Competition between states to attract investment will boost Indias economy – Moneycontrol

The debates surrounding theVedanta-Foxconn dealhave reignited the discussion around industrial development, the strategy of the state governments, and the role of the Centre. Since Independence, India has been accustomed to the State-directed developmental model, where the government decides the flow of investment through five-year plans. The use of license-permit raj, and planning decisions defying market logic led to severe misallocation of resources over the years. The resultant weakening of the economy, and inefficiency ultimately led to the Balance of Payment crisis which forced the economic reforms of 1991.

One of the main thrusts of the economic reforms was to move away from direct planning to indicative planning, and allow for greater play of market forces in the economy. The states were now free to attract private investments by offering incentives, and other support to the industry. With the scrapping of the planning commission by the Narendra Modi-led National Democratic Alliance (NDA) government, India buried a relic of the Soviet-inspired past that hindered economic growth with its market-distorting interventions.

The last decade has seen the rise of co-operative federalism in the realms of taxation reform, dispute resolution, and health and welfare. But it has also witnessed the emergence of competitive federalism regarding industrialization, and attracting private investment. With no central planning, either direct or indicative, to count upon, states increasingly realise that they must play a proactive role in encouraging economic development; and that it requires attracting more and more private investment in various sectors like manufacturing, tourism, financial services etc.

The state governments are compelled to improve their law and order, and administration to make frontline bureaucracy business-friendly, and reform rules and regulations to make legal framework compatible with economic and technological changes. They are also required to make their states an attractive destination for private investment by providing several incentives and concessions like land, subsidy etc., with the hope that resultant investment will raise the tax collection in future to a sufficient level.

Competition between states has been a driving factor behind administrative and process reforms in the states. Such healthy competition between states to provide the best services and facilities to attract investment in manufacturing capacity can only be a positive sign for the economy. It will create more jobs in the country, and generate value and economic development.

In competitive federalism, the role of the Centre also becomes very important. The Centre acts as the facilitator and impartial referee between states. It sets up the rules of the game by framing appropriate economic policies, granting greater autonomy to states, and acting as a mediator between states and multinational companies wherever required. And the current government has been delicately balancing between co-operative federalism and competitive federalism.

The approach adopted by the NITI Aayog to come out with sector-specific indices is a good example of the Centre promoting healthy competition among the states. The Sustainable Development Goals Index, the India Innovation Index, the Export Preparedness Index, ranking on the performance of Aspiration Districts, etc., have propelled states to strive for better performance. Be it Business Reform Action Plan categorising states from best to least performer or finance commission recommendations pushing decentralisation and greater autonomy for states, there has been a general push towards making states proactive to attain developmental goals.

Such competition is much needed if India was to achieve its stated target of achieving a $5 trillion GDP in the coming years. Competition can unlock local potential, and make the state leadership an active stakeholder in economic development by aligning their incentives with economic growth. Higher economic growth is the pre-condition for economic development. It can nudge the states from the destructive policies of freebies, and instead put them on the path of capacity building and long-term investment to achieve fundamental transformation in economy and polity.

The Vedanta-Foxconn deal also indicates that this competition cannot be just about offering higher subsidies, or land. The stable and reliable pro-business political culture, efficient general administration, presence of local industrial cluster, better infrastructure, responsive bureaucracy, and enterprising local representatives are all factors in the mega-investment decisions by the companies.

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Competition between states to attract investment will boost Indias economy - Moneycontrol