The United States of India Strategy Politics Mar12

8/11/2019 The United States of India Strategy Politics Mar12

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The Uni t ed St ates of I ndi a

India StrategyIndia Strategy

(Politics)(Politics)

Nikhil Vora / Nikhil Salvi

IDFC Securities Ltd(Dir) +91-22-6622 2567(M) +91 98211 32471Email: [email protected]

March 2012

Centre& StateORCentrevsState


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India Strategy (Politics)India Strategy (Politics)

I n the happi ness of hi s subj ects l i es t he K i ngs happi ness;I n t hei r w el fare his w el fare,

He shall not consi der as good, only t hat w hi ch pl eases him,

but t reat as benefi cial t o him, what ever pleases hi s subjects

--- Chanakya, Arthashastra

Are t odays Ki ngs (read poli t i ci ans) rediscoveri ng t his maxim.at l east at t he st at e l evel ?

Todays Kingsare 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 havinglittle 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 betweenstates to attract capital and investments that accelerate economic activity. Looking ahead, we believe this competition will only intensify and

with increasing decentralization of powers, tomorrows 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, Bihara place where civilization ends

Clearly, we dont 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 ofconstitution is federal in structure

w hat i s import ant i s t hat t he use of t he w ord 'Union' i s del i berat eThough the count ry and t he peopl e may be di v i ded i nt o di ff erent St at es for conveni ence of

admi ni st rat i on, t he count ry i s one i nt egral w hol e, i t s peopl e a si ngl e peopl e l i v i ng under a singl eimperi um deri ved from a si ngl e source

Dr B R Ambedkar , Chairman, Drafting Committee of the Indian Constitution

I t i s t he Union of I ndia w hich is the basi s of our nati onal i t ySt ates are but l imbs of t he Union,and w hi l e w e recogni ze t hat t he l imbs must be heal t hy and st rongi t i s t he st rengt h and st abi l i t yof t he Union and it s capaci t y t o devel op and evol ve t hat should be governi ng consi derat i on of al l

changes in t he count ry

- The State Reorganisation Committee


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Questions we seek to answerQuestions we seek to answer

But how cl ose i s t he real i t y ofCent re-St at e rel at i onst o that env i saged?

And w hat does t hat mean foreconomi c grow t h of t he count ry ?

We rev i si t t hi s i dea in t he backdrop of i ncreasi ng st rai n i n

Cent re-St at e rel at i ons and resul t s of recent assembly el ect i ons

4


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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 assemblyelections. ..while National parties relegated to sidelines

Regi onal part i es w i ning w i t h majori t y votesat expense of Nat i onal part i es!


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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!


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What do t he recent assembly el ect i ons

port end for 2014?

7


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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

8

India


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9

DDjj vu 1996vu 1996--99?99?

plus a change, pl us c'est l a mme chose

(t he more t hi ngs change, t he more t hey st ay t he same)- J ean-Baptiste Alphonse Karr, in the Les Gupes, J anuary 1849


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1010

DDjj vu 1996vu 1996--99?99?

I s per i od of st able cent ral government set forchange af t er 3

consecut i ve st abl e fi ve-year t erms?

J un-91 May-96 May-96 Mar-97 Mar-98 Oct-99 May-04 May-09

5years 13days 13mths 10mths 11mths 5years 5years 5years

Loksabha 10th 11th 11th 11th 12th 13th 14th 15th

No of parties incoalition

1416

13 13

9 10

May-14

?

?


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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?

?


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What can fragmented mandate in 2014 can mean to reforms?What can fragmented mandate in 2014 can mean to reforms?

Can coal i t i on government s (15+ part i es) prov i de pol i t i cal st abil i t y?Can a fract ured Par l i ament arr i ve at a consensus on reforms?

Reforms Parliament Act/LawCabinet Key measures

FDI in single brandretail

Land acquisition bill

Mining bill

Goods & services tax

Direct Tax code

J an 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 domesticsmall and cottage industries!

Companies to pay at least 2x market price in urban and 6x inrural areas; Companies shall provide for rehabilitation andresettlement

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 thecountry; According to CII, GST could add 1-1.5% to GDPgrowth

Move towards a simplified direct tax structure and lower taxrates; To improve tax collections due to lower evasions

It would enable filing of complaints against politicians andbureaucrats 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 stableBUT, nothing happening even now with stable govtgovt!!

