Modi And Shah Need To Push BJP States Harder On Factor Market Reforms

In a column recently, this writer had made the case for a stronger Prime Minister’s Office (PMO), with parallel power structures at the level of states (the Chief Minister’s Office), and cities (Mayoral Offices). The main reason for advocating this concentration of power in one office – at least in the medium term – was this: we simply do not have state capacity to implement anything that is crucial for growth and equity.

For one, the bureaucracy is more obsessed with its own power than ensuring the effective implementation of policy; it neither has the competence nor the capability to develop and implement policies in complex and fast-changing areas like technology or digitisation, even if its intentions are benign.

Corruption in the judicial and legal system ensures that even basic things like contracts cannot be enforced in a timeframe that makes commercial sense. While our politicians have little competence beyond knowledge of how to win elections, even when we do have politicians like Narendra Modi who want this country to progress fast, the chances of failure are high.

The main reason for this is that India became a modern democracy before it became a modern state, where state capacity can be taken for granted. Most modern democracies evolved from autocracies, where state capacity already existed before democratisation.

China may never be a democracy in our lifetimes, but it built state capacity centuries ago, and never had an issue with implementing anything. This is why when it decided to become factory to the world after Deng Xiaoping opened his country for foreign investment, there were no hiccups in implementing his policies.

In India, even after Independence, we did not build real state capacity where the ordinary rule of law would prevail, with power being proportionate to responsibility. The Indian Administrative Services, which inherited the colonial power infrastructure, had no reason to dilute its own power.

Politicians who got elected through a first-past-the-post system with a minority of votes had every reason to hijack state resources or capacity for narrow ends. We thus never had state capacity to work with ordinary laws. Every major law on our statute book has draconian provisions in order to make it implementable, starting with the Constitution itself, where even the right to free speech is constrained by numerous restrictions.

In short, we are the world’s most incorrigible and irresponsible democracy, where power goes without accountability, and nothing systemically important can be designed or implemented without the centralisation of power.

If we look at what has worked during the Modi tenure of five-plus years so far, it is only projects driven directly from the PMO – Swachch Bharat, Ujjwala, Jan Dhan, Aadhaar – that have worked very well. But go beyond toilet-building, and even Swachch Bharat can be found wanting. Many states and cities still do not have plans for clean streets and effective garbage disposal.

Many reforms initiated by the Centre – for example, the liberalisation of the Apprentices Act, and the budget-announced changes to allow for fixed-term labour contracts – are simply not filtering through to state and city levels, since states are important players in notifying labour laws.

The Centre wants a single market for agri-commodities, but even Bharatiya Janata Party (BJP) governments are hesitating to liberalise the Agricultural Produce Marketing Committee (APMC) laws because vested interests manage to scuttle these plans.

Maharashtra, which voted to liberalise the laws in 2018 so that essential commodities could be sold outside APMCs, shelved its plans after protests at the Mumbai and Pune APMCs.

State resistance to change was best demonstrated recently when many of them refused to implement the stiff fines for road safety and rule violations, and diluted the penalties. A strong effort to push hard for road safety has effectively become the usual crawl towards minor improvements.

One can wait till the cows come home for labour and agricultural market reforms by states, but if the economy is to speed up, there is no option but for the Modi government to push state governments harder. The Prime Minister has often been castigated for being a dictator within his own party (along with party President Amit Shah), but the reality is that he has simply not been harsh enough with his own chief ministers, leaving them to their own devices.

While it is possible that states run by opposition parties may occasionally want to thumb their noses at the Centre in order to assert the federal nature of the Indian state, what stops Modi and Shah from telling their own state governments to fast-forward reforms or else…. Most of the pain points in the ease of doing business exist in the states, and if states don’t speed up reforms, the whole improvement in India’s ease of doing business rankings will turn out to be a cruel joke.

Modi wants both cooperative and competitive federalism. Both actually have to be led by BJP-ruled states. Opposition-ruled states have no political reason to be cooperative, and they will not be competitive – except in terms of ruinous competitive populism – unless BJP states decide to up the ante on factor market reforms.

Once BJP states start attracting investments based on big reforms, the opposition-ruled states will also start competing for investment. It is the lack of such reforms in BJP-ruled states that makes competitive federalism an impossibility.

The impetus for growth and reform now ought to be led by states, which control over 60 per cent of national tax revenues, including money that comes to them through devolutions from the central revenue pool. The process should begin by Modi and Shah telling their own state chief ministers to get a move on, or face consequences.

It is the unwillingness to use political capital to get its own state units to perform that is creating India’s economic performance deficit.