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Growing local economies — States have big stakes

G. Ramachandran

States are the strength of the national economy, and their competitiveness is a main determinant of prosperity and growth. National economies rarely grow consistently if their sub-economies lack the policies, politics and administrative effort that lead to competitiveness. India's somewhat disappointing performance since the initiation of reforms is perhaps because of the little effort to make the local economies competitive, says G. Ramachandran.

INDIA WILL not be globally competitive if its local economies do not operate competitively. States are the most important determinants of the strengths of the national economy, and their competitiveness is one of the principal determinants of prosperity and growth. National economies rarely grow consistently when their sub-national economies lack the policies, politics and administrative effort that lead to competitiveness. The somewhat disappointing performance of the national economy since the initiation of reforms a decade ago is most likely the result of national policies that have assumed that India can be made competitive without expending the necessary effort to make the local economies competitive.

The rate of growth achieved in the first quarter of 2002-03 provides an impetus to examine the competitiveness of the States. In a year that has been as tough as the one in which the global economy is in now, the Indian economy's growth at a decent rate of 6 per cent in the first quarter is heartening. This is the news that the Government may have wanted at a time when the local currency sovereign credit-rating has been lowered by Standard & Poor's. It is a pity the good news came a trifle late, but ratings are not determined by one quarter's growth rate. There would be more good news quarter after quarter if the local economies in the States operated competitively. India's sovereign credit ratings would be raised if sub-national policies, politics and administrative effort paid more attention to growth.

Growth is vital. Everything else is empty rhetoric if growth, competitiveness and prosperity remain elusive. National economies understand this. This explains why economic growth is an important measure of the effectiveness of their policies, politics and administrative effort. When the `growing is good', national economies directly show proof that their policies and effort deliver. When the `growing is bad', there is indirect proof that some policies, politics and administrative effort have not worked. Should not States and their local economies have an opportunity to provide proof of their effectiveness? More importantly, if States are characterised by some policies and administrative effort that are not effective, would the national economy be able to sustain its current rate of growth?

But an analysis of the recent rate of growth as a function of the States has yet to be performed. Did Assam grow as well as it did last year? Did Madhya Pradesh and Tripura beat forecasts for the first quarter? Did they have first quarter forecasts? Have the districts in Chhattisgarh performed better than they would have if they had been in Madhya Pradesh? Answers to these questions have yet to become important. Few States have come forward to cheer the first-quarter growth of the national economy. Few States know how well their local economies grew. The analysis of economic growth in India is based on sectors such as agriculture, manufacturing, mining, construction and transportation. But the analysis says little about what States could do or have done to make their sub-national economies grow. It also says little about what the Central Government should do for the sub-national economies.

Parts and the hole?

The building blocks of the national economy may appear to be amenable to national policymaking and implementation, but require different local approaches.

A nation as large as India may succeed better with economic strategies if the building blocks of aggregate growth were better understood. Building blocks possess specific properties that make the response to national policies heterogeneous, wherein the heterogeneity is determined by the local economy. A tax concession pertinent to investments in equity may have more relevance to Maharashtra and Gujarat than to Tamil Nadu. Policies related to horticulture may be of greater relevance to Himachal Pradesh than to Orissa. Some policies related to horticulture may seemingly have the same relevance to Andhra Pradesh and Arunachal Pradesh, but could need very different administrative approaches.

The heterogeneity that characterises the local economies has somehow not been given due importance in pursuing growth. This has made the tasks of assessing the impact of national policies and local policies on the local economies difficult. The need to distinguish these characteristics and their responses to national and local policies did not arise at a time when the Centre was regarded as the accumulator of all surpluses and the well-informed distributor of savings and taxes. The assumption that the Centre was a well-informed distributor of savings and taxes held for a while, and then questions about its intentions became loud. Some States have expressed doubts about the quality of the information and the equity of the intentions of the Centre in its role related to savings and taxes.

These doubts and the questions have contributed to the shifting of a significant part of the responsibility for fiscal prudence as well as the blame for fiscal imprudence to the Centre. If the nation's local currency credit ratings are lowered, it is the responsibility of the Union Finance Minister. If the foreign currency sovereign credit rating is lowered, it is the responsibility of the Union Finance Minister. There is more. The scope and the content of policymaking at the national level have shielded the States from the implications and outcomes of inappropriate local policies and willingness to pursue competitiveness. It is also likely that the thrust of policymaking at the national level has given States few incentives to pursue competitiveness through appropriate policies and practices.

This warped logjam has to be broken. States have to have the incentives to pursue competitiveness through appropriate policies and practices. They have to face the consequences of fiscal imprudence. They have to face the consequences of poor governance too.

Governance and its outcomes

Much, if not all, of the flak for poor governance and fiscal imprudence has always been directed at the Centre; States rarely include themselves in the list of causal factors. On a lower level, the blame for poor governance and fiscal imprudence has always been laid at the doors of State governments; district administrators rarely see themselves as proximate causes. This practice of viewing the Centre as the pivot of economic well being has not changed over the last five decades. The Centre has unfortunately become the proxy for governance around the country.

If the Centre was the real effective pivot, its policies and its administrative ethos should have a reasonably uniform impact on the incomes of households across the country. The statistical properties — mean, median, mode and variance — of incomes of households show little trace of the assumed impact of the Centre. Household incomes in the districts are driven by agriculture, and the States in which districts are located (Business Line, September 6).

The impact of agriculture is not surprising. Analyses of data since 1957 pertaining to India, China, the US and the European Union show that India has consistently had the highest percentage of workforce employed in agriculture (60 per cent in 2000). Agriculture generates about 27 per cent of GDP. Agriculture products account for more than 65 per cent of private final consumption expenditure of most households. What is surprising is that the quality of governance by the States should have an impact on incomes derived from agriculture. Agriculture is often regarded as an activity whose fortunes are driven by the monsoons. If an activity that is so prone to natural forces, water and soil could be comprehensively affected by the quality of governance by the States, would not the quality of governance by the States have a greater impact on manufacturing and services?

Human effort, finances, organisation, information and adherence to systems drive manufacturing and services. The quality of governance by the States should have a greater impact on manufacturing and services because they depend on a complex matrix that is prone to administrative effort and policy. Human motivation and effort, financial practices and integrity, organisational flexibility and effectiveness, fidelity of information and adherence to systems are dependent on governance.

Who is good, who is not

The need to measure the performance of States arises from their ability to influence incomes from agriculture, manufacturing and services. Moreover, the parts of the national output add up to the nation's output.

If States shirk the responsibility of sustaining output and incomes from agriculture, manufacturing and services, there is little the Centre can do. It could hand out more doles from the responsible States that take to governance more seriously, but that would be a punishment meted out to the good performers.

If States faced no disincentives while shirking their responsibility to sustain output and incomes from agriculture, manufacturing and services, the Centre would face the implications of ratings downgrades from time to time. Neither situation makes economic sense. The warped and tortuous logjam has to be broken.

The Centre could make a beginning by making it possible for citizens to know if their States are doing what is good for their local economies.

Just as the Centre submits itself, even if very reluctantly, to S&P ratings, the States should submit themselves to measures of economic performance. So, let this process begin with two familiar questions: Did Madhya Pradesh and Tripura beat forecasts for the first quarter? Did they have first quarter forecasts?

(The author is a financial analyst. Feedback may be sent to indiagrow@sify.com)

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