CMs to Tata, drive in

It is perhaps the first time when states8217; have openly and aggressively indulged in competition for large-scale investments. This is a development that is both welcome and worrisome. It is welcome because such competition will only make states more responsive to the requirements of the investor. And worrisome because, if left unhindered, it could significantly and negatively impact state government budgets.

As the Indian economy gets more and more decentralised, and as thankfully the Planning Commission steadily moves towards absolute redundancy, action at the state government level will become the critical factor in enabling private sector investment. nbsp;Politicians at the state level also now know how important investment is for their long-term survival. nbsp;And so don8217;t be surprised if most states try to open up channels of communications with the Tatas and aggressively woo them for the relocated Nano plant. nbsp;Of course this will all be in the name of employment, income, equitable growth, etc. Indeed large investments have many characteristics that individual states can benefit from. But in the end it is all about votes. nbsp;

This could be of concern for many reasons. nbsp;

First, politicians need to show quick results to the masses. And they are liable to promise all kinds of subsidies, freebees, regulatory relaxations, tax holidays, etc, in order to attract large-scale investments with a high PR value. nbsp;Most such promises have long-term implications on the state budget. But the benefit to the politician is in the short term. Therefore there is a likelihood of the ruling politician to yield more than he should. nbsp;

Second, many state governments are quite small in size and lack necessary expertise when compared to large corporate houses. In typical negotiation and bargaining situations therefore they may end up yielding inordinate benefits.

Third, many such incentives to attract investment also may have anti-competitive implications, as those competitors that have not availed themselves of such benefits will unnecessarily have to suffer. nbsp;

Fourth, such one-on-one benefits hinder the development of open and transparent markets and economy that provide a level playing field to all, irrespective of size or scale.

Not surprisingly, empirical studies from both India and abroad suggest that such inter-state competition for investment leads to extraordinary benefits for large private investors at the cost of overall welfare. Most such studies tend to call for some action that would prevent such inter-state competition. nbsp;

But the benefits of such competition between states also cannot be negated. For one, such competition forces state governments to be on their feet in being responsive to the requirements of investors. Two, it reduces the bargaining power of lobbies that extract all types of benefits from investors at the state-level. Three, since some of the benefits from the investment flow back to the investor it only improves the overall investment attractiveness of the country. And four, greater competition between states implies greater options and choices for the investor.

Study after study has shown how poor state government responsiveness is hindering investment and growth in the country. nbsp;In most cases, investors complain of how individuals, politicians and lobbyists misuse the tied-in nature of large investments to extract rents from them. There is of course no recourse for the investor. He has to deal with those that employ such delay tactics. For his part, the entity delaying has little to lose, but the investor has. nbsp;

In the net therefore, inter-state competition should be encouraged, not discouraged. But for reasons outlined above, such competition should not be unencumbered. Certain areas will need to be brought out of the wide set of domains over which states compete. nbsp;We would also need to limit but not eliminate the extent of benefits that states can provide. nbsp;

The objective is to make states responsible for the promises that they make, and to deliver on them in a timely manner. Such competition will provide the natural incentive for states to eliminate delays, reduce inspector raj, provide rapid infrastructure connections, and in general be more investor friendly. Perhaps finally we have found something that the Planning Commission can do.

To come back to the Singur-Tata case, thanks to the poor compensation offered in the initial phase, it has snowballed into a highly avoidable controversy. But it is no longer about land or compensation or the emotional connect between the farmer and his land. It is about bargaining positions being taken by politicians and social activists on the one hand and the investor on the other. The Tatas appear to have had more than their fair share of such situations. By opening negotiations with other states, they have taken the negotiations away from the non-transparent sphere to a transparent one. Ratan Tata needs to be applauded for this. nbsp;

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The writer heads Indicus Analytics expressexpressindia.com