BIBEK DEBROY: Is state-level integration possible?

If you can address the revenue concerns, pushing the economic agenda will be easier.

There have been occasions in the past when people have tried to generate a common economic agenda across political parties, so that regardless of the political complexion of the coalition at the Centre, core reforms continue. Some core reforms may indeed have continued. However, attempts to generate an explicit consensus never worked. If one scrutinises the agenda of pending reforms, barring the financial sector, most reforms are state government subjects. The cutting, or blunting, edge of reforms is at state-level. For instance, under the Seventh Schedule, all factor markets are state subjects, as is agriculture. Indeed, if one succeeds in moving labour away from the Concurrent List to the State List, as is sometimes argued, this will become even more the case. We now have that old wine in a new bottle, with people advocating a common economic agenda across states. More specifically, there is a subset of that idea, with removal of inter-state restrictions on goods as the focus. If not throughout India, at least in the north, or the south. Some of these restrictions are directly fiscal "" lack of uniformity in VAT rates, non-VAT indirect taxes, stamp duties, motor vehicles taxes and so on.

Others are not quite fiscal and concern agriculture "" APMC Acts, orders under the Essential Commodities Act (ECA) and so on. Still others are broadly under what may be called the common standards category, including rules under the Motor Vehicles Act. Finally, there are issues like roads, power, water and so on. There is a substantial amount of literature on integration schemes across the world, multilateral, regional, bilateral. This is both theoretical and empirical. And once the dynamics of structural adjustments are taken into account, the consensus is unambiguous "" integration leads to overall welfare gains. The argument is no different for an integration scheme within India. For instance, if agro-related restrictions are removed, welfare gains will be of the order of 25 per cent, thanks to dis-intermediation. The distribution of this 25 per cent may vary, but farmers will get higher prices and consumers will pay less. If all inter-state restrictions are eliminated within north India, the incremental income growth in the north will be of the order of between 1.5 and 2 per cent of state domestic product. The transaction costs of doing business will decline by 20 per cent. The precise figure may vary, depending on the model and the assumptions behind the model, but there is no denying the gains. If that is the case, why is there this great reluctance to integrate? Nor are we talking about France and Germany, where there were historical and non-economic reasons behind the resistance.

Unless we figure out the reasons, any attempt to generate consensus will also fail. I can think of four related reasons. First, acceptance of any external commitment implies loss of sovereignty and degrees of freedom, so to speak. The post-1991 reforms at the Centre required acceptance of such a diminished right on the part of the government and this hasn't necessarily percolated down through to the states. Agriculture is a case in point. Second, there is a tax-cum-revenue reason and this transcends the VAT argument, since there are intra-state revenue devolution issues. Who cares about the recommendations of the state finance commissions? Third, notwithstanding the three Kelkar (and other) recommendations, governments are still reluctant to accept the premise that tax policy is not the best instrument for pushing assorted objectives. Incumbents of North Block, including the present lot, find it difficult to accept this premise. How do you expect the states to comply? Fourth, the argument that integration is win-win is fallacious.

There are overall welfare gains no doubt, particularly when dynamic structural adjustments follow. But, in the interim, there are losers and these typically, are more vocal, concentrated and influential than the gainers. Take the wholesale market for vegetables in Delhi. Political hell will break loose if that cartel is broken. Hence, the obvious point again. There is a tradeoff between long-term welfare gains and short-term myopic political considerations. Consequently, the objective of a common state-level economic agenda and removal of inter-state barriers may be desirable, but there is legitimate scope for skepticism. The argument that VAT, in the sense of unification of sales tax, succeeded thanks to the empowered group of finance ministers, will not completely wash. The VAT proposition was simpler. However, even within the broader framework, if one can address revenue concerns, one suspects that pushing through the economic agenda will be easier. The focus should thus be one of addressing and revamping expenditure and revenue models for local bodies.