Business Today

Too many cooks?

Muscular federalism may threaten the India growth story.

Dhiman Chattopadhyay | Print Edition: January 27, 2008

Roadblock to India’s growth story
Roadblock to India’s growth story
The Goa Government decides to scrap 15 special economic zones (SEZs) in the state. The Centre caves in and agrees to review them. In UP, Chief Minister Mayawati rides roughshod over Reliance Retail’s plans to set up base in the state. In West Bengal, the mere mention of an SEZ creates panic. In Tamil Nadu, the DMK government threatens to nationalise all cement factories unless manufacturers drastically reduce prices. Are powerful regional parties, backed by vested interests, weakening the Centre and scaring away potential investors?

Says ASSOCHAM President and Videocon Group Chairman Venugopal Dhoot: “Why should the Centre feel weakened? It’s the state governments’ prerogative to allow or disallow anyone from using their land to start an SEZ.” Others vehemently disagree. Former Disinvestment Minister in the NDA government, Arun Shourie, says: “There is no government at the Centre at all. In both the UP and Goa incidents, some very good ideas have been perverted into real estate speculation by vested interests. In West Bengal, some 200,000 acres were notified. Of this, 83,000 acres were given to the Salim Group without following any legal procedure. No wonder, good policies are being defeated.”

Predictably, Congress spokesperson Abhishek Manu Singhvi rubbishes any claims of a weak Central government. “The name of the game is balancing competing public interests, which alone can lead to harmonious development. Starry-eyed gung-ho SEZ implementation is as bad as no SEZs. The virtue always lies in between,” he says.

But, what about the trend of local governments scrapping contracts signed by the Centre, thus, creating an air of uncertainty? Isn’t politicking hampering India’s growth story? “Of course,” says Shourie. But Singhvi begs to differ. “The framers of our Constitution did conceive India as a quasi-federal structure, but in reality, almost all major Central initiatives have to be implemented by states.

The worry points

Politicking by states can open up a whole can of worms.

  • A stronger dose of federalism may scare away investors
  • Political fragmentation is creating an uncertain investment climate
  •  A precedent, once created, can have a domino effect
  •  The issue lies in a grey area legally 
Therefore, purely state-specific contextual situations cannot be blindly ignored, if we want long-lasting SEZ development. If appropriate rectification is sought to be done, I think it’s unfair to call it politicking,” he says.

But, won’t such a different-rules-for-different-states policy scare away potential investors? And won’t this create a precedent that can be cited by other states to thumb their noses at the Centre’s policies? Dhoot is not too sure. “Goa won’t have much of an impact. It’s a tourism hub and not an industrial state. In West Bengal, too, Nandigram is just 1 per cent of the state,” he says, but admits that if problems keep cropping up in states like UP, Orissa and Maharashtra, things may become too hot to handle.

Singhvi, predictably, assures that investors are not scared. He adds: “To try to achieve a balanced growth after Centre-state interactions will, far from scaring investors, lead to longer lasting SEZ relationships, fully involving local civil society at the state level.” And what about the legal repercussions? Noted Supreme Court advocate Prashant Bhushan says: “In legal terms, if the Centre concludes that a project can cause grave environmental problems or goes against public interest, it has the power to scrap it. In addition, the General Clauses Act says that if a government has the power to do something, it also has the power to undo the same thing. So, the Centre has the power to scrap a project, followed by compensation to developers. Also, remember that SEZs cannot be implemented without a state government’s approval.”

The final word, though, comes from Arun Maira, Chairman of Boston Consulting Group (India). “We should look beyond immediate roadblocks since the future looks brighter. Too much centralisation has been our problem for long. In some ways, states choosing their own path is a step in the right direction,” he says. Many foreign investors, he reveals, in fact, prefer investing in India over China because of this very reason—the democratic set-up. “Investors I have spoken to in the US are of the view that China has hidden risks. So they hedge on China, but come to India,” Maira concludes.

— Additional reporting by Kapil Bajaj

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