Pol i cy i nact i on -Key bi l l s st al l ed

PFRDABill

Foodsecurity

Bill

GSTB

ill

Land

acquisitionBill

Min

es&

Min

eralsBill


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1414

BUT, nothing happening even now with stableBUT, nothing happening even now with stable govtgovt!!

Government grappl i ng w i t h corrupt i on and governance i ssuesKey economi c deci si ons del ayed

Interministerial

friction

Ministry ofEnvironment

and Forests

Ministry of CoalMinistry of Power

New Pow er proj ect s orders dow n 25% yoy i n FY12!

C di i bC t I di it b t


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Corporate India sums it up bestCorporate India sums it up best

Theres a sense t hat t he bureaucracy has st opped t ak i ngdeci si ons as t hey fear t hat act i on mi ght be t aken agai nst t hem

in fut ure even for honest mi st akes.

- Sunil Bharti Mittal

I s I nt ent t o govern more import ant t han majori t y i n l egi sl at i ve bodi es?

I li i i ki d l i CI li i ti ki d l i C t S f i iSt t f i ti


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Invocation of Presidents 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 frictionState 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

(States share of taxes minus Central grants)

Uneven distribution of Central grants Bias towards states ruled by same party as the Centre

P li i ti ki d l i C tP li i ti ki d l i C t St t f i tiSt t f i ti


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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

E i O tl kEconomic Outlook


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1818

Economic OutlookEconomic Outlook

So Is therehope fortheeconomy??

Changes in Indian economy postChanges in Indian economy post liberalisationliberalisation


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Changes in Indian economy postChanges 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: TataCase Study: Tata NanoNano production plant shiftproduction plant shift


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Case Study: TataCase Study: Tata NanoNano production plant shiftproduction plant shift

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Tata M otors st arted w ork on const ruct i on Si ngur plant i nWest Bengalfor Nano

Dec-06

Sep-08

Oct-08

J un-10

Wi t hin j ust one month, Tata M otors fi nali zed locat i on of

new product i on plant at Sanand, Gujarat

Si ngur plant st art ed manufact uri ng, but immediat el yshut dow n due t o l aw and order i ssues

Tata M otors deci ded to shi ft pl ant l ocat i on to another st at e;Four promi nent st at es compet ed t o host t he new pl ant

Gujarat , M aharasht ra, Karnat aka, AP

New pl ant const ruct ed in record t ime of 14 mont hsand i naugurat ed!

30months

1 month

14

months

West Bengal s l oss i s Guj arat s gai n Rs20bn investment ; 10,000 j obs!

What drives economic growth todayWhat drives economic growth today and tomorrow?and tomorrow?


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I s st at e l evel economi c devel opment bei ngdecoupledfromCent ral pol i cy t hrust ???

What drives economic growth todayWhat drives economic growth todayand tomorrow?and tomorrow?

State

performancevs

Centre

Per capita net State Domestic product (at constant prices)

- In 20 out of 28 states, Average for FY09-FY11 higher than Net NationalProduct (NNP)

Out of these 20 states, 11states were ruled by parties/coalitions other than

the one in Centre!

GUJ ARAT:Direct tax collection growth in Gujarat at 17%yoy for 2010-

11 was highest in the country Gujarat ruled by BJ P 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

What drives economic growth today & tomorrow?What drives economic growth today & tomorrow?


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2222

I n t he happiness of hi s subject s l i es t he K i ngs happi ness;I n thei r w el fare hi s w el fare,

He shal l not consi der as good, only t hat w hi ch pleases him,but t reat as benefi ci al t o him, w hat ever pl eases hi s subject s

What drives economic growth today..&.. tomorrow?What drives economic growth today..&.. tomorrow?

Are todays Kings (politicians) rediscovering this maxim.at least at the state level?

The root of w eal t h i s economi c act i vi t y and l ack of i t bri ngs mat eri al dist ress.A k i ng can achi eve t he desi red obj ect i ves and abundance of r i ches by undert ak i ng

product i ve economic act i vi t y , i n t he absence of w hi ch, bot h current prosperi t y andfut ure grow t h are i n danger of dest ruct i on.

