examples of state reforms on land and labour from the past one year include:

Land

l Gujarat, 2016: Amended its Land Acquisition and Rehabilitation Act, eliminating the requirement of a social impact assessment and consent clauses for certain types of development projects.

l Maharashtra, 2016: Amended the Maharashtra Land Revenue Code, allowing the sale of certain publicly-owned lands that were previously slated only for leasing.

l Maharashtra, 2015: Amended its Gunthewari Act, allowing mid-size plots to be divided, and easing the process to sell such plots.

l Andhra Pradesh, 2015: The Andhra Pradesh legislature passed a bill extending land leases from the government to private entities from 33 years to 99 years.

l Rajasthan, 2016: Passed the Rajasthan Urban Land (Certification of Titles) Bill, 2016, which offers a state guarantee of title after a land purchase.

l Uttar Pradesh, 2016: Approved the Uttar Pradesh Information Technology & Start-Up Policy 2016. To encourage start-up growth, the policy waives taxes on land purchased for office use and on built-up offices, as well as electricity dues for five years.

l Uttar Pradesh, 2015: UP issued the UP Revenue Code (Amendment) Ordinance, allowing, among other things, Dalits with less than 3.5 acres to sell their land to non-Dalits.

Labour

l Gujarat, 2015: Passed a series of labour law reforms, making it more difficult for utility workers to go on strike, reducing the time employees have to seek redress for dismissal, and more.

l Karnataka, 2016: The government announced a new retail trade policy that allows establishments to be open longer, relaxes labour laws and stocking limits, and also allows women to work at night.

Competitive federalism is not yet embraced by every state. But a handful of states are clearly taking steps to strengthen their business environments, including initiating difficult reforms on land acquisition and labour flexibility, at a time that national reforms in these areas are politically stuck. Continued progress by such states over time will have a much greater impact on India’s economic future than what happens in Delhi.