India’s Changing States

The concept of devolving power to India’s states as “laboratories for reform” has re-emerged as a fashionable theory for speeding up economic development in India. Prime Minister Narendra Modi regularly touches on the twin theories of “competitive federalism” and “cooperative federalism”- getting states to push each other to have the most inviting business climate, while simultaneously getting states to work together to speed up national development.

There is a great deal of logic in focusing on states; collectively, state governments have a larger impact on India’s overall competitiveness than the federal government, managing critical inputs like electricity, water, issuance of a range of licenses licenses, among other factors. With Parliament’s inability to function well in the latter half of the year, state reforms are increasingly important for India’s overall competitiveness. In 2015 we saw some successes and failures in terms of changing the balance of power between India’s states and the central government, and some tangible steps states took to create more competitive business environments.

Changes to the Center-State Balance of Power

There are five major actions during 2015 that are shifting the balance of power between India’s states and the central government, namely:

• Goods and Services Tax (GST): Parliament is still contending with a constitutional amendment that will create a national “Goods and Services Tax (GST).” This GST will take certain powers away from state and local governments, though the version likely to be adopted is a far cry from the model version first envisioned a decade earlier. The amendment passed the lower house of Parliament in May 2015, but has not been taken up for a vote in the upper house.
• DIPP’s 98 Point Action Plan for State Reforms: In September the Department of Industrial Policy and Promotion (DIPP), in conjunction with The World Bank, prepared a study that, for the first time, offers a credible apples-to-apples comparison of the relative ease of doing business in each of India’s 32 states and territories based on a 98 point action plan. While the results were not inspiring—only seven states had implemented at least 50 percent of the model reforms—gathering information should always be a precursor to action.
• Power Sector Bail Out/UDAY: On November 5, the Cabinet approved a plan, called “Ujwal DISCOM Assurance Yojana” or UDAY, to rehabilitate India’s decrepit electric power sector. Constitutionally, electric power is administered at the state level, and in an atrocious condition. Its poor performance is a combination of political interference in pricing, consumer theft, corruption, and lack of investment. Total losses of India’s state electricity boards was approximately $66 billion at the end of Fiscal ’15. Through UDAY, the government hopes to increase efficiency, reduce interest rates, and enforce financial discipline on states. As of December 19, twelve states have agreed to participate in UDAY, including Andhra Pradesh, Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Madhya Pradesh, Punjab, Rajasthan, Uttar Pradesh, and Uttarakhand. UDAY is not the central government’s first attempt to clean up the electric power industry. But it will hopefully be more successful than past efforts.
• Smart Cities: Soon after his party’s May 2014 election victory, Prime Minister Modi began talking about redeveloping India’s cities and turning them into “Smart Cities.” On August 27, the government released a list of 98 Smart Cities, and is now working with state governments to draft action plans and assess funding requirements. The price tag for making India’s cities “smarter” is quite high. There are numerous, sometimes-competing visions for what “smarter” means. Indian cities lack empowered municipal governments. And most voters reside in rural or semi-urban areas, making large-scale investment in building up India’s cities a difficult political balancing act.
• Devolution of Tax Revenue to States / Working Group of Chief Ministers: In February 2015 the Modi government announced that it would increase the share of federal money that is directly sent back to the states to 42%, up from 32% previously. The government created a sub-group of Chief Ministers to propose amendments to how states carry out central government programs. That group submitted its report in October, proposing that the central government cut down on the number of programs it carries out at the state level, and make some programs optional.

State Reforms in 2015

In October CSIS launched a project to bring more clarity into the political economies of India’s largest and most-developed states by preparing a weekly update on the ten most significant states. Gleaning through the first two months of these weekly updates, we are starting to get concrete information on actions at the state level that will strengthen—or weaken—the business environment.

Proponents of India’s states as the “laboratories for reform” are typically deficient in tangible examples of what states have specifically done to improve their business environment in recent years, apart the well-documented move by the Rajasthan government to relax its labor laws in November 2014 by amending the Industrial Disputes Act, allowing firms to fire 300 employees (up from 100) without requiring government permission. But one example of pro-business policy does not make a national narrative. Several other states did follow suit by passing their own amendments to the Industrial Disputes Act, but information on what states are doing can be difficult to ascertain. Below are some examples of positive and negative move by India’s largest and most developed states in the last quarter of 2015, since we began to track such progress.

Positive Developments

Land:

• Uttar Pradesh, December 2015: UP passed its UP Revenue Code (Amendment) Ordinance 2015 allowing, among other things, Dalits with less than 3.5 acres to sell their land to non-Dalits. Of course, as an ordinance, it will lapse unless it is approved by the state legislative assembly.
• Maharashtra, November: Maharashtra amended its Gunthewari Act, allowing mid-size plots to be divided, and easing the process to sell such plots.
• Andhra Pradesh, December: The Andhra legislature passed a bill extending land leases from the government to private entities from 33 years to 99 years.

Labor:

• Gujarat, December: Gujarat passed a series of labor law reforms making it more difficult for utility workers to go on strike, reducing the time by which employees must seek redress for dismissal, and more.
• Maharashtra, December: Maharashtra passed its Factories Amendment Act, which will allow females to work night shifts (7:00pm to 6:00am).

Governance/ Politics:

• Karnataka, December: The Karnataka state legislature passed a law that further empowers village-level governments (gram sabhas) from administering local funds.
• Delhi, November: The Delhi High Court ruled that the Delhi government is not empowered to undertake a review of the finances of the three private electricity distributors serving Delhi.

Licensing/ Regulation

• Maharashtra, December: Companies located in Maharashtra can now self-certify that they have the correct pollution control equipment in place. It may increase non-compliance, but will also cut down graft by inspectors.
• Andhra Pradesh, December: The Andhra legislature passed a bill to allow the establishment of private universities.

Negative Developments

• Gujarat, December: The Gujarat High Court ordered that development of the Dholera Special Investment Region freeze while a case on the government’s land acquisition for the region is head. Dholera is a very high-profile economic development project, and part of the Delhi-Mumbai Industrial Corridor (DMIC).
• Haryana, December: The Supreme Court upheld a Haryana election law that mandates candidates for local elections (Panchayats) be literate, debt-free, and have a toilet in their home.

Looking Ahead:

In the last year we have seen a deterioration in Parliament’s ability to function, and few signs portend of higher legislative productivity in the year ahead. With losses in the state elections in both Delhi and Bihar, the BJP’s potential timeline for exerting greater control on the upper house of Parliament, which is elected by state legislatures, has lengthened to well beyond the 2019 national election. The year ahead is unlikely to dramatically shift the trajectory for the upper house; of the five states heading to elections in 2016, the BJP is only expected to be a challenger in one, the mid-size state of Assam.

The central government still controls other critical levers that do not require legislation. Examples include amending foreign investment rules, building infrastructure, reducing aggressive and unreasonable tax collections, creating a level playing field with government-owned companies, increasing the transparency of commodity auctions, and more.

Still, with the government’s focus on “cooperative federalism” and “competitive federalism,” and some level of paralysis in Parliament, state reforms are certain to get greater attention in 2016. The DIPP’s proactive work to prepare an “apples to apples” review of the business environment of the states in 2016 gives savvy chief ministers an unprecedented level of information on how they stack up versus their competitors. The horses have definitely been taken to the water. And at least a few are starting to drink.

Richard M. Rossow is a senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies (CSIS) in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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