Race to the top: Indian state business regulations in second quarter of 2016

While key reforms related to land acquisition and labour laws are stuck in Parliament, states have been taking the lead in adopting reforms in these areas


Recent work by NITI Aayog to measure the competitiveness of Indian states has given state leaders new visibility into what they need to change in order to win the race for investment. Photo: Mint
Recent work by NITI Aayog to measure the competitiveness of Indian states has given state leaders new visibility into what they need to change in order to win the race for investment. Photo: Mint

India’s 29 states collectively have a much larger impact on India’s overall business competitiveness than the federal government. States manage critical inputs like electricity, water, most land acquisition, and a majority of licenses, among other factors. Recent work by the Department of Industrial Policy & Promotion (DIPP) and NITI Aayog to measure the competitiveness of Indian states has given state leaders new visibility into what they need to change in order to win the race for investment. Some states, though certainly not all, are taking advantage of this new set of policy tools.

While key reforms related to land acquisition and labour laws are stuck in parliament, states have been taking the lead in adopting smart reforms in these areas. Every quarter we review key policy-regulatory changes among the 13 large states we cover in our weekly Update on India’s States. For the most recent quarter, April-June 2016, Rajasthan topped the list with four positive regulatory changes; Gujarat came second with two. Five other states each had one significant, positive policy change in this period.

On the other hand, four states—Gujarat, Rajasthan, Karnataka, and Tamil Nadu—introduced regulations that will harm their business environments. These harmful regulations, outlined below, typically cover things like tax increases, reduced labour flexibility, and price controls.

Apart from the actions states are taking on their own, India’s center-state dynamics continue to shift.

• UDAY: The electricity distribution bailout, Ujwal DISCOM Assurance Yojana, now has 14 states signed up, and the deadline has been extended for a year.

• Goods and Services Tax: A number of important regional parties have voiced their support for the Constitution (122nd Amendment) (GST) Bill, 2014, which will bring a more uniform system of production and sales taxes across India.

• NITI Aayog—Model State Law: On 31 March, NITI Aayog released its Report of the Expert Committee on Land Leasing. The report signals a new phase of NITI Aayog’s work: crafting model laws and regulations for states.

• Cabinet—Model Shops Act: On 29 June, the cabinet approved a model Shops and Establishments Act. The model act can be adopted voluntarily by states and includes provisions to allow malls, cinema halls, restaurants and other retailing establishments to remain open on seven days a week.

Here is a breakdown of the more significant policy changes by state governments from April-June 2016, among the 13 states on which my program focuses:

Land:

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

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

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

• Rajasthan: Passed two additional land-related bills. The Rajasthan Land Pooling Schemes Bill, 2016 allows pooling of smaller land plots, while the Rajasthan Special Investment Region Bill, 2016 simplifies the use of “eminent domain” for land acquisition.

• Uttar Pradesh: 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.

Labour:

• Karnataka: 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.

Water, power, sanitation:

• Rajasthan: Rajasthan has moved forward with its plan to lease electricity distribution in two districts, Kota and Bharatpur, to Calcutta Electric Supply Corporation (CESC). The venture will operate under the input-based distribution franchisee model, in which CESC pays a set price for electricity provided by the state.

Other regulations:

• Andhra Pradesh: The government issued a notification making e-procurement mandatory for government departments and public sector organizations.

• Gujarat: The government issued the IT and Electronics Start-up Policy, under which the state will fund 50% of the cost of establishing an incubator. The policy also offers various types of direct financial assistance to start-ups.

• Rajasthan: The Rajasthan government has repealed 248 obsolete laws. The repealed laws cover issues such as use of manure, coal controls, and electricity duties, among others.

• Telangana: Telangana’s labour department approved a 3-year extension to a government order that allows retail outlets and other establishments to remain open 365 days a year.

Harmful regulations:

• Karnataka: Karnataka has directed taxi aggregators such as Uber and Ola to cease operations in the state until they secure a license from the government and abide by pricing controls.

• Tamil Nadu: The information technology sector in Tamil Nadu will now be covered by the Industrial Disputes Act of 1947, allowing workers in the sector making labour force reductions more difficult.

• Gujarat: The government introduced a new Purchase Policy that mandates that government departments attempt to purchase products manufactured in India and obtain approval from the department secretary before procuring material from abroad.

• Rajasthan: The government has begun imposing a 5.5% entry tax on goods that are purchased outside of the state via e-commerce. Goods will be exempt if value-added tax was paid before the goods are sold online.

In the coming months, NITI Aayog may release its exhaustive survey of state business regulations, dramatically augmenting the DIPP’s earlier 98-point assessment. And the proposed model centre-state agreement to extend Bilateral Investment Treaty (BIT) provisions to state governments may also be publicly released. The pressure is on for states to enact sensible pro-business regulations.

The author is senior fellow and Wadhwani Chair in U.S. India Policy Studies, the Center for Strategic and International Studies

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