Competitive States of the Union

Cooperative federalism, and healthy competition for development among states, is the Modi Government’s refrain. This, it says, is essential to develop India fast, resolve the regional imbalances in growth and increase the size of the economy manifold. Rajiv Jayaram returns to the topic to examine its importance in India’s aiming big

Nearly two years ago, INCLUSION ran a special edition featuring ‘State of Governance’ in which some well-known authors analysed the reasons behind some of the vexed issues confronting India like the dispartiies in development performance among states, shrivelled grassroots governance, barriers to social mobility and the frailties in the justice system. The series of articles underlined a fact that has not diminished in value—the acute need to “develop a credible framework for assessing quality of governance in various states that could possibly provide an agenda for governance reforms,” as our Editorial put it.

The idea reverberated in the interview the, same July-September 2013, INCLUSION carried with the then Chief Minister of Gujarat, Narendra Modi. Packing a punch in his inimitable way, Modi told us: “One of the biggest benefits of good governance is that it does not look at welfare of any particular section of the people; it would result in welfare of all. For example, if you improve water supply, all would benefit. If you improve education or health services, all the citizens in that area would benefit.”

He went on to add that good governance is not, say, just building a bus station but ensuring that the bus service is punctual, buses are well maintained, travel is safe and conductors are courteous with passengers—attention to these aspects.

Competitive, Cooperative Federalism

Within 10 months, Modi became the Prime Minister of India and his government now has reinforced our belief in good governance—well-designed development schemes, with a bus stand or a hospital as parable—that he so strongly espoused in his political life.

After coming to power in May 2014, he has time and again called for applying cooperative, competitive federalism to good governance—a healthy competition among states for socio-economic development, investment and growth. There is a sharp focus to reignite India’s growth engine. As opposed to an earlier era of policy paralysis, there is now clarity in decision-making and governance is policy-driven. Red-tapism is being cut down, a speedy clearances system has been carefully constituted, key reforms—like labour and tax reforms—are either being attempted or on the anvil, investment activity has picked up and the number of stalled projects has declined dramatically.

Above all, there is as much renewed self-confidence in India’s capacity to aim big. It was not at all a sign of either irrational exuberance or swagger when the Prime Minister urged, early this year, Indians to work hard to increase the size of the economy from the present $2 trillion to ten-fold in the next 25-30 years. If he could translate his belief in good goverance just outlined in the words quoted from the interview at the national level, of course, it’s well within our grasp in the timeframe.

Yet, there are red flags going up about the state of the Union. Early July, the government released the partial data of Socio-Economic and Caste Census. The census findings portray a grim picture of poverty and lack of economic opportunities in India’s villages. They are a reminder that India must continue to make direct interventions to relieve poverty, boost spending in building a beefy social infrastructure to ensure socioeconomic mobility, build modern infrastructure of every kind, urbanise and grow fast. The new government’s schemes like Digital India, Direct Benefits Transfer, Smart Cities, Housing for All and skilled workforce provide an enabling ambience, but the key to unlock the potential of all these schemes lie with the states.

However, is the glass full or half-empty? Isn’t it that when we study the ground realities in many of India’s states—the chronic poverty, endemic corruption and culture of impunity and bureaucratic apathy—the hope of a $20 trillion economy in quarter of a century looks more and more like a riddle? All findings of studies and common sense would tell us that the key to build a strong economy lies in the states, more so as the Modi Government has given greater autonomy and more freehand to the states in implementation of huge and multiple centrally-sponsored development schemes.

The Prime Minister’s call for $20 trillion economy in the backdrop of his earlier intent to inspire cooperative, competitive federalism, prompted us to return to the states story in search of answers.

Six Tracks to Competitiveness

Madhya Pradesh, once scoffed at as the heart of BIMARU, has indeed scripted a turnaround story. A May 2015 study by Ambit Capital ranked states based on their performance over the last three years in terms of GDP growth, fiscal responsibility and reform measures, particularly measures in labour reform and ease of doing business. It studied 10 states—UP, Gujarat, Kerala, Karnataka, West Bengal, Tamil Nadu, Rajasthan, undivided Andhra Pradesh, Maharashtra and Madhya Pradesh—which actually contribute over 75 per cent to the national GDP. The study also looked at which five Indian states are most likely to drive GDP growth in India over the next few years. Madhya Pradesh was ranked at number 1 in performance over the three indicators over the last three years. It is also among one of the five states most likely to drive GDP growth of the country.

As the state’s Chief Secretary, Anthony de Sa says, the report’s conclusions gave him immense satisfaction. He is part of the team that helped bring about a paradigm shift in the state’s development priorities and that has taught him ample lessons. For de Sa, six factors were important. One is the presence of good physical infrastructure—roads, electricity, water, etc. The second is openness of a state to private participation in its economy. The third is the extent to which a state is willing to use information technology in governance. The fourth is related to something like infrastructure, land, particularly for the manufacturing industry. The fifth aspect that makes a state competitive is the labour relations. The sixth is a commitment of the government to good governance.

Legacy Matters

If Madhya Pradesh is the rising power, Maharashtra has been an established power. It is the most industrialised, the most favoured investment destination and one of the most progressive states in India. Its capital, Mumbai, doubles up as the financial and cultural capital of India. Unlike Madhya Pradesh, it did not have to take painstaking efforts in the recent decades to chalk out a growth path. Anyone who thought of starting a business, trade, commerce or any kind of industrial activity looked at Maharashtra. Even today that is so but there is tremendous amount of competition which is coming from states including Gujarat, Karnataka, Madhya Pradesh, Andhra Pradesh and Tamil Nadu; but Maharashtra has held its ground.

