States need to reform fast to speed up projects, growth

With GDP growth having halved from over 9% in 2010-11 to just 4.5% today, many observers are demanding more reforms from New Delhi. Finance minister Palaniappan Chidambaram replies that a new wave of reforms is indeed being implemented. The central Cabinet has cleared more than Rs 3 lakh crore worth of projects.

Yet, industrial growth remains below 2%, and the index of industrial production has actually fallen in seven of the last 12 months. The Purchasing Managers’ Index for services has, for the first time, fallen four months in a row.

Why is so much effort producing so little result? One answer is that the new efforts are not enough. Second, a bureaucracy fearful of CBI investigations refuses to move files. But a third reason is, surely, that reforms in New Delhi are not enough, and need supplementation at the state level.

Gone are the days when an industrial licence was the key hurdle. Today, not just New Delhi but state governments too have, in their worthy search for inclusiveness, created voluminous laws and regulations regarding the environment, forests, tribal areas and land acquisition. Even if New Delhi clears hundreds of projects, state-level clearance remains. That is one reason why mass clearances by New Delhi have not yielded an investment boom.

Even central regulations are implemented by officials at the district level. The states themselves have to approve many issues relating to forests, tribal areas, the environment, mining rights, pollution and land acquisition. In the old days, bribes could fetch these clearances. But in today’s anti-corruption mood, that is no longer possible. So, hundreds of projects remain in limbo.

Static States

Over a hundred coal projects have been cleared by the central environment ministry but are simply not taking off. Kumar Mangalam Birla is accused of getting a bonanza through a coal-block allotment in 2005, yet that project has not been completed even today, eight years later.

The states need to rethink their approach. They have limited technical and bureaucratic capacity, and cannot easily handle even public order or basic services. This overburdened bureaucracy simply cannot handle the hundreds of new rules and regulations.

The states must simplify regulations so that mines can be opened within three years of applying (against 12 years for coal mines today). A better trade-off is required between the needs of production and the needs of other issues like the environment and land acquisition. The latest Land Acquisition Bill could delay projects inordinately.

The silver lining is a clause enabling state governments to lease rather than acquire land. The leasing option can cut delays. Instead of losing their land and status, farmers will become landlords of the Tatas and Birlas, improving their status. This will also reduce wild land speculation, and is the sort of reform states must push.

The Doing Business 2013 report of the World Bank ranks India at only 134th of 189 countries in ease of doing business. India comes only 179th in ease of starting a business, 182nd in ease of getting a construction permit, 111th in getting an electric connection, 158th in paying taxes, 92nd in registering property and 186th in enforcing contracts. No wonder many Indian businessmen would rather invest abroad.

Most hurdles to doing business require state-level reforms, not just the central level. State governments are important actors in permission to start a business, notably in the conversion of agricultural into industrial land (a terribly bribe-ridden area).

Shopkeepers say permission for a new shop is nightmarishly tough. Not Constructive Construction permits are issued entirely at the state or city level. India is at 179th position in this respect, because construction permits are a major avenue for kickbacks. That’s why black money and the mafia are prominent in the construction business.

Registering property is another racket at the state and city levels. Gujarat is supposedly the least corrupt state, yet businessmen claim that one Collector collects a fee on every square yard registered. There is no automatic way of registering (such as online registration, used in many countries).

Needlessly Taxing

Businessmen pay both central and state taxes, several times a year. They pay corporate tax, octroi, municipal taxes, sales tax, customs duty, entry tax and a host of other minor imposts, each entailing hours of paperwork. It is ridiculous that India is 158th in this respect despite having some of the best software companies in the world, which can surely devise simplified, quick tax payments. India comes 186th in enforcement of contract, because of huge legal delays.

The moribund police-judicial system is run almost entirely at the state level — the central level is tiny. Faster justice requires massive reforms at the state level.

I could go on and on. Analysts need to stop focusing on just macroeconomic or central government reforms. The most urgent reforms in many fields are needed at the state level.

One thought on “States need to reform fast to speed up projects, growth

  • 2013.Dec.13 at 14:31
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    The article is well appreciated which conveys the sorry state of Indian Economy. The reasons are also highlighted well. The blames are squarely on the Governments : Center & State and their rules & regulations. However in my opinion, these elements are not the ace culprits, these are merely Govts and a bundle of papers, they cannot act themselves. The real culprits are human beings: the citizens of India who run the Govts directly or indirectly and they are supposed to execute the rules and regulations smoothly. They are the custodians.
    This kind of situations will prevail as long as there is injustice, whether it is in India or in any other nation. Therefore, we the human beings: each one should practice Humanity and Dharma (The Justice). Lets give it a try. God helps who help themselves. Aamin!!!

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