Taking states on board

The story of the Modi government’s big economic initiatives so far during its second tenure presents an interesting contrast. On the one hand, the government has shown an eagerness to address many of the long-pending troubling economic policy issues, but on the other, its attempts at introducing the more fundamental changes in economic policies have failed to make much headway. Indeed, these decisions could be placed under two baskets. One pertains to decisions that were aimed at helping India Inc and the other is about policy changes requiring participation and involvement of the .....
The story of the Modi government’s big economic initiatives so far during its second tenure presents an interesting contrast. On the one hand, the government has shown an eagerness to address many of the long-pending troubling economic policy issues, but on the other, its attempts at introducing the more fundamental changes in economic policies have failed to make much headway.

Indeed, these decisions could be placed under two baskets. One pertains to decisions that were aimed at helping India Inc and the other is about policy changes requiring participation and involvement of the state governments. While the relative ease with which the Modi government took the first set of decisions has been remarkable, the failure in enforcing the second set of policy changes has been troubling.

A reduction in the corporation tax rates, linked to phasing out of exemptions, was announced early in its second tenure. India Inc was understandably pleased. The Union Budget for 2021-22 announced the policy on privatisation and monetisation of government assets. It’s true that the pace of privatisation has been slow. No sell-off has taken place so far and only the legislative bill on privatisation of general insurance companies has been passed, although along with some ministerial caveats. But the government has been quick with the rollout of its monetisation plan, aimed at leasing government-owned assets in a wide range of infrastructure sectors and earning revenues for the central exchequer.

Similarly, the ghost of the retrospective taxation law of 2012 has been banished with a legislative change and the start of negotiations with the aggrieved foreign companies to resolve the disputes with them. A relief package for the beleaguered telecom sector has been announced, although it is not clear how effective it would be in resolving the financial stress of the companies.

In contrast, the government’s move to reform laws pertaining to agriculture and labour has made little progress. Amidst Covid-19 and without much debate in Parliament, the government got three laws on agriculture passed in 2020. These laws were to allow farmers to sell their produce to anyone of their choice, relax the stringent norms on storage of crops and facilitate contract farming. But the operation of all the three laws has been suspended by the Supreme Court, after the ongoing farmers’ agitation in many north Indian states gained momentum.

The four Labour Codes that were to simplify and streamline the labour laws have been passed by Parliament, but the rules are yet to be framed. It now appears that the four Labour Codes will become effective only from next year, even though Parliament had passed them in 2020. The much-needed reforms in the goods and services tax (GST) regime have been slow. There is no timeline yet for the rationalisation of the rates and the states are grumbling over protecting their revenue growth through the continuation of the compensation package. The ambitious reforms agenda for the cooperative sector, which was hinted at through the formation of a separate ministry for cooperation in July, is facing problems as the courts have restricted the scope of the Centre’s policy jurisdiction only to multi-state cooperatives.

It is instructive that the Modi government is not hesitant about rolling out measures or incentives to help the Indian private sector. Reducing taxes for India Inc, privatising state-owned enterprises, providing financial incentives to the private sector for increasing their investments in certain sectors under the Production Linked Incentive (PLI) scheme, raising tariffs for select goods, ending the retrospective provisions of the so-called Vodafone tax or forgoing government revenue to help the telecom sector do not face any resistance either from within the Bharatiya Janata Party (BJP) and the Sangh Parivar or the government.

Illustration: Binay Sinha
If the Modi government faces any resistance in implementing its economic policies, it is only in areas where the states are required to play a role. The BJP along with its political allies rules in almost 18 states in the country. But if policies on agriculture, labour, GST and cooperative laws will have to be changed, the support and concurrence of all the states are necessary for their smooth and effective implementation. This realisation should have been obvious for a government led by a former chief minister. In any case, nobody should underestimate the power of the states in India, thanks to the provisions in the Indian Constitution. But that realisation is yet to dawn on the current leadership at the Centre and this has serious implications not just for governance but also for growth.

Consider the following. It is widely acknowledged that economic growth in the medium-term can be sustained through a boost to government investment, since there is little hope of any early revival in private consumption. But the problem is that most analysts track the Centre’s capital expenditure plan to judge if investments are rising. In the process, they ignore how the states are faring on this front. Thus, a growth rate of 15 per cent in the Centre’s capital expenditure in the first four months of the current financial year becomes a cause for concern, as this pace is well below the projected annual growth rate of 26 per cent.

But nobody seems to be tracking the states’ capital expenditure plan, even though the states’ total budget size is almost 30 per cent higher than the total expenditure of the Union budget. There are, of course, many problems in tracking the expenditure pattern of the states. One, states do not follow a standard norm for classifying their revenue and expenditure streams, making comparisons difficult. Two, the states’ budget data are released after a lag of many months, while the Centre’s budget data are available just after one month. The Reserve Bank of India’s annual publication on state budgets is released almost a year late.  

Obviously, there is an urgent need for standardising the classification of budget data of states and synchronising them with the way the Centre classifies such numbers. There is also an urgent need for reviving institutions that could help the Centre and the states engage in a healthy debate and discussion over economic policy issues, instead of allowing important policy reforms getting embroiled in political differences, leading to agitation and delays in the implementation of policy changes.

Since its formation in 1990, the Inter-State Council has held only 11 meetings in the last 30 years. The last time the Council met was in 2016. It was set up to create an institutional framework to promote cooperative federalism and resolve Centre-state policy issues. Given the many policy areas where the Centre and the states have not been seeing eye to eye in the last few years, it is time the Modi government soon convened the 12th meeting of Inter-State Council.


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