Editorial Today – Shift the reform debate to states

Issue Policies have to be implemented by state and thus the states also need reforms.

Present scenario of Indian states Though India is a single political entity it is yet to become single economic entity.

Correlation between regulation and productivity There is negative correlation across the states with investment and productivity.

Measures taken by government to tackle this GST, Labour Reforms and Land Policies.

Challenges of states States differ significantly in their economic, social, demographic and financing characteristics.

Conclusion

Issue

• Whenever we talk about reforms, it is about reforms by central government. But policies have to be implemented by state and thus the states also need reforms.

Present scenario of Indian states

• Though India is a single political entity it is yet to become single economic entity.
• The reality is that there is still a high degree of heterogeneity across Indian states, creating critical barriers to investment, entrepreneurship, property rights, trade and competition. These have created a highly uneven business and financing environment. For example, various cross-state tax barriers exist, impeding the flow of goods, increasing costs unpredictably and raising the burden on businesses that move products across barriers.
• The differences in product market (The product market is the marketplace in which final goods or services are offered for purchase by consumers, businesses, and the public sector.) regulation have added to varying degrees of competition across states, effectively protecting state-run enterprises.
• The differences in labour laws and regulations across states have discouraged jobs being created in the formal sector, and are therefore especially restrictive for labour-intensive sectors.
• Differentiation between states in land records, registration and property rights remains a key bottleneck in systematically using the latent capital in land resources.
• Manifold differences remain in the licences and permits system at the state level, coupled with sector-specific administrative burdens for corporations as well as for sole proprietor firms.
• In sum, these add up to a domestic economy that is not well integrated, with significant negative effects on resource allocation, capital creation and efficiency.

Correlation between regulation and productivity

• There is negative correlation across the states with investment and productivity—states with high regulatory barriers have lower competition, investment and factor productivity.
• The continuing differences in barriers and incentives across the states are the key reasons why corporate investment in India has not yet responded significantly.

Measures taken by government to tackle this

GST

• Long-awaited step of reducing and rationalizing the various cross-state tax barriers through the goods and services tax, or GST, is one measure that should directly improve India competitiveness and help raise India’s tax to gross domestic product ratio closer to that of other emerging-market comparators.
• Rationalizing the many state and central taxes into a harmonized GST will help build a more unified domestic market.

Labour Reforms

• The government is working on labour reforms at the state level, hoping to spark competition among the states to attract investment, both domestic and foreign.

Land Policy

• More states are planning and undertaking legislation intended to make property a more tradable resource.

Challenges of states

• States differ significantly in their economic, social, demographic and financing characteristics, and it will be challenging to move the process forward in an inclusive way. The centre has a key role to play in incentivizing and moving the reform process forward consistently.
• All these reforms need to be matched with resources. Larger share of central tax revenues given to states by Fourteenth Finance Commission will help in this. But this can be utilised efficiently if fair apportion of central and state budget is done taking into consideration the debt sustainability.
• The forthcoming review of the Fiscal Responsibility and Budget Management Act is an important step in this direction.

Conclusion

• A more integrated domestic economy with much more consistency across states’ governance and finances is needed to better build benefits from the reforms that are in the public debate.