Taking states along

Next govt should build consensus on reforms

In a recent interview, Prime Minister Narendra Modi was asked what reforms were required to increase interest globally about investing in India. In response, the Prime Minister pointed out it was not merely the Government of India that needed to work to attract investment; both state and local governments needed a similar approach to investment-friendly policy and regulation. Without cooperation from state governments on land availability and on regulatory action from local governments, investors would continue to struggle. If, when it came to ease of doing business, the Union government received support from the states, argued Mr Modi, there would be no need for any investor to look elsewhere other than India.

Mr Modi, who was, after all, once chief minister himself, cannot be faulted on his analysis of the problem. His administration’s experience in office also reveals the importance of taking states along when it comes to major economic reform. Tax reform, namely the introduction of goods and services tax, was accomplished when consensus was achieved with state governments. But both land and labour reform, which are central to increasing investor interest and market efficiency in India, has stalled because of significant opposition, not least among state governments. The four proposed labour codes that consolidate existing central labour laws cannot be properly rolled out, for example, until all states pre-publish draft rules under those codes. Union Finance Minister Nirmala Sitharaman, also in a recent interview, stated the next target for reforms in India would have to be at the level of local governance, given that panchayats and urban local bodies controlled a lot of regulatory activity as well as land. Both Mr Modi and Ms Sitharaman stressed that competitive energy had built up among many states, and the desire to attract investment was universal.

There is, however, a great deal more that the Union government can and should do to build a consensus. Mr Modi has spoken occasionally of the level of cooperation between the state and Union governments visible during the height of the Covid-19 pandemic. What should be recognised, however, is that cooperation came about because of frequent meetings between the Prime Minister and chief ministers. The institutionalisation of Union-state interaction is essential if a common approach to reform is to be constructed. In the past, the Planning Commission played part of that role. Its successor, the NITI Aayog, needs to take more measures to replicate that effort. The Inter-State Council, a constitutional body that last met in 2017, also needs more frequent interactions.

More communication between the political leadership of states and the Union government is essential, ideally with minimal politicisation and a focus on common-policy priorities such as welfare delivery and investment. This would also help check the increasing pressures on Indian federalism, which come from multiple avenues — whether contrasting approaches to law or fiscal policy — and which, if ignored, could cause destabilising sub-nationalism to take hold. But it would also be necessary that the government in New Delhi respect the political desires, aspirations, and requirements of state leaders, some of whom will naturally be from Opposition parties. This understanding has been somewhat lacking in recent years, and needs to be built again.