Arvind Panagariya | Apr 5, 2014, 12.05 AM ISTA game-changing reform strategyHow the next PM could both empower states and remove the economy's fetters at one stroke The reforms that Prime Minister Narasimha Rao began and Prime Minister Atal Bihari Vajpayee carried forward had focused mainly on liberalization of product markets. Removal of investment and import licensing, price and distribution controls, high tariffs on industrial goods, restrictions on foreign investment and small-scale industries reservation all related to product markets.
While this liberalization successfully placed India on a high-growth trajectory, impediments to sustained rapid growth over several decades remain. Indeed, the total absence of follow-up reforms during the last decade has returned India to the 1980s growth rate.
Moreover, even while the economy grew 8% a year, unlike in South Korea and Taiwan in the 1960s and 1970s and China more recently, manufacturing failed to emerge as the leading sector in India. A vast labour force notwithstanding, employment-intensive manufacturing in the organised sector has performed poorly in India. The apparel industry, in particular, remains populated by low-productivity tiny firms that are incapable of taking advantage of the vast world market. India`s apparel exports are less than one-tenth those of China.
Most observers agree that this deficiency cannot be corrected without extending the reforms to factor markets, principally labour and land. While labour-market reforms have gone entirely untouched in the post-reform era, the only significant reform in the area of land has been the 1999 repeal of the Urban Land Ceilings and Regulation Act of 1976 under Vajpayee.
The recent land acquisition Act, though dubbed as a reform, actually sets back the cause of reforms by miles. According to the best available information, acquisition of new land came to a standstill the day this Act became a reality.
Today, most analysts remain pessimistic about reforms of the key labour and land legislations. Removal of even the most draconian provisions in the Industrial Disputes Act, 1947 and the new land acquisition Act is seen as politically risky.
The million dollar question then is how can a future reform-oriented prime minister usher reforms in these areas? Are we condemned to forever live with our past sins and thus keep the doors to organised sector employment shut for 95% of the workforce?
A leading policy analyst who has also been a policymaker has recently suggested to me a simple, politically feasible solution to this conundrum.
It is a relatively straightforward matter for the central government to empower states to amend many central laws as applied within their respective jurisdictions. If the next prime minister were a champion of decentralisation and rejected centralized one-size-fits-all approach to laws on issues of local importance, he or she would welcome such transfer of power.
Moreover, since states would be the ones amending the laws, associated political risk to the central government would be minimal. Once such power is conferred, competition among the large number of states would unleash experimentation and reform on a scale unimaginable under the current centralized approach.
The question then is how precisely the Centre can confer such power on states. Would this not require a politically difficult constitutional amendment in the first place? The beauty of this solution is that the change can be accomplished through an ordinary amendment of the law whose reform is sought.
All central labour laws and the land acquisition Act fall under the Concurrent List of the Constitution. Both the central and state governments are empowered to legislate on subjects on this list. But in case of a conflict between central and state laws, it is the central law that prevails. Therefore, as it stands, state laws are constrained by the boundaries drawn by central laws.
But as Paras Kuhad, an Additional Solicitor General of India, succinctly puts it, "The ambit of power possessed by the Parliament being plenary, it is always open to the Parliament to confer any enabling power under a statute on any legal entity including State. The Constitution does not provide any limit as to the manner in which the power contained under the Concurrent List is to be exercised by the Parliament."
Therefore, all that a future central government will need to do is to insert in a law on a subject on the Concurrent List a clause stating that the legislation shall apply to all states that do not amend it and that in the states that amend it, the amended legislation shall apply. The clause could even spell out sections of the law that the central government wishes to allow or disallow to be amended by the states.
This approach to reform could be extended to many recent social legislations falling under the Concurrent List as well. For example, the Right to Education Act allows states to apply only input norms as the basis of recognition of schools. If the legislation were amended to empower states to amend it, some states may opt for performance-based norms for school recognition.
Likewise, if empowered to amend the rural employment and food security laws, some states may opt for cash transfers or for linking employment programmes to building housing and toilets for the poor. The state empowerment route, thus, offers unlimited scope for experimentation across states.
The writer is professor of Indian political economy, Columbia University.
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