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The “United States” of India?
India Strategy India Strategy (Politics)(Politics)
Nikhil Vora / Nikhil SalviIDFC Securities Ltd(Dir) +91-22-6622 2567(M) +91 –98211 32471Email: [email protected]
March 2012
Centre‘&’State OR Centre‘vs’State
India Strategy (Politics)India Strategy (Politics)
“In the happiness of his subjects lies the King’s happiness;
In their welfare his welfare,
He shall not consider as good, only that which pleases him,
but treat as beneficial to him, whatever pleases his subjects”
--- Chanakya, Arthashastra
…Are today’s ‘Kings’ (read politicians) rediscovering this maxim….at least at the state level?
Today’s ‘Kings’ are increasingly being reminded of this maxim, as evinced from state level assembly elections in past two years, in which regional parties that promised better governance were awarded with majority mandate (irrespective of incumbency factor!). With the Central coalition in power faltering in spite of clear mandate in last general elections, and regional parties reading recent political winds correctly, we hazard a guess that the next general elections may see a fragmented Parliament with coalition government of smaller regional parties having little in common. Does this entail economic growth taking a backseat as the future Parliament labors to arrive at consensus over reforms?
We think otherwise, not because we believe coalition parties will put reforms over politics (unlikely, as history shows us), but because state governments are increasingly using their constitutionally allocated powers to drive economic progress demanded by a ‘younger’ electorate. Post liberalization, the centre has limited to policy making, while investment function is increasingly taken up by private sector. Private investments gravitate towards states with better infrastructure and policies conducive for business, thereby fuelling competition between states to attract capital and investments that accelerate economic activity. Looking ahead, we believe this competition will only intensify and with increasing decentralization of powers, tomorrow’s India, although in letter will still be a ‘Union of States’ as envisaged in the Constitution, but in spirit will more resemble ‘The United States of India’!.
This reminds me of something that VS Naipaul, the Nobel winning author once commented, “Bihar…a place where civilization ends…”
Clearly, we don’t agree…!!!
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‘‘United States of IndiaUnited States of India’’? Better or Worse?? Better or Worse?
The First Article of Constitution describes India as a ‘Union of States’, although the nature of constitution is federal in structure
“…what is important is that the use of the word 'Union' is deliberate…Though the country and the people may be divided into different States for convenience of
administration, the country is one integral whole, its people a single people living under a single imperium derived from a single source”
– Dr B R Ambedkar , Chairman, Drafting Committee of the Indian Constitution
“It is the Union of India which is the basis of our nationality…States are but limbs of the Union, and while we recognize that the limbs must be healthy and strong…it is the strength and stability of the Union and its capacity to develop and evolve that should be governing consideration of all
changes in the country“
- The State Reorganisation Committee
Questions we seek to answerQuestions we seek to answer……
But how close is the reality of Centre-State relations to that envisaged?
And what does that mean for economic growth of the country?
We revisit this idea in the backdrop of increasing strain in Centre-State relations and results of recent assembly elections
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What do recent Assembly Elections indicate?What do recent Assembly Elections indicate?
West Bengal
Tamil Nadu
Uttar Pradesh
Punjab
Bihar
Kerala
India
Regional parties winning convincingly in recent assembly elections…. ..while National parties relegated to sidelines
Regional parties wining with majority votes…at expense of National parties!
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What do recent Assembly Elections indicate? What do recent Assembly Elections indicate? ““MMOORREE””
Onus towards better governance (voting even to incumbent)!
Move away from narrow caste / religion politics?
Economic aspiration demanding better politics/governance?
Regional parties gaining at expense of National parties!
What do the recent assembly elections
portend for 2014?
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Are regional parties crowding out National parties?Are regional parties crowding out National parties?
2014 General Elections?India
2009 General Elections
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India
9
DDééjjàà vu 1996vu 1996--99?99?
…plus ça change, plus c'est la même chose…(the more things change, the more they stay the same)
- Jean-Baptiste Alphonse Karr, in the Les Guêpes, January 1849
1010
DDééjjàà vu 1996vu 1996--99?99?
Is period of stable central government set for change after 3 consecutive stable five-year terms?
Jun-91 May-96 May-96 Mar-97 Mar-98 Oct-99 May-04 May-09
5years 13days 13mths 10mths 11mths 5years 5years 5years
Lok sabha 10th 11th 11th 11th 12th 13th 14th 15th
No of parties in coalition
1416
13 13
910
May-14
?
?
0%
25%
50%
75%
100%
1980 1984 1989 1991 1996 1998 1999 2004 2009 … 2014
Seats won - National Parties Seats won - Regional Parties
1111
National parties ceding ground to regional parties?National parties ceding ground to regional parties?
?
1212
What can fragmented mandate in 2014 can mean to reforms?What can fragmented mandate in 2014 can mean to reforms?
