Six Things States Can Do To Tackle India’s Economic Slowdown

As a country becomes complex, institutions become increasingly important for economic growth and redistributive justice. There may be a debate whether institutions are important as a factor responsible for growth or not, but everyone recognises the role they play in sustaining the growth momentum.

Therefore, in some ways, institutions are an important component of ensuring sustained economic growth.

This brings us to state governments which haven’t faced the same level of scrutiny from either the civil society, the electorates or even journalists which has resulted in an increased divergence between the state capacity at the Union government level and the state governments level.

Frequent pressure on the union government forced it to undertake several reforms, including administrative, however, the same is sadly untrue for most state governments.

This at a time of a slowdown becomes more significant as what happens at the state government level can have a bigger impact on growth.

For instance, many have observed that a fiscal expansion by the Union government has a lower multiplier effect on the economy compared to the impact of a state fiscal expansion. It is, therefore, evident to ask the state governments to share the responsibility of moving towards a $5 trillion economy.

Here are a few things that state governments must do to ensure the same:

Enforcement Of Contracts

The last few months have witnessed a disturbing trend of changes in state governments resulting in frequent reneging on contracts negotiated by previous governments. To be fair, this trend has prevailed in Indian politics for decades. Two recent examples that come to mind are of Amravati where Andhra Pradesh Chief Minister Jaganmohan Reddy has decided to junk the idea of a modern state capital. The kind of foreign investor money in the state is effectively stuck and the entire world is watching how political changes influence sovereign contracts.

Consequently, investors, both in India and foreign, are reluctant to enter into long-term contracts with the government.

If Reddy’s decision was not enough then Maharashtra politics has resulted in the coalition scrapping — or at least considering to scrap — the Mumbai-Ahmedabad bullet train project.

The move is a political move as it is Prime Minister Narendra Modi’s pet project, however, it will have disastrous economic consequences and not just for the state of Maharashtra but for the rest of the country.

Japan offered a concessional loan for the bullet train project and made a long-term investment for the same, however, the entire value is stuck should the project be scrapped.

Of course, in the absence of Maharashtra, we may get a Delhi-Ahmedabad bullet train, but Japan and their investors will no longer risk their money by investing in such projects for a long time in India.

Nearly every foreign investor talks about the Vodafone adventurism by the United Progressive Alliance (UPA) government and these two specific instances to highlight their insecurity despite India being an otherwise attractive destination.

The sheer short-sightedness of these state governments is therefore going to adversely affect other state governments. There is a need to enforce sovereign contracts irrespective of the government that enters them.

Provisions should be made to ensure that such contracts cannot be invalidated — even by judicial bodies as they did with coal and 2G. Even if there is graft involved in allocation of assets or into such contracts, the contract must be honoured but heavy penalties must be imposed on both the investor and the government official.

Land Acquisition

The number one concern of several manufacturing companies is with regards to land acquisition which is why a bulk of these firms prefers investing in states that are more proactive in terms of providing the required land.

There is a need to create a true single window and not one which opens and shows 10 fresh doors for regulatory provisions. A single department for domestic and for foreign investors that processes the request, acquires the land and transfers the land for manufacturing companies must be put in place.

For existing manufacturing zones, the total time for the process should be between 30-45 days. An example for this is the Gujarat Industrial Development Corporation (GIDC) which is extremely efficient in terms of processing requests for land and transferring the same in a time bound manner.

Labour Laws

There has been some progress on labour reforms by the central government as we are witnessing four labour codes come into effect.

However, the labour code on industrial relations retains the provision of the Industrial Disputes Act with regards to the retrenchment of workers.

To successfully take out surplus labour from agriculture we need to create adequate non-farm job opportunities in the labour-intensive manufacturing sector, and therefore states must dilute such provisions as per their considerations in order to attract greater investments.

GST Reforms

Goods and services tax (GST) has been one of the biggest indirect taxation reforms and it is shaping up as a stable taxation regime.

However, there is an opportunity for GST 2.0 guided by the principle of maximising tax compliance and simplicity of the system.

While administrative and procedural issues are being adequately addressed by the Finance Ministry, what is needed now is to initiate a discussion on a three rates framework for the same.

State governments should stop their incessant discussion on extension of compensation under the GST law but instead work towards better compliance from their end. The only solution for enhanced revenue should be improved compliance rather than squeezing the central finances to meet their state deficits.

Disinvest In State PSUs

Privatisation is yet another favourite topic of discussion which raises a lot of eyeballs as people still are unable to recognise its importance.

However, while central government has looked at disinvestment of central public sector undertakings (CPSUs), state level disinvestments and privatisation have been occasional. Therefore, the governments in various states should initiate a comprehensive programme of getting out of these enterprises and focus primarily on provisioning of public goods.

Agricultural Reforms And Dismantling APMCs

While many frequently go to the central government to address issues related to the farm sector, a bulk of the powers is vested with state governments. Our archaic agricultural policy needs an overhaul and agricultural produce market committees (APMCs) must be dismantled to ensure liberalisation of agricultural markets.

Moreover, gradual phase out of power and other subsidies must be done by the states to ensure that the price of such products reflect the true cost of production.

India is no longer the economy it was in the 1980s. It has made tremendous progress over the last couple of decades, and it is far more complex as an economy. Consequently, state governments need to recognise the importance of their role in economic development.