Reforms leader, Growth laggard

BS OPINION

One of the first things that comes to mind while discussing Andhra Pradesh and its chief minister Chandrababu Naidu is their strong reforms image "" the state, for instance, was the first to kick off power sector reforms by unbundling its electricity board, and it was the first to make formation of water user associations mandatory for running irrigation projects, it has the highest growth in tax and non-tax mop-up compared to its other southern compatriots, and so on.

Yet, take any parameter, whether it is GDP growth, private sector investment, or literacy rates, and Andhra's behind the others "" a reforms leader, but a growth laggard.

On the investment front, as a report in this paper yesterday showed, much of the state's high investment levels are actually because of government projects.

And while the state has made substantial inroads into software exports, take away Satyam from Hyderabad, and you have much less to show for the state's software prowess.

Part of the reason, of course, is the historical backwardness and the poor initial conditions "" Andhra saw the highest hikes in literacy rates and access to safe water in the 1990s but it remains at the bottom of the southern league tables.

There's also the fact that Mr Naidu's father-in-law, the late N T Rama Rao, not only left the treasury quite bankrupt, he got the electorate very used to the idea that generous doles were what governments were there for.

Naturally, getting out of such a morass takes time. It doesn't help, though, that Mr Naidu is himself a great one for populism "" while cutting growth in the size of government staff helped slash the salary component of government expenses from 43 per cent in 1994-1995 to 35 per cent in 2000-2001, extending the pension scheme to employees of local bodies and aided institutions, along with the 5th Pay Commission, saw pension costs jump from 9 per cent to 30 per cent.

It helps, of course, that a friendly central government supports his populism "" as compared to its allocation share of 6.7 per cent, Andhra got 7.6 per cent of anti-poverty funds through centrally sponsored schemes last year.

A larger problem for Naidu, as well as for most states, of course, is the near-complete absence of meaningful second-generation reforms.

In the farm sector, for instance, apart from several restrictions on inter-state movement of paddy and rice, the state continues to impose a 1 per cent market fee, a 4 per cent sales tax and 5 per cent rural development cess.

Similarly, while the Contract Labour Act applies to contractors employing more than 20 people, in Andhra it applies to contractors employing more than five people, making labour laws even more stringent in the state.

The natural question is: can Andhra sustain, or increase, its growth rate given the deep fiscal crisis it is in? If you go by the Planning Commission's analysis, outlined in the 10th Plan, it's going to be an uphill task.

Mr Naidu, however, is hoping his reforms spiel will attract enough investment to spur growth high enough so as to make genuine reforms possible, and painless.

Life, sadly, is no fairy tale, and so hard decisions need to be taken first, while the results take years. That, of course, is why organisations like the World Bank, and now the central government, give states a breather through loans.