Chanakya, Arthashastra

Chanakya, Arthashastra

Gujarat Maritime Board: State Initiative successGujarat Maritime Board: State Initiative success


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Gujarat Maritime Board: State Initiative successGujarat Maritime Board: State Initiative success

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Other st ates fol l ow i ng Guj arat model M aharasht ra (D i ghi ), O ri ssa (Dhamra, Gopal pur),

AP (K ri shnapatnam), TN (Karai kal )

Port development is a Concurrent subject

Both Centre and State govtcan set up ports

Port development in Gujarat far ahead of others

Gujarat government has actively promoted private portdevelopment

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 Centres purview)

Bihar policy decisions: State Initiative successBihar policy decisions: State Initiative success


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Bihar policy decisions: State Initiative successBihar policy decisions: State Initiative success

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The UN gave $30,000 aw ard t o Bi har for i t s simpl i fi ed t axat i on model !

Once upon a time .

Bihara 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 governmentspent Rs2bn providing bicycles to girl students reaching 9th standard

Innovative means of tackling corruption attach properties of corruptbureaucrats

Metro Rail Projects: Another State InitiativeMetro Rail Projects: Another State Initiative


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Metro Rail Projects: Another State InitiativeMetro Rail Projects: Another State Initiative

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Success of Delhi Metro spurring Metroprojects 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

J aipur Metro Bids invited

Kochi Metro Under planning phase

Pune Metro Feasibility Studies underway

Does FY12 foretell future trend for India? FDI > FII?Does FY12 foretell future trend for India? FDI > FII?


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(12)

-

12

24

36

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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I n FY12 (w orst year of current government i n t erms of governance), FD I i nf l ow s surpassed FI I Goi ng forw ard, FD I i nt o st at es may remai n st eady, FI I i nvestment s may become volat i l e

While Centre willimplement policies, stateswill drive investments

Crystal gazingCrystal gazing Weak Centre.Weak Centre Stronger states?.Stronger states?


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Crystal gazingCrystal gazing.Weak Centre.Weak Centre.Stronger states?.Stronger states?

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I s l ocal economi c grow t h gi v i ng St at e government s l everage over Cent re?

increasingly younger electorate forcing governments to focus oneconomic growth

reality increasingly accepted byregional parties.

Major policy decisions still inCentres purview

and enforced by recent electionresults

but increasing autonomy to begiven to States

Competition for showcasingeconomic growth to voters areality

E.g. FD I i n ret ai l , Land Bil l ,Envi ronment al pol i ci es

Devel opment focused par t i es re-el ect ed i n Guj arat (BJP), Bi har (JD )

Di f f i cult y i n administer i nggeographi cal l y l arge and popul ouscountry l i ke I ndi a

El ect i on mani fest os of w i nning part i efocusi ng on economi c grow t h rat her

t han fr eebi es

PoliticalPoliticalpowerpowershiftingshiftingtoto

statesstates??

Crystal gazingCrystal gazing.But what can go wrong?.But what can go wrong?


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Crystal gazingCrystal gazing.But what can go wrong?.But what can go wrong?

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Wi l l St at e Government s pi ck up the gaunt l et of economi c devel opment w i t hi n t hei r scope?

State Governments squandering away mandate foreconomic development.

.by pandering to populist (read money-losing)policies; E.g. no increase in power tariffs in Tamil Nadufor past five years, delays in power tariff increase in WB

State fiscal position deteriorating due to politicallargess'

Crystal gazing...What will CentreCrystal gazing...What will Centre--State relation be like?State relation be like?


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Crystal gazing...What will CentreCrystal gazing...What will Centre State relation be like?State relation be like?

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How w i l l t he Cent re-St at e rel at i onship appear i n t he fut ure of I ndia?

Even if one State Government falters on economicdevelopment, others waiting to capture the opportunitycasein point Tata Nano production shift to Gujarat

Stronger economic growth will embolden states tooppose Central dictats..case in point NCTC Bill

Increasing decentralisation of economic policymaking

States to be the ground zero for both politics andeconomics, 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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,, , p, p

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Thank You

Nikhil Vora

(Dir) +91-22-6622 2567

[email protected]


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The United States of India Strategy Politics Mar12