Can coalition governments (15+ parties) provide political stability?Can a fractured Parliament arrive at a consensus on reforms?
Reforms Parliament Act/LawCabinet Key measures
FDI in single brand retail
Land acquisition bill
Mining bill
Goods & services tax
Direct Tax code
Jan Lokpal bill
Not requiredFDI of 100% in single brand retail has come into effect; For FDI > 51%, mandatory sourcing of at least 30% from the domestic small and cottage industries!
Companies to pay at least 2x market price in urban and 6x in rural areas; Companies shall provide for rehabilitation and resettlement
Tax of 26% of profit of coal miners and 100% royalty for others;Also, central and state cess to be levied on mining companies
Move towards a common indirect tax regime across the country; According to CII, GST could add 1-1.5% to GDP growth
Move towards a simplified direct tax structure and lower tax rates; To improve tax collections due to lower evasions
It would enable filing of complaints against politicians and bureaucrats without prior government approval
Not required
FDI in aviation Not required FDI of 49% in aviation is on the cards! Not required
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……BUT, nothing happening even now with stable BUT, nothing happening even now with stable govtgovt!!
Policy inaction - Key bills stalled
PFRDA Bill
Food security
Bill
GST Bill
Land
acquisition Bill
Mines &
Minerals Bill
1414
……BUT, nothing happening even now with stable BUT, nothing happening even now with stable govtgovt!!
Government grappling with corruption and governance issues Key economic decisions delayed
Inter ministerial
friction
Ministry of Environment and Forests
Ministry of CoalMinistry of Power
New Power projects orders down 25% yoy in FY12!
Corporate India sums it up bestCorporate India sums it up best……
“There’s a sense that the bureaucracy has stopped taking decisions as they fear that action might be taken against them
in future even for honest mistakes.”
- Sunil Bharti Mittal
Is ‘Intent to govern’ more important than majority in legislative bodies?
Invocation of President’s rule in case of political instability -article 356 invoked 65 times since Independence!
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Is policy inaction masking underlying CentreIs policy inaction masking underlying Centre--State friction?State friction?
Key areas of friction
No of times President's Rule imposed on states
Year 1951-60 1961-70 1971-80 1981-90 1991-00 2001-10
No 4 10 18 12 9 11
More autonomy demanded for States • Raising resources from mineral wealth
Higher share in taxes, cesses and surcharges • In the period, FY09-FY11, there was net outflow from States to Centre
(State’s share of taxes minus Central grants)
Uneven distribution of Central grants
• Bias towards states ruled by same party as the Centre
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Policy inaction masking underlying CentrePolicy inaction masking underlying Centre--State frictionState friction……
Recent skirmishes
Goods and Services Tax Bill
• Prolonged process of getting State governments to arrive at consensus
• First announced Union Budget 2007-08
• Initial date of implementation – April 2010
• Postponed multiple times to bring all states on board
• When will it be implemented - ?
National Counter Terrorism Centre
• State Governments alleging Centre infringing on Constitutional Powers and Federal structure
• National Counter Terrorism Centre being opposed by Gujarat, Chhattisgarh, Bihar – all three ruled by parties other than one at Centre!
• Key opposition on – infringement of rights of state security forces
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Economic OutlookEconomic Outlook
So Is there hope for
the economy??
1919
Changes in Indian economy post Changes in Indian economy post liberalisationliberalisation……
• Economy no longer solely driven by Central policy
• States competing against each other for economic development
• Competition between States for attracting
Capital
Investments
Creation of employment opportunities
Increased economic activities
• Private sector investment gravitates towards states offering better infrastructure and governance
Case Study: Tata Case Study: Tata NanoNano production plant shiftproduction plant shift
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Tata Motors started work on construction Singur plant in West Bengal for Nano
Dec-06
Sep-08
Oct-08
Jun-10
Within just one month, Tata Motors finalized location of new production plant at Sanand, Gujarat
Singur plant started manufacturing, but immediately shutdown due to law and order issues
Tata Motors decided to shift plant location to another state; Four prominent states competed to host the new plant –
Gujarat, Maharashtra, Karnataka, AP
New plant constructed in record time of 14 months and inaugurated!
30 months
1 month
14 months
West Bengal’s loss is Gujarat’s gain – Rs20bn investment; 10,000 jobs!
2121
Is state level economic development being decoupled from Central policy thrust ???
What drives economic growth todayWhat drives economic growth today……and tomorrow?and tomorrow?
State performance
vsCentre
• Per capita net State Domestic product (at constant prices)
- In 20 out of 28 states, Average for FY09-FY11 higher than Net National Product (NNP)
Out of these 20 states, 11states were ruled by parties/coalitions other than the one in Centre!
