‘Reforms by conviction and incentives’ have replaced ‘reforms by stealth’: PM

Prime Minister Narendra Modi today said that India have replaced ‘reforms by stealth and compulsion’ with ‘reforms by conviction and incentives.’ In a blog on LinkedIn, he also lauded “Centre-State bhagidari.”

“When we formulated our economic response to the Covid-19 pandemic, we wanted to ensure that our solutions do not follow a ‘one size fits all’ model,” he wrote. “For a federal country of continental dimensions, finding policy instruments at the national level to promote reforms by state governments is indeed challenging. But we had faith in the robustness of our federal polity and we moved ahead in the spirit of Centre-State bhagidari.”

In May 2020, as part of the Aatmanirbhar Bharat package, the Central government allowed states higher borrowing for 2020-21, he said. “An extra 2 per cent of GSDP [gross state domestic product] was allowed, of which 1 per cent was made conditional on the implementation of certain economic reforms. This nudge for reform is rare in Indian public finance. This was a nudge incentivizing the states to adopt progressive policies to avail additional funds. The results of this exercise are not only encouraging but also run contrary to the notion that there are limited takers for sound economic policies.”

The four reforms to which additional borrowings were linked (with 0.25 per cent of GDP tied to each one) had two characteristics, the Prime Minister wrote. Firstly, each of the reforms was linked to improving the Ease of Living to the public and particularly the poor, the vulnerable, and the middle class. Secondly, they also promoted fiscal sustainability.

The first reform under the One Nation One Ration Card policy required state governments to ensure that all ration cards in the state under the National Food Security Act (NFSA) were seeded with the Aadhaar number of all family members and that all Fair Price Shops had Electronic Point of Sale devices. The main benefit from this is that migrant workers can draw their food ration from anywhere in the country. Apart from these benefits to citizens, there is the financial benefit from the elimination of bogus cards and duplicate members. Seventeen states completed this reform and were granted additional borrowings amounting to Rs 37,600 crore, Modi wrote.

The second reform, aimed at improving ease of doing business, required states to ensure that renewal of business-related licences under seven Acts is made automatic, online and non-discretionary on mere payment of fees, the Prime Minister wrote. “Another requirement was implementation of a computerized random inspection system and prior notice of inspection to reduce harassment and corruption under a further 12 Acts. This reform (covering 19 laws) is of particular help to micro and small enterprises, who suffer the most from the burden of the ‘inspector raj’. It also promotes an improved investment climate, greater investment and faster growth. 20 states completed this reform and were allowed additional borrowing of Rs 39,521 crore.”

In accordance with the recommendations of the 15th Finance Commission and several academics, the third reform was carried out. It required states to notify floor rates of property tax and of water and sewerage charges, in consonance with stamp duty guideline values for property transactions and current costs respectively, in urban areas. This would enable better quality of services to the urban poor and middle class, support better infrastructure and stimulate growth. Property tax is also progressive in its incidence and thus the poor in urban areas would benefit the most, the Prime Minister wrote.

The fourth reform was introduction of Direct Benefit Transfer (DBT) in lieu of free electricity supply to farmers, he wrote. “Additional borrowing of 0.15 per cent of GSDP was linked to this. A component was also provided for reduction in technical & commercial losses and another for reducing the gap between revenues and costs (0.05 per cent of GSDP for each).”

Overall, 23 states availed of additional borrowings of Rs 1.06 lakh crore out of a potential of Rs 2.14 lakh crore. As a result, the aggregate borrowing permission granted to states for 2020-21 (conditional and unconditional) was 4.5 per cent of the initially estimated GSDP, the Prime Minister wrote.

Officials who have been working on these reforms suggest that without this incentive of additional funds, enactment of these policies would have taken years, he wrote. India has seen a model of ‘reforms by stealth and compulsion.’ This is a new model of ‘reforms by conviction and incentives.’

The Prime Minister wrote, “I am thankful to all the states who took the lead in ushering in these policies amidst tough times for the betterment of their citizens. We shall continue working together for the rapid progress of 130 crore Indians.”