Swadheen Kshatriya, Chief Secretary, Government of Maharashtra, believes what has changed in the last few decades is that the world has become very competitive and no state or country can take it for granted that they would continue to have the advantage that they may have achieved some time ago.

He points to the natural advantages Maharastra has. “We have the advantage of having a huge sea coast. So, we actually grew as a state which had a harbour and from Mumbai the growth engine has grown. We have not only Mumbai and JNPT, but about 8 to 9 major ports are now coming up. A third giant port is coming up at Tarapore near the seafaring area over there. That is another advantage that our state has,” he added.

Ease-of-Doing Business

As competitive federalism increasingly kicks in, what’s the new perspective, given the legacy and natural advantages, we ask him. Ease-of-doing business, of course. “I think the competition really is now amongst states to bring about a greater ease-of-doing-business. Even if you have the infrastructure, a young manpower and skilled people, unless you cut the red tape and you do away with the white cap, business is not going to be attracted. In Maharashtra, we keep on reducing red tape; we have, on an average about 70 permissions required for any activity and we are targeting it to be brought down to 30 or so—not only the number of permissions but the time that is taken for permissions,” says Kshatriya.

States must be able to take decision fast in order to attract investments, says the industry keen on partnering with states and making investments. “Give me the joy of ‘yes’ or gift of ‘no’, but don’t sit on my file. Don’t keep me hanging because if I am an entrepreneur or if I am in business, I can’t live with uncertainties. The speed of decision-making is very important. Wherever it happens states have thrived, wherever it does not happen the states suffer,” say industry experts in unison.

Kshatriya says, studies have revealed that the time taken earlier was phenomenal, construction permissions took more than 164 days, electricity–21 days and so on. “So, we have cut down all that. Construction permissions are now expected to be cleared in about 45 days and electricity in 7 days. Best, there is consensus that we should minimise these further. Registration is going to be instantaneous, if documents are correct. So, the ease-of-doing business plays the pivotal role,” he adds.

Preeti Sinha, Senior President & Global Convenor, YES Institute, says states like Madhya Pradesh and Maharashtra which are doing so well can be a role-model and a guide to other states that need to figure out what to do.

Competitive States as India’s Calling Card

Competition always results in something good and advantages are going to flow out of that. Kshatriya says competiton will make states work harder to achieve results. Each State has its own advantage. “I am frank to admit that agriculture growth in Maharashtra has lagged, is not really a great advantage for the state of Maharashtra, whereas neighbouring Madhya Pradesh has recorded a progidious figure of 21 per cent growth. Our driving force is going to be industry, trade, commerce and services. On that, all States may try but the advantage the State of Maharashtra has, is something which other States are going to take several decades to come near that,” he says.

De Sa points out that unlike China, India’s growth model is not essentially FDI-driven. China’s growth story was FDI-driven and export-oriented. “FDI is important because of the money and technology, it brings in. But in India the larger share of investment originates from internal sources and a large market exists in India. We need to nurture the market because we want to increase our own living standards and people’s purchasing power. Recognising that India is not an export-oriented, FDI-driven economy, the competitiveness of states inter se is very important,” he explains.

Like Maharashtra, Gujarat is considered an industrial powerhouse. For long, the state has etched out an image as a wellspring of entrepreneurial dynamism. In the past one-and-half decades, the state has taken its strategy many degrees higher, giving rise a new label in development parlance called “the Gujarat model”, which won enough plaudits that it’s currently in vogue.

Sanjay Kaul, Managing Director of Gujarat Informatics Limited (GIL), believes strong and clear leadership was the crucial factor that helped crystallise the model. “The first point is clarity of thought and vision at the highest level, and I would say, after Narendra Modi became Chief Minister. He figured out early that without building strong soft and hard public infrastructure, the state can’t build the foundations of a strong economy.”

“Along with the strenuous efforts to build them, the state also spelt out clear policy guidelines cutting across sectors, whether they are industrial, manufacturing, textile or agriculture,” he said.

Kaul points out that factors that drove the development model: e-governance and use of information technologies, active private sector participation and sharp focus on skill development.

In Global Competitiveness Index report published by the World Economic Forum, India fares a poor 71st of the 144 countries ranked in 2014-15. The rankings are based on WEF’s GCI which is based on scores covering 12 categories. They are institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.

The report said that improving competitiveness would yield huge benefits for India, as it would help re-balance the economy and move the country up the value chain ensuring more solid and stable growth. “This in turn could result in more employment opportunities for the country’s rapidly growing population,” it added.

Zohra Chatterji, Distinguished Fellow, SKOCH Development Foundation, thinks that the dawn of 21st century has brought about a sea-change in the dynamics of the development debate.  States have been realising that economic development is going to be the key to people getting jobs. “All states realise that it is more important for them to cash in on their intrinsic strengths. They have also learnt that they need to package their state well, and so we see some shining examples like Madhya Pradesh.”

India must embrace competitive, cooperative federalism to rise rapidly through the ranks of the competitiveness globally and throw the whole world in a loop, as China did in the past two decades. A surajya is in realm of the possible.

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