Indian State Reforms: In Search Of New Commitments

With India’s national elections behind us, we have seen an increased level of important state-level business reforms in July-September 2019. Included among these reforms are vital changes to land and labour policies in multiple states, as well as progress in enacting new industrial policies. But the area of most policy action in recent months relates to modernising energy infrastructure, with developments in the electric vehicle and solar power policies in particular. However, state elections in Haryana and Maharashtra did slow the pace of reforms in these two dynamic states. Further, noticeably absent was any new push by the Modi government to encourage cooperative/competitive federalism.

In this quarter, the top two states are Gujarat and Uttar Pradesh.

Gujarat led the way with three positive reforms. Uttar Pradesh comes second, with two positive reforms. Eight other states also had positive reforms in this period. Four states launched policies harmful to business, including two damaging policies from Delhi.

Beyond business reforms, other state-level issues have taken most of the public attention in the past few months. Notably, the central government’s abrogation of Jammu & Kashmir’s special constitutional status, as well as the newly-inducted Bharatiya Janata Party government in the state of Karnataka, led by Chief Minister BS Yediyurappa. With this change, the BJP is now in charge of 13 states, and the minor coalition partner in another state - Bihar. Also, of note, the new Andhra Pradesh government, led by the YSR Congress chief minister YS Jaganmohan Reddy, is frightening the business community by threatening to revoke every contract signed by the previous government.

State elections continue to impact state-level reforms as seen historically. Ahead of their elections, Haryana and Maharashtra were notably absent in enacting new business reforms. With the results announced on October 24, we will see if these states move ahead with planned reforms early in their new tenures. Despite falling short of the required number of seats, BJP is set to maintain its dominance in Maharashtra and Haryana state legislatures, although the coalitions could again backtrack consensus on policies, sidetracking reforms. Jharkhand will have its state assembly election by the end of 2019, wrapping up the slate of state elections this year.

While more difficult to definitively quantify than studying specific business reforms, political stability is often cited by investors as another key determinant of investment location. In the most recent version of states’ business environments, the Business Reform Action Plan, Haryana, Jharkhand, and Maharashtra ranked third, fourth, and thirteenth, respectively.

Center-State Balance Of Power

Despite meaningful progress early in its first term, the Modi government has become much less active in encouraging state-level reforms through cooperative/competitive federalism.

The central government has not drafted a model law in years and has not issued a states’ business environment ranking since 2017.

States control significant portions of India’s business regulatory environment; a new commitment to pressing for state reforms would be welcomed. And the belief that BJP states are more likely to enact Modi’s economic mandates is only partly true, as I pointed out in an earlier BloombergQuint column ‘Have Modi’s Chief Ministers Been Executing His Reforms?’

The Fifteenth Finance Commission is to conclude its work in November 2019. Led by NK Singh, the Commission continues to engage state leaders, economists, and other interest groups that will inform its forthcoming report on devolution of central government taxes to the states and related matters.

Rumors are swirling that the Finance Commission may roll back the enhanced level of center-state fiscal transfers initiated five years back.

This could give states’ the much-needed impetus to become proactive in charting the reform agenda. Especially since states may have to raise their own funds without relying on central government doles.

The Ministry of Power has become increasingly active in trying to press state governments to adhere to contractual terms with electric power producers. For instance, the central government is attempting to force states to open letters of credit for power purchase agreements, and articulating the process for a private power producer to begin selling electric power on the market if it defaults due to non-payment of its state distribution company.

Prime Minister Narendra Modi also laid out an ambitious program, the Jal Jeevan Mission, to deliver clean tap water to every home in the nation by 2024. This will involve a great deal of center-state coordination, as with other ‘missions’ launched during the Modi government’s first term.

Specific Business Reforms Enacted By States: July-September 2019

Land

Himachal Pradesh: Launches online portal to expedite clearance of cases for land acquisition under the HP Tenancy and Land Reforms Act, 1972.
Punjab: Relaxes rules around large industrial parks; half of land can be used for residential and commercial development.
Uttar Pradesh: Allows farmers to lease land for solar power and agriculture projects.

Labour

Tripura: Passes amendments to the Essential Services Maintenance Act, 1968, to end strikes in a range of important industries and services such as healthcare.

Business Regulations

Assam: Cabinet approves a new ‘Industrial and Investment Policy of Assam, 2019’ offering a range of incentives for new investments including power subsidies, captive infrastructure assistance, and a range of fee exemptions.

Gujarat: Allows 32 private jetties to handle third-party cargo.

Tamil Nadu: Releases ‘Tamil Nadu Electric Vehicle Policy 2019’, an expansive new policy to encourage production and adoption of electric vehicles.

Uttar Pradesh: Releases ‘Electric Vehicle Manufacturing & Mobility Policy 2019’ to provide a range of incentives to firms to produce and sell electric vehicles in the state.

Power/Water

Chhattisgarh: New distributed solar regulation allows leasing of land for third party solar power development.
Gujarat: Amends Solar Policy, 2015, to allow small and medium firms to draw more power from captive solar projects.
Gujarat: Eases restrictions on its rooftop solar policy to expedite
Rajasthan: Launches ‘Solar Energy Policy 2019’ featuring a range of incentives to expand solar power capacity.

Also Read: Indian State Reforms: Cow Tax To Water Subsidy

Business-Negative Regulations

Delhi: Expands electric power subsidies (Rs 200/month) to rental properties.
Delhi: A new regulation forces bars and restaurants to throw out liquor if it has not been consumed within 5 to 8 days of purchase.
Manipur: Passes a law making it more difficult for non-residents to settle in the state.
Mizoram: Passes a law making it more difficult for non-residents to settle in the state.
Uttarakhand: High Court passes an order where women cannot take maternity leave after their second child.

Richard Rossow is the Wadhwani Chair in U.S. India Policy Studies at The Center for Strategic and International Studies in Washington D.C.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.