Terms of Trade | India’s perverse federal economic competition

Published on Sep 16, 2022 06:35 PM IST

The controversy over Vedanta-Foxconn project moving to Gujarat and an embattled Hemant Soren passing the 1932 domicile threshold in Jharkhand are examples

In Maharashtra, the ruling NDA has been facing attacks from the opposition over the proposed Vedanta-Foxconn semiconductor plant moving from Maharashtra to Gujarat. (HT Archive) PREMIUM
In Maharashtra, the ruling NDA has been facing attacks from the opposition over the proposed Vedanta-Foxconn semiconductor plant moving from Maharashtra to Gujarat. (HT Archive)

Two seemingly disparate developments have made headlines this week.

In Maharashtra, the ruling National Democratic Alliance (NDA) has been facing attacks from the opposition over the proposed Vedanta-Foxconn semiconductor plant moving from Maharashtra to Gujarat.

In Jharkhand, the state cabinet took a decision to make 1932 land records the basis for determining domicile status in the state.

Politics notwithstanding – the big-ticket investment will help the ruling Bharatiya Janata Party (BJP) in Gujarat where polls are scheduled later this year and Jharkhand chief minister Hemant Soren is facing possible disqualification from the assembly – these two instances underline a perverse aspect of inter-state tensions in India’s economic growth story.

States often compete with each other in what economists often describe as a “race to the bottom” to attract big investments. At the same time, they are increasingly resorting to various policies which make (futile) promises of equal opportunities to their citizens. This week’s column will argue that both these tendencies are detrimental to what should be a healthy federal competition in the Indian economy.

To be sure, the first problem is not unique to Indian states, although the second problem might have stronger roots in India than in other parts of the world.

Wooing capital

What makes a big-ticket investment go to one state instead of another? If one is not doing an apples-to-oranges comparison – comparing a state with well-developed infrastructure and logistics network and a coastline with a landlocked poor infrastructure one would be such an example – it eventually comes down to the kind of deals the investor can strike with the government.

While the rollout of Goods and Services Tax (GST) and the centre’s Production Linked Incentive (PLI) scheme has brought some parity on this issue, states still have a lot of discretion in other matters such as allocation of land and other resources for such investments. While such concessions are often justified in the name of attracting investment, there should be little doubt that they entail a drain on the resources of either the exchequer or the people at large. The latter is especially true when investment projects involve large-scale displacement where consent is often manufactured through the might of the state.

What exactly are the terms of the “deal” between the state and private investors that are rarely made public? The track record on this is so bad that even Nirupam Sen, the industry minister in the communist government in West Bengal had refused to come clean on the exact terms of the agreement between Tata Motors and the West Bengal government for the Nano project, calling it a “trade secret”.

To be fair, almost every political party which runs a state government indulges in such practices when it comes to dealing with large private investors. The communists, when they would defend such practices, would often plead helplessness by saying that if they did not do these things, investors would simply go away to other states which were more than willing to offer them better terms.

While window-shopping by private investors is a phenomenon of the post-reform period in India, there are enough examples (and claims) of some states being treated unfairly by the Centre when it came to allowing private investment in the pre-reform period as well. Licences by the Centre and policies such as the freight equalisation scheme (which deprived mineral-rich states of their comparative advantage) were some of the tools which were used to achieve these ends.

Who gains, and who doesn’t?

It is not the case that states are not aware of the political costs of such concessions made to big capital. While no one can deny the fact that big investment projects, when they do come, bring huge economic gains to the state and national economy, there is a big question mark over the pool of beneficiaries which gain from such investments.

Technological advances are making production more and more capital-intensive which means that direct employment generation from such activities is a fraction of what it used to be. This combined with the increasing trend of contract work and getting migrant workers to do a lot of the work – both these practices eventually increase the bargaining power of capital over labour – has meant that the local population does not gain much from such investments.

Then there are the second order effects of migrants with upward economic mobility increasing their clout in the local economy. This, to be sure, is not a problem of the post-reform era. Nativist movements driven by growing economic anxieties existed much before the Indian economy was opened up in the 1990s. The rise of the Shiv Sena in Mumbai or the Jharkhand movement stemmed, partly, from these impulses.

However, it is also true that such anxieties have proliferated significantly in the recent period.

Policies such as reservations for local residents in not just government but also private jobs (Haryana brought such a policy in 2021) are examples of these kinds of tendencies. While there is no denying the genuine grievances of many of these political currents, the question of whether policies such as the Jharkhand government’s latest decision to set 1932 as the date for determining domicile status are progressive cannot be brushed aside.

The backlash, the consequences

Barring some exceptions, inter-state mobility has always been free in India. While this is not appreciated enough, the freedom to migrate either between states or from rural to urban areas has been extremely critical to civil liberty in India. This does not exist in countries such as China and Thailand.

While migration and associated urbanisation have created serious problems in India’s urban landscape, its historic role in India’s economic progress cannot be denied. It is difficult to imagine most of India’s megacities or industrial towns without migrants.

To pose a hypothetical question, how correct is it for a government to declare a family which has been living in a state since 1947 ineligible for domicile status and the potential benefits which come with this status? This is exactly what the Jharkhand government’s decision will do.

Of course, the criticism of such a policy is not to be confused with regulations which prevent usurping of property of economically vulnerable sections such as Scheduled Tribes. The irony is that such laws are blatantly violated by all political parties when it comes to clearing the way for big-ticket investment projects, especially in mining.

The hype created by political parties over such decisions notwithstanding, the actual material gains of policies which claim to be a game-changer for the economic interest of local people are actually very small. There is no conspiracy theory here. Government employment has been experiencing a contraction both in quantitative and qualitative terms. Even governments are aware that they cannot practically ask private companies to reserve the better-paying jobs for local residents. The origins of India’s high-skill workforce have a bigger relation to parental economic and social capital rather than any particular region.

In fact, one could go further and argue that the costs of this kind of nativist politics — in terms of the social fissures they create and the distraction they generate from the larger challenges at hand — are higher than whatever benefits might accrue from them.

Is this kind of federal competition in the economic realm desirable? This is definitely not an ideal situation. It would be much better if states were to agree on a lower minimum when it came to granting concessions to private capital and a maximum when it came to implementing policies which fragment India’s labour market at the regional level. Many reasonable voices have been arguing on these lines for quite some time now.

However, India’s political system, which works on a top-down political finance model and is unable to resist any urge to succumb to majoritarianism (the religious aspect of it is just one variety) has no incentive to undertake these reforms. The ultimate losers, as is always the case, will be the voters.

Every Friday, HT’s data and political economy editor, Roshan Kishore, combines his commitment to data and passion for qualitative analysis in a column for HT Premium, Terms of Trade. With a focus on one big number and one big issue, he will go behind the headlines to ask a question and address political economy issues and social puzzles facing contemporary India.

The views expressed are personal

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    Roshan Kishore is the Data and Political Economy Editor at Hindustan Times. His weekly column for HT Premium Terms of Trade appears every Friday.

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