• GUJARAT: Direct tax collection growth in Gujarat at 17%yoy for 2010-11 was highest in the country – Gujarat ruled by BJP for past 2 terms
• TAMIL NADU: #1 urbanised state among large states (48% of population as per 2011 Census) – TN ruled by regional parties
• BIHAR: The share of services to the state GDP has increased from 50.5 per cent to 61.6 per cent in the past 10 years
2222
“In the happiness of his subjects lies the King’s happiness; In their welfare his welfare,
He shall not consider as good, only that which pleases him,but treat as beneficial to him, whatever pleases his subjects”
What drives economic growth today..&.. tomorrow?What drives economic growth today..&.. tomorrow?
Are today’s ‘Kings’ (politicians) rediscovering this maxim….at least at the state level?
“The root of wealth is economic activity and lack of it brings material distress. A king can achieve the desired objectives and abundance of riches by undertaking productive economic activity, in the absence of which, both current prosperity and
future growth are in danger of destruction. ”
– Chanakya, Arthashastra
– Chanakya, Arthashastra
Gujarat Maritime Board: State Initiative successGujarat Maritime Board: State Initiative success
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Other states following Gujarat model – Maharashtra (Dighi), Orissa (Dhamra, Gopalpur), AP (Krishnapatnam), TN (Karaikal)…
Port development is a Concurrent subject
Both Centre and State govt can set up ports
Port development in Gujarat far ahead of others• Gujarat government has actively promoted private port
development
• 19 operational ports (under state purview)
• State ports in Gujarat handle 74% of traffic handled by all non-major ports in India (ports out of Centre’s purview)
Bihar policy decisions: State Initiative successBihar policy decisions: State Initiative success
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The UN gave $30,000 award to Bihar for its simplified taxation model!
Once upon a time ….
“Bihar…a place where civilization ends…” - V S Naipaul, Nobel-prize winning author
Today….• Only state with 50% seats in municipal bodies reserved for women
• Fast track courts – fastest judgment delivered in 13 days
• 5,000 ex-soldiers recruited into ‘special auxilliary force’ to check crime
• New and simplified ‘Patna model of taxation’
• Property taxes based on local area and use of property
• Other states following similar model
• 50% decline in girl students’ dropout rate – after the state government spent Rs2bn providing bicycles to girl students reaching 9th standard
• Innovative means of tackling corruption – attach properties of corrupt bureaucrats
Metro Rail Projects: Another State InitiativeMetro Rail Projects: Another State Initiative
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•Success of Delhi Metro spurring Metro projects across major cities of India
• Mumbai Metro – Phase-1 under construction; Phase-2 awarded
• Bangalore Metro – under construction
• Chennai Metro – under construction
•Kolkata Metro expansion – under construction
•Jaipur Metro – Bids invited
•Kochi Metro – Under planning phase
•Pune Metro – Feasibility Studies underway
(12)
-
12
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FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12
FII Net investment ($bn) FDI Investment ($bn)
Does FY12 foretell future trend for India? FDI > FII? Does FY12 foretell future trend for India? FDI > FII?
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In FY12 (worst year of current government in terms of governance), FDI inflows surpassed FII !Going forward, FDI into states may remain steady, FII investments may become volatile
While Centre will implement policies, states will drive investments…
Crystal gazingCrystal gazing…….Weak Centre.Weak Centre…….Stronger states?.Stronger states?
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Is local economic growth giving State governments leverage over Centre?
…increasingly ‘younger’ electorate forcing governments to focus on economic growth …
…reality increasingly accepted by regional parties….
Major policy decisions still in Centre’s purview…
…and enforced by recent election results…
…but increasing autonomy to be given to States…
Competition for showcasing economic growth to voters a reality…
E.g. FDI in retail, Land Bill, Environmental policies
Development focused parties re-elected in Gujarat (BJP), Bihar (JD)
Difficulty in administering geographically large and populous country like India
Election manifestos of winning parties focusing on economic growth rather than freebies
Political Political power power shifting shifting to to statesstates??
Crystal gazingCrystal gazing…….But what can go wrong?.But what can go wrong?
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Will State Governments pick up the gauntlet of economic development within their scope?
State Governments squandering away mandate for economic development….
.…by pandering to populist (read money-losing) policies; E.g. no increase in power tariffs in Tamil Nadu for past five years, delays in power tariff increase in WB
…State fiscal position deteriorating due to political largess'…
Crystal gazing...What will CentreCrystal gazing...What will Centre--State relation be like?State relation be like?
29
How will the Centre-State relationship appear in the future of India?
Even if one State Government falters on economic development, others waiting to capture the opportunity…case in point – Tata Nano production shift to Gujarat
Stronger economic growth will embolden states to oppose Central dictats…..case in point – NCTC Bill
…Increasing decentralisation of economic policy making
…States to be the ‘ground zero’ for both politics and economics, shifting focus away from Centre…
In letter, In letter, ““Union of StatesUnion of States””, but in spirit , but in spirit ““United States of IndiaUnited States of India””??
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