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States to become divers of Next-Gen reforms in India

Sushma Ramachandran

The interim budget for 2024-24 belied expectations of providing any pre-poll sops. Instead, it turned out to be a workmanlike document continuing the trend of past policies while keeping a clear focus on maintaining fiscal discipline. The highlight of the proposals was the ambitious 5.1 percent target set for the fiscal deficit along with a modest 11.1 percent rise in capital expenditure.

What was new, however, was a one-time loan being offered to states to accelerate the reform process. This is the first time such an incentive has been offered to motivate states to push forward economic reforms that have so far been carried out largely by the central government.

A look at the brief economic statement that preceded the budget shows the center is now recognizing that the role of state governments must expand in this regard in coming years. The statement which replaced the usual annual economic survey gave some clear hints about the way forward for next-generation reforms in case this government returns to power after the elections. Looking ahead to the creation of a developed economy by 2047, it highlighted the state’s role in making future reforms more “purposeful and fruitful.” It also underlined the need to improve governance at the district, block, and village levels, making them both citizen and business-friendly. Equally significantly, it noted that states will have to be proactive in areas like health, and education which are mentioned among the next big things on the reform front.

 The budget proposals expanded on the concept of states being the drivers for the next stage of reforms. Pointing to their increasing role in formulating growth and development-oriented reforms, the Finance Minister announced that Rs. 75000 crore would be offered to them as a 50-year interest-free loan to achieve these milestones.

The shift towards states as accelerators of future reforms stems from a feeling – voiced in recent times by top officials – that the center has concluded its role in easing the process of doing business. The next round of procedural changes, it is being stressed, need to be at the ground level. In other words, regulatory processes must be eased at the state, municipal, and village levels.

The view has found resonance with investors who have frequently complained about intricate rules and procedures that bog down the establishment of projects in states. These include approvals by municipalities or by village-level governing bodies that have yet to alter existing systems. The broad swathe of clearances that used to hamstring investors at the central level has now been reduced to a large extent but the number of approvals needed to set up a new business remains sizable and is a daunting prospect.

 The areas proposed to be given more attention in the next generation of reforms are also substantially different from the past. The economic statement identifies these as health, education, skilling, and land acquisition. These are all sectors that come directly under the purview of states rather than the central government.

 hat is heartening is that finally there is a shift towards sectors that have been relatively neglected in the past for reforms. Industrial development has taken center stage ever since the economic liberalization and reforms of 1991. In contrast, the social sectors  – health and education – have consistently received inadequate outlays for building up quality infrastructure. In the case of health, for instance, India has been allocating only 2.1 percent of GDP compared to 5 percent for China and 9.2 percent for Brazil. Developed countries typically have a much higher allocation with the U.S. at over 16 percent.

Similarly, education outlay has been kept at 2.9 percent of GDP, according to the Economic Survey for 2022-23. In contrast, China is reported to be spending about 4.01 percent of GDP on this sector.

The outcomes of such slim funding for these sectors became evident during the Covid pandemic. The lack of infrastructure in tier 2 and tier 3 cities as well as rural areas was revealed starkly at the time. The inability to maintain sufficient hygiene levels as well as to implement protocols to prevent infection was glaringly obvious. There have not been any reports since then indicating that the status of primary health facilities within states has improved to any significant extent.

As far as education is concerned, it was again the pandemic that exposed the fault lines between the rich and poor as well as between the urban and the rural segments of the country. With schools closed then, the decision to opt for online learning meant that only students who had access to electronic devices could keep pace with the courses. More affluent children especially in urban areas naturally had an advantage over their less privileged peers.

The other new reform areas cited in the statement include skills to meet the needs of new technologies as well as land acquisition. The former is critical to ensure the young become employable while the latter has proved a major stumbling block for investors. Skilling has become critical in the era of artificial intelligence and fast-developing technologies. The country’s much-talked-about demographic dividend will not yield results unless the youth are equipped to deal with these sunrise technology sectors.

Land acquisition has also become a hurdle for many greenfield projects. These issues which are essential for future development are the domain of states.

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It is thus possible that the government’s expected third term could usher in an era of greater center-state cooperation to make the next phase of reforms more effective. This would be a welcome development as the social sectors need urgent attention and upgradation. Unless this is done, it will not be possible for India to truly become a developed economy by the target date of 2047.

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