States lead the way in economic reforms
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The Narendra Modi government’s economic policymaking agenda was crowded by a few singularly large actions in the final months of 2016: securing final passage of the goods and services tax (GST), carrying out the demonetization programme, and preparing the 2017-18 Union budget. We have seen a real reduction in tangible action on the wider reform agenda, which my institution tracks in our “Modi Economic Reforms Scorecard”. We have not had reason to make any substantive changes to our reform tracker since the middle of 2016. However, we have seen a real uptick during the fourth quarter of 2016 in state-level reforms, particularly from Haryana, Gujarat and Maharashtra. These three states had a combined 12 legal or regulatory reforms seen to improve the business environment. With the Bharatiya Janata Party’s election victory in a number of state elections this spring, notably Uttar Pradesh (UP), there are renewed hopes that other states will follow suit. BJP-led states have tended to reform more aggressively than non-BJP states, with the notable exceptions of Andhra Pradesh and Telangana.
States exert a tremendous level of control over many facets of the business environment in India. The Centre dominates heavily regulated sectors, including most services industries, as well as market access and trade liberalization. Beyond that, states play the dominant role. Most business licences are controlled by state agencies. Key inputs like electricity, water, and sanitation largely rely on state agencies. And states split authority with the Central government over other key issues such as land acquisition and labour regulations.
Among the 13 large states we cover, there were a total of 14 positive reforms in this period, compared to an average of 10 significant positive reforms in the previous two quarters. Apart from the three states noted above, Delhi and West Bengal each took positive steps to improve their business climate. Only one of the five states where elections were held in February-March, UP, is covered in our index. UP did not have any significant economic reforms during the last three months of 2016, perhaps due to the elections.
Changes to land regulations, both industrial and residential, were among the more common reforms during this period. This is likely a reflection of the fact that there seems to be little hope for significant land acquisition reforms at the Centre. A couple of examples of the types of steps taken include: Gujarat is poised to have another industrial boom, lifting a moratorium on new and expanding industrial facilities in Ankleshwar, Vapi, and Vatva; Haryana is making land held by village councils available for development.
States had less success this quarter in further liberalization of India’s onerous labour regulations. West Bengal had the lone reform in this space, easing regulations governing employment of teachers.
Apart from land and labour, Haryana and Maharashtra both had multiple significant reforms in other parts of their regulatory environment. Haryana’s chief minister gave up “final authority” over development licences. The state liberalized regulations on private transportation companies and introduced a new public procurement policy that should give a boost to small firms. Maharashtra cut required permissions in the hospitality sector, and adopted new procurement rules meant to give start-ups some assistance in winning contracts.
Not all policymaking at the state level has been positive for business. We saw two regulatory changes proposed or implemented that would harm the local business climate in two states. Karnataka has proposed 100% reservation for native workers in blue collar jobs, while Maharashtra’s Electricity Regulatory Commission has disallowed most facets of an important tariff hike requested by the Maharashtra State Electricity Distribution Co. Ltd.
The fourth quarter of 2016 also brought further developments in the balance of power between the Central and state governments. Four more states signed on to the power-sector bailout package, Ujwal Discom Assurance Yojana (UDAY), bringing the total up to 21 (since then, Sikkim has also joined). When signing on to the UDAY programme, states agree to several power-sector reforms outlined in the related agreements the state signs with the ministry of power. In addition, the GST continues to move forward, albeit slowly. A compromise on power-sharing between the Central and state governments has been hammered out, and we will hopefully see the final legislative steps in mid-2017, allowing this critical tax reform to be rolled out this year.
Looking ahead, more changes in the relationship between states and the Central government are on the agenda. NITI Aayog announced a new project to track health indicators in each state; a survey to collect this information is under way, and should create an important new tool to guide policymakers. The final report should be made public by September, according to the initial guidance.
In the coming weeks, we will see if the governments in the states where elections were recently held come out of the box quickly with a reform package, decide to reward voters with short-term incentive packages that are likely harmful to their long-term growth prospects, or take a most modest approach to their mandate. Two other states will hold elections later this year: Gujarat and Himachal Pradesh. While the impact of the elections on national reforms is often overstated, there does appear to be a higher correlation of “reform paralysis” at the state level in the run-up to the state elections. Gujarat will be an interesting test case for this dynamic, since the state’s governments have tended to run on platforms of economic development.
Note: In referring to state reforms, the author’s team focuses on reforms by the 13 states most significant for foreign investors, namely: Andhra Pradesh, Bihar, Delhi, Gujarat, Haryana, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan, Tamil Nadu, Telangana, Uttar Pradesh, and West Bengal.
Richard M. Rossow is senior adviser and Wadhwani Chair in US-India Policy Studies, the Center for Strategic and International Studies.
For the full quarterly update of the states, visit livemint.com/statesquarterly
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