American Chamber of Commerce in India
Apex Chamber of US Industry in India

Breakfast Meeting : Smart Infrastructure – “Promise and Pitfalls of State-Led Economic Reform – 7th September 2016

A breakfast meeting featuring guest speaker Dr. Sarah Watson, Associate Fellow, Wadhwani Chair in US India Policy Studies, Center for Strategic and International Studies, Washington D.C., was held on 7th September in Chennai. 

While India’s economy continues to power forward at its now characteristically strong clip over the past two and a half decades, India has been among the world’s fastest growing economies and within the next several years would overtake the stronger economies. The second wave of economic reforms coupled with the race to be on top of the ‘ease of doing business’ list, the states are competing with each other to be a destination of choice for investors.

What can be observed is that government managed capitalism does not foster innovation and enforcement of timelines for execution of projects is sadly lacking. Though government directed investment plays an important role in the development of physical infrastructure and adoption of new technologies we can observe that government officials never value assets and allocate resources as efficiently as market forces can. Dr. Sarah Watson began by mentioning that under the Constitution of India, the 29 states of the union control the economic policy in areas crucial for business and some areas like foreign trade, national infrastructure, banking and currency, while labour laws, education, environment, electricity and factories are in the concurrent list.

It has been observed that states are likely to move backwards and forwards as they remain focused on re-election as national governments. This results in narrow parochial interests and lowers the capacity of bureaucrats to function efficiently and what matters most is the close connections to powerful interests resulting in less transparency.

The central government, with its progressive and pan India policies, is able to attract highly educated and motivated persons to return to India and work for the government. This is not so with the states. The advantages of state led growth and reform is that states are smaller and nimbler and changing a state’s course requires fewer decision points and buy-in from fewer constituencies. As most states are sufficiently similar to one another (except in land area), the competition between states is real.

State led reforms succeed when discrete actions by individual states change the way business is done within their state, a few states have shown success stories in areas such as labor laws, land acquisition etc. The other situation which reforms success is when the states sign on centrally coordinated campaigns that require a real buy-in from state governments to have any real effect, viz., GST and UDAY. States are the agents of change in India and if the political will is there, it results in economic growth and prosperity to its people.

In the run up to elections, most states announce freebies and this is not a good policy decision as ‘making things free will not encourage investment.’ It can be inferred that ‘states are laboratories of democracy.’ So it is imperative to bring states ‘on board’ to meet the challenges in bringing about national level and state level reforms to propel the engine of growth in India. This can be brought about by putting the spotlight on the challenges; providing information on the reforms; creating awareness and for the states to unite to act as voices for strong policy at the center.


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