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Business Commentary/Mahesh Nair

The loser! North India lags behind the rest

Farooq Abdullah, the chief minister of Jammu and Kashmir, sipped a glass of water, looked across the room full of industrialists and said: "Take my word, nothing is going to come out of this. Next year we shall meet again in this room. I will be here along with my fellow chief ministers from Delhi, UP, Haryana, Himachal Pradesh, Punjab and Rajasthan. We will all talk about how important it is for the northern states of India to create a free trade zone. How we can share our resources. How investors like you can benefit from our economic friendly policies.

"We will all talk. Pardon me for being a pessimist. Nothing will come out of this. Nothing has come out of the last meeting we held a year ago."

Abdullah's candid confession is an apt description of the economic condition of north India. While the flavour these days is to talk of global trade bodies like the WTO, EU, and ASEAN, it is illuminating to look at how the confederation of Indian states function on economic matters. The six north Indian states -- Delhi, Jammu & Kashmir, Haryana, Himachal Pradesh, Rajasthan, and Uttar Pradesh -- are a good place to start with. After all, they have already started a programme called Concord -- a regional co-operation programme launched on the initiative of the Confederation of Indian Industries.

According to a study conducted by Feedback Strategic, north India has been lagging behind the other regions in the country (with the exception of the northeastern states) in improving the quality of life of its people. A Rs 100 earned in 1995 would, in the year 1996, be worth Rs 101 in Punjab, have the same value in Haryana (Rs 100), and dip to Rs 98 in Rajasthan. To see what value for money people in these states get, compare it for the same period with other states. That very hundred-rupee note would be worth Rs 106 in Maharashtra and West Bengal, Rs 105 in Kerala, and Rs 104 in Andhra Pradesh!

Even if you were to benchmark the best in north India with the best from the rest of India the comparative indicators are disappointing. The compounded annual growth rate (CAGR) during the years 1990-96, according to a Reserve Bank of India report, fared much worse than other states. For instance, in agriculture the best CAGR in the north was recorded by J&K which touched 3.2 per cent while Punjab came up with 3.1 per cent. Comparatively, West Bengal boasts of 5.9 per cent and Karnataka 5.3 per cent during the same period.

The state domestic product (SDP)-the value of total product of enterprises operating in the state regardless of their ownership -- in the north is in a bad shape too. If you were to exclude Delhi -- which is technically a city and not a state (compounded annual growth rate of its SDP: 6.3 per cent) -- the rest of north India are way below the other Indian states. Himachal Pradesh's SDP boasts of 4.3 per cent growth rate and Punjab 4.2 per cent. Maharashtra, on the other hand, has a 7.5 per cent growth rate and Kerala 6.7 per cent.

What went wrong? According to Vinayak Chaterjee, Chairman of Feedback Ventures, a firm that specialises in setting up joint ventures between private enterprise and state governments, the north Indian states must redefine their roles. "They have to shift from being a sponsor to facilitator by allowing development to take place with private capital. Since 1956 states have been creating state industrial development corporations, providing loans and equity support, setting up public sector units, and building industrial estates, roads, ports and townships. They must get out of all these businesses."

The tragedy is that most of the north Indian states have been unable to do so. Meanwhile, other Indian states have already begun their homework.

"These are tough decisions to make, and it may bring us less votes," confesses Captain Kanwaljit Singh, finance minister of Punjab. "But eventually this is what we have to do. Let's face it. Businessmen should be running business. And politicians should be running governments."

Chaterjee has a solution. "Put up an apex level body, something like an economic development board, which will provide single-point coordinated decisions. Set up regulatory bodies like a state highway authority which will lay the basic guidelines for every sector. Raise funds on your own like the Tamil Nadu Urban Development Fund and the Ahmedabad Municipal Bonds. And form common markets -- have a uniform value-added tax scheme for instance -- amongst the northern states."

But why are these steps not being taken? The refrain as echoed by Prem Kumar Dhumal, chief minister of Himachal Pradesh, is, "Give us some more time. For six chief ministers to sit and work out details like these, it takes time you know."

The sad truth is that there simply isn't time left. As most of these northern states have discovered if you don't reach out for the pudding, somebody else will. As a Business Today survey of investors had shown, not one of the north Indian states is amongst the first six preferred destinations for investment in 1998. Haryana comes in at destination number 7, Delhi No 9, Uttar Pradesh No 13, Punjab No 15, Rajasthan No 17, and Himachal No 18. It will not take a genius to know where you will be headed to if you have a couple of millions to invest.

The irony is that these six northern states were at one stage the most likely candidates to get their act together. After all, they are either run by BJP governments or have an alliance with it (save the J&K's National Conference which has, as is the fashion nowadays, decided to lend "issue-based support").

To get these soporific governments moving we should take a leaf out of what the Clinton administration has done in the United States. Clinton introduced a scheme which designated six cities Urban Empowerment Zones (UEZ). Instead of doling out funds to create government jobs and housing complexes, the federal government has provided these six UEZs with a 10-year package of tax incentives and $100 million in cash-grants to prepare these zones for new business opportunities. The only criteria is that each of these cities, sponsored by their respective state governments, will have to competitively bid against each other for being one of the Chosen Six.

Imagine what such a scheme could achieve here in India. The mayors and councillors of each major town, backed by their respective state governments, will have to do their homework -- in fact, take a tip from what Vinayak Chaterjee suggested -- and bid for the UEZ jackpot. A ten-year tax holiday and say Rs 1 billion for preparing these zones for new business opportunities would make these towns preferred investment destinations.

It would enhance the image of the state governments and its coffers.

And it will improve the value of our hundred rupee note

But will such schemes be ever implemented in India? Or will we have to swallow the bitter truth of what Farooq Abdullah prophesied?

I'll be glad to take a wager.

Mahesh Nair