The population heavy states will now have to imagine the reform agenda on their own
One could say that it is still the prerogative of the states to do the heavy lifting in factor reforms, and it is why many objected to the Centre enacting the three farm laws. Credit: AFP File Photo
The repeal of the farm laws will worsen the inequality challenge in the Indian economy because state capacity to drive reforms are significant and rising in the southern states, widening their difference from the Bimaru (Bihar, Madhya Pradesh, Rajasthan and Uttar Pradesh) states.
This has implications. India is the only major economy globally where people do not stay close to the manufacturing centres. In China, the population is concentrated in the coastal belt around the gigantic SEZs. In the USA, it is California and the eastern states where the population density is the highest. In contrast, India’s eastern states have the people, but the manufacturing centres are on the western and the southern coasts. This profoundly impacts reform outcomes for the people.
When firms sell goods and services to consumers in an economy, the transaction is best when both can drive prices with information. The reforms in the first phase for India have secured this benefit. If you buy any goods or services in a market, there is competition among firms to secure your business, and there are often regulators to ensure standards. These were ushered in with the support of the Centre over the past three decades. This phase did not need people to move from their homes.
The second phase of reforms is more tricky. These reforms mean allowing the factors of land, labour and capital that firms use to demand a similar fair price for themselves using price information. In the case of labour, this meant people could discover productive employment near their homes. To do that, however, each state needed to step in with reforms. But in the two decades since 2000, only a few state governments have been able to ensure them.
It has thus created the manufacturing regions in the Western and Southern states, but those centres have not come up in the population rich states of the east. This significant difference in state capacity has made factor reform outcomes so different within India and exacerbated inequality.
The land reforms story is well known in this context. The LARR Act of 2013 was meant to clamp down on land acquisition, and it has done so especially well in the eastern states. These are the regions of east UP, Bihar, Jharkhand and West Bengal that are capital scarce but have the land and the labour which could have come in useful to generate wealth. The exceptions to LARR have been carved out by the southern states plus Maharashtra and Gujarat. It encouraged the manufacturing industry to concentrate in these states.
Another example in this context is the model land tenancy law passed by the Centre in 2018. The law allows more extensive property rights of their land holdings by owner farmers. Consequently, it creates incentives for them to lease out their land to others to farm. The aim is to make more fallow land cultivable and raise productivity all around. As the late Tajamul Haque, chairman of the special cell on land policies at the Niti Aayog and author of the model act, noted, “Currently, 25 million hectares of land in the country are lying fallow largely because owners are not leasing them out due to restrictive clauses”. While states from all regions have moved to adopt the law on paper, check out which among them have made it successful.
The difference in state capacity is also why the labour law rationalisation is happening at warp speed in the western and southern states but caught in a time warp elsewhere. The vast and rising internal migration within India is a testament to this inequality. The migrants are grudgingly welcomed in the host states but left with no options at homes they have left.
One could say that it is still the prerogative of the states to do the heavy lifting in factor reforms, and it is why many objected to the Centre enacting the three farm laws. Yet, given this wide chasm of capacity, what is the chance that the farm level reforms will depart from this established script?
Instead, the repeal of the farm laws introduces additional problems for labour in the eastern states. There were no easy options to attract industry into these states with no bait of land or scarce capital. Those states had only one option on the table: to make agriculture more productive so that labour could be employed more productively and raise wages off the farm too. This needed substantial ramp-up of public investments, not the dribbles of incremental increase the respective state budgets can provide. The farm laws, if implemented, would have attracted private investments into these states, making up for the shortage of public investment to tap the rich harvest possible in non-cereal crops. The shortage of state capacity to do the heavy lifting could have been made up through the central support via legislation.
Remember, the SEZs, too, were supposed to be state-led. There was no good reason, a priori, for the Centre to intervene. Yet, no industry captain was willing to move in until the Centre passed the SEZ Act in 2006.
The population heavy states will now have to imagine the reform agenda for the factors on their own. It is a tough call and, on the evidence of recent history, unlikely to succeed. The state-wise differences in health and education outcomes are a stark reminder that the inequality challenge has just become more difficult.
(The writer is a business journalist)
Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.