Note: This is an article I wrote in April of 2009. Published it elsewhere, but never put it on my blog.

The arrival of the investor-friendly politician

As India began 2008, we watched Tata Motors enter its 20th month of impasse with protestors at the Singur site of its proposed Nano car plant. In the time since Tata unveiled plans to build its ground-breaking $2,000 four-passenger car out of a new factory in the town of Singur in West Bengal, few imagined the opposition that would build up. This was hardly the first time a project faced opposition in India, but the thousands of lives the Singur factory had touched ensured a protracted battle between its proponents and opponents.

Among its most vociferous supporters stood the ruling party, the Communist Party, which had gone to great lengths to attract the much coveted project. In what is one of the greatest political ironies in India, the party that had long relished being a vocal critic of corporate India, did a complete turnaround under its Chief Minister, Buddhadeb Bhattacharjee, to support the Tata project.

It is unclear exactly when the balance of power shifted between the opposing sides, but once the courts got involved, events started working against the project. In an affidavit mandated by the state High Court, the West Bengal government admitted that only 30% of the land for the project had been acquired with the consent of the landowners. For the protestors who had been claiming they had been treated unfairly, that was the evidence they needed to justify their opposition.

For investors in India, the state government’s botched management of the land acquisition process reveals a couple of considerations. First, a supportive government need not represent popular support. When investing in densely populated regions or agricultural lands, investors may have to deal directly with landowners. Second, monetary compensation need not be the best way to buy land. To a farmer, land can represent an inflation-indexed livelihood and collateral – benefits which are typically excluded from the government’s buying price. Third and most importantly, it pays to reduce your fixed investments in India today more than any point in the past, particularly because there are alternatives.

Hardly four days after it announced its decision to leave West Bengal, Tata Motors revealed a deal to relocate the Nano project to Gujarat. In an otherwise noisy democracy where every politician jockeys for attention with populist sops, the reception that Modi gave Tata was noticed. It remains to be seen whether Modi’s strategy will reap dividends in the upcoming elections, but for now, his constituents and investors benefit from the Chief Minister’s ambitious drive to reinvent his image, sullied by the Gujarat riots in 2001, and his state as the place to do business in India.

A few decades ago, such an alternative would have scarcely presented itself to Tata merely because India’s socialist policies suffocated business activity comprehensively. India’s heavily protected economy was mediocre all around, irrespective of which part of India you were talking about. Back then, the very idea of bureaucrats competing for investments was laughable. Today, it is conceivable.

Evidence of competition

Inter-state competition is not new to India; one of the best examples of economic competition occurred three centuries ago in Rajasthan’s Shekhawati region. A significant portion of the trade between India and Central Asia travelled through the princely states of Jaipur and Bikaner in those days. The farsighted rulers of Shekhawati lowered transit taxes to divert caravans from their rivals. As Shekhawati grew in importance as a trading route, traders migrated to the region and invested their fortunes there. Today, the region is home to beautiful traditional villas evoking memories of a rich past.

As of the last election in 2004, India sported some 6 national and 47 state parties, each promulgating its own social and economic agenda. Some on the far left, some to the center and some to the right. The scale here is relative, because India’s political and economic language has socialist moorings, and will continue to do so for some time. But within what the U.S. would consider to be a largely socialist vocabulary, there is plenty of scope for differences. And these differences have only grown as the central government has devolved more and more powers to the state and local governments.

Source: Department of Industrial Policy & Promotion

The disparity between the states becomes clearer with a comparison of their track records with attracting investments. In fiscal 2008, Chhattisgarh catapulted to the top of the league table based on investment proposals filed with the government. In 2001, after years of consensus-building and political campaigning, Chhattisgarh, formerly part of Madhya Pradesh, was given the status of an independent state. So Chhattisgarh gives us a rare opportunity to observe what devolving powers can achieve. From 1999 to 2000, Madhya Pradesh, including Chhattisgarh, attracted Rs. 115 billion in investment proposals. From 2002 to 2003, Chhattisgarh attracted Rs. 242 billion solely by itself. During the same period, its former parent state lagged behind at Rs. 25 billion. While only one indicator of progress, Chhattisgarh’s success with attracting investments as a state lends more support to the notion that it was underserved as part of a larger state.

There is more evidence that state governments are getting more aggressive about attracting investors. A ranking of the states by investments announced during the fourth quarters of 2008 and 2007 shows that while the states at the bottom are consistently poor performers, the states at the top are less consistent. Of the five poorest performers in 2007, four continue to lag behind their peers in 2008, whereas only Maharashtra and Orissa have retained their position in the top five. So, once you get past the laggards, there are plenty of movers and shakers, reflected in the progress made by Gujarat, Uttar Pradesh, Punjab and Bihar. The picture that emerges from this data is that of an increasingly competitive economy where governance is becoming an important differentiator.

Within chaos, diversity

Analysts often contrast the speed of economic reforms between “de-centralized” India and “hyper-centralized” China. Such simplifications ignore important exceptions in the political systems of both countries. For India, the lack of a heavily centralized government also leaves space for a variety of freedoms at the state level. True, the country still has much to do before it can claim to be a truly localized democracy, but even as it is today, India’s federal structure gives scope for different kinds of consensus to play out in the country.

For decades, my home state, Kerala, has seen a massive migration of its labor force to the Middle East and other parts of India. The flip side of having a fully literate society is that as peoples’ skills increase, their expectations will increase and they will seek higher paying jobs. But as Kerala’s history of militant trade unions and communist leanings has turned away many potential manufacturing investments, many Keralites have voted against their state’s economic choices by leaving for more fertile grounds. This scenario is playing out in other states in India where governments and civil societies are pursuing different socio-economic tradeoffs. As this happens, the cliché of India as a lumbering elephant will look increasingly outdated. If anything, India will begin to resemble more a herd of elephants, some sprinting, some stumbling and others idling.

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