New Battle Looms In Powerful Indian States As Modi Tightens Grip

(Bloomberg) -- Narendra Modi’s steady conquest of India’s state governments and his drive to unify taxes across the country are fueling a new competition between provincial chief ministers for investment in factories, businesses and jobs that is redrawing the country’s industrial map.

The ruling Bharatiya Janata Party has extended control to a record 18 states, representing roughly 60 percent of India’s gross domestic product. That’s allowing Modi to erode decades of fighting between the central government and provincial leaders, who are responsible for everything from providing industrial land to law and order.

While Modi’s lack of a majority in the upper house of parliament hinders his ability to implement change at the federal level, the state-level victories give him the chance to speed up reforms like land acquisition and labor laws across a large part of the country. And by forcing even non-BJP chief ministers to compete for investment by providing infrastructure and cutting bureaucracy, rather than through tax breaks and corruption, businesses are being encouraged to invest in states that previously had little to offer.

"Over the past few years, we have seen a concerted effort by the central government to drive competitive federalism among states," said Abhishek Gupta, Mumbai-based India analyst with Bloomberg Economics. "Irrespective of political affiliation, we should see state governments competing against each other for business investment."

Modi is fueling the new competition by sending state governments a higher share of federal tax revenue. If his strategy works, and more of the country sees an economic boost, it could cement the BJP’s position in power and set up Modi for re-election in 2019.

Rajasthan Reforms

Since the BJP took power in poor, landlocked Rajasthan in 2013, the state government has tried to promote industrial growth by reforming labor laws, land purchasing rules and power distribution.

"Rajasthan is almost always among the leaders in terms of the highest number of positive regulatory changes," said Richard Rossow at the Center for Strategic and International Studies in Washington, D.C. "We have seen several BJP states in addition to Rajasthan tend to be among the leaders in enacting reforms."

The BJP administration has purchased land for factories directly from farmers to set up dedicated industrial areas, removing one of the traditional bugbears of trying to build a factory in the country. Land negotiations have frequently become bogged down in talks with conflicting groups, such as farmers and local officials, giving rise to corruption and legal disputes that could hold a project up for years.

One zone in Rajasthan, near the city of Neemrana was set up just for Japanese manufacturers, and now hosts Toyota Motor Corp. and Daikin Industries Ltd.

"They are friendly to industry," said Ram Narain Singh at his auto parts factory in Bhiwadi, Rajasthan.

The BJP-ruled state of Madhya Pradesh is now emulating Rajasthan’s labor law reforms, Capital Economics analyst Shilan Shah said in a Sept. 13 note.

Political Consolidation

The BJP has spread across India at a remarkable rate. In March, it came to power in Uttar Pradesh, India’s most populous state with 200 million people, as well as in the smaller states of Goa and Manipur. In July, the BJP helped form the government in Bihar, a state of 100 million, after a governing coalition collapsed. Polls suggest the BJP will retain power in Gujarat in elections in December and could wrest control of mountainous Himachal Pradesh from the opposition Congress party.

Rajasthan industry minister Rajpal Singh Shekhawat said economic growth gets a boost when both the central and state governments are the same party, because policy cooperation is more likely.

"We believe that poverty cannot be alleviated by state investment alone,” Shekhawat said in his Jaipur office. “Poverty can only be eliminated by an accelerated pace of growth."

Despite a slump in India’s economic growth rate, partly thanks to the roll out of the goods and services tax and a shock move last November to demonetize much of the country’s currency, Modi remains popular among voters. A survey in May found he was the preferred prime minister for 44 percent of respondents and the BJP retained the level of support that gave it a sweeping victory in 2014.

Still, the easier political gains at a provincial level may be coming to an end for the BJP.

‘Difficult States’

"What are left are the more difficult states -- West Bengal, Kerala, Tamil Nadu -- where our presence has been negligible at best," said Yashwant Sinha, a senior party leader who was finance minister in a previous BJP government.

BJP or not, with states still wielding so much power, investors suggest the quality of the local chief minister is a big factor in a state’s performance.

In Uttar Pradesh, the ruling party appointed Hindu monk Yogi Adityanath as chief minister. He immediately channeled Hindu cow worship into a campaign against "illegal" slaughterhouses. Soon after, executives at legitimate meat export businesses complained of official harassment and a steep drop in business. Adityanath also came in for criticism after dozens of children reportedly died at a government-run hospital that wasn’t paying suppliers.

Siddharth Nath Singh, Uttar Pradesh’s health minister, defended the chief minister’s actions and said the government acted firmly on the health crisis.

In Haryana, another BJP-ruled state, the party appointed newly-elected legislator Manohar Lal Khattar to the top job in 2014. He has come under fire for the state’s handling of a series of violent riots in August related to the arrest of a religious leader, including one that killed more than 30 people The violence mirrored a week of angry protests in 2016 that prompted Maruti Suzuki India Ltd. to temporarily halt production at two factories. Khattar has defended the police response during the unrest, while Congress party members called for Khattar’s resignation.

Neeraj Daftuar, who works in Khattar’s office, said the protests have roots predating Khattar’s appointment and that "it would be unfair if we were to judge him just on the law and order situation."

"The recent law and order crisis in Haryana and the health tragedy in UP have complex causes, but the inability of the state to marshal an effective response cuts against Modi’s pledge to bring a dose of good governance to India’s states,” said Milan Vaishnav, a senior fellow at the Carnegie Endowment for International Peace. "This raises concerns not only for wary investors, but also for residents of the state."

The BJP has also advocated populist policies such as waiving farmer loans that could widen state fiscal deficits.

"Whether it’s a BJP state or a Congress state or a whatever state, it’s leadership that delivers results," said Salil Singhal, an Indian businessman who works in both Rajasthan and Gujarat. "There is now a competition among the states to say, ‘Things are better here than elsewhere, so come and invest in my state.’"