Centre-State Relations

Author - Baijayant 'Jay' Panda

Posted on - 29 May 2008

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This article was published on 'The Indian Express' on 29th April 2008..





Article Title:”Empire tunnels back”

In some important ways, India’s Central government behaves with states in much the same way that the British Raj did with pre-Independence India. Certain key policies of the Raj decimated the Indian economy by encouraging — even forcing — value-addition activities to shift abroad, relegating India to becoming just an exporter of raw materials. Gandhiji’s boycott of English textiles symbolised our resistance to such policies.

For five decades after Independence, the policies of the Central government did something similar to India’s mineral-bearing states. Policies like freight equalisation — whereby the railways were made to subsidise transport of raw materials — artificially removed the economic advantage of states like Orissa, Bihar and Madhya Pradesh. Thus, while economic logic dictated that large investments in value addition of minerals (steel plants, power plants, etc) should have gone to such states, in fact, they got only a fraction of it.

Instead, political logic ensured that the majority of such investments went, in classic Soviet style, to faraway states that had more clout in Delhi. The country is littered with factories in places that have no economic rationale for their locations, far from mines, ports and markets. Apart from being sub-optimal for the country’s economy, such policies had a devastating effect on mineral-bearing states. With little long-term investment in value-added downstream activities, and a pittance in mineral royalties, these states saw none of the poverty alleviation enjoyed by the newly industrialised states.

The last decade has seen a reversal of such distortions. A major factor has been the emergence of coalition governments, which are far less autocratic, and regional parties, which are far more assertive. This has led to mineral-bearing states implementing policies favouring local value addition — in other words, giving higher priority to those seekers of mining rights who also commit to investing, within the state, in downstream production facilities.

The results have been dramatic. Take, for example, Orissa. Earlier a perennial laggard in investment and economic development, it has had a stunning turnaround since implementing the policy of local value addition. More than Rs 20,000 crore is already invested, with Rs 400,000 crore in the pipeline. These numbers are not just significant, they represent a historic turning point. For the first time since Independence — in fact, in many centuries — Orissa’s annual GDP growth rate has started exceeding the national average.

To anyone who doubts the relevance of GDP growth rates to the aam aadmi, I can only point out the concurrent improvement in Orissa’s social development indices: sharp drops in infant mortality and child malnutrition, and rise in state government expenditure on rural infrastructure.

The mantra of value addition has also been taken up by other mineral-bearing states. The chief ministers of Chhattisgarh, Jharkhand, Madhya Pradesh, Rajasthan and Orissa have been working closely towards this. Karnataka, before its government gave way to president’s rule, also took similar steps. These states stand to benefit not just in monetary terms but also in the number of jobs created by insisting on local value addition. The historical damage caused to them by central planning cannot be undone, of course, but at least prospectively justice will be done.

Now, however, the empire has decided to strike back. Imperial Delhi, under the guise of the new National Mineral Policy, has decided to grab back the power of allocating mining leases without any prioