The Bharatiya Janata Party’s control of Maharashtra and Haryana, in addition to Gujarat, Rajasthan and Madhya Pradesh, where it is already in power, will ensure that the BJP-led Central government can push through second-generation reforms, largely under the purview of states, with much more ease.
To start with, these states geographically make a large contiguous belt, now accounting for almost 37 per cent of India’s GDP, the country’s powerhouse of investment activity and growth. For investors, the fact that political control in these states is firmly vested with a party that is also ruling at the Centre — and that, too, in a majority — will make a significant difference when it comes to deciding where to put up their next factory.
According to economists, the next generation of reforms involve labour, power tariffs, Goods and Services Tax (GST). If a few larger states can be induced to undertake these, the demonstrative effect on other states to follow suit could be enormous, says Sajjid Chinoy, Chief India Economist, JP Morgan. “Given the nature of India’s federal policy, states will have a crucial role to play in reforming land, labour, energy and taxation laws,” he adds.
A friendly government in New Delhi would well mean faster environmental and other statutory approvals for projects such as a coastal highway, for instance, in Maharashtra. Neelkanth Mishra, India Equity Strategist, Credit Suisse, says that the Centre’s role has shrunk dramatically now. “For states ruled by the same party, there will be no fundamental dissonance in accepting the Centre’s advice,” he says.
According to Mishra, doing business in India today is more about interacting with state governments. “Labour inspectors, sales tax officers and police are all under the state,” he says. It is important for the Centre to get states on board to meet the various promises made. “In this context, BJP coming to power in Maharashtra and Haryana is very significant,” Mishra says.
Equally important is the fact that the Delhi-Mumbai Industrial Corridor, currently under execution, runs through these five States. The Khushkhera-Bhiwadi-Neemrana belt in Rajasthan — an extension of the Gurgaon-Manesar region of Haryana — has already attracted investments from Japanese firms like Honda, Daikin, Hitachi and Nissin Brakes. Likewise, there are two electronic manufacturing clusters coming up in Madhya Pradesh near Jabalpur and Bhopal.
While Rajasthan and MP qualify as aspirant industrializing States, the BJP gaining power can change fortunes even for an already developed Maharashtra, which, along with Gujarat, has a one-quarter share of India’s GDP.
At Rs 80,000 crore in just sales tax revenues, Maharashtra is in a pole position with tax revenues alone aggregating Rs.1,30,000 crore — way ahead of other states. And what’s encouraging is that VAT collections have been growing at a good clip — 10 to 11 % — over the last six months compared to a year ago.
What could further help Maharashtra or Gujarat in attracting further investments is the uncertain political scenario in Tamil Nadu — post Jayalalithaa’s exit as Chief Minister — and the impact of the Hudhud cyclone in Andhra Pradesh, which could temporarily set back the new CM, Chandrababu Naidu’s ambitious industralisation plans for a newly formed state.
But on the other hand, much of eastern India — from Uttar Pradesh and Bihar to West Bengal, Orissa and Jharkhand — may face relative investor apathy, not the least for being ruled by non-BJP parties. They could, however, benefit indirectly through migration opportunities for their labour force that accelerated growth and investments in western India would create. This could, in the form of labour flows from east to west, turn into a political trump card for the BJP when these relatively less industrialised states go to the polls.
These states will also face competitive pressures, as Chinoy observes, to reform or be left out by investors. Otherwise, their relative lack of development could strengthen the BJP’s claims of development in states ruled by it — something that worked well in the 2104 Lok Sabha elections — and, in fact, fuel the party’s rise.
In some ways, the results in Maharashtra and Haryana could also boost the Centre’s plans of introducing the legislation paving the way for implementing a nationwide GST regime. Haryana, which had till recently expressed concerns, and Gujarat earlier, may now come on board.
What economic policy makers expect now is a more confident government backed by more electoral numbers and a popular mandate taking more measures including perhaps unpopular decisions now that polls are out of the way for a while. The decision to free diesel prices and raise the price of natural gas on Saturday could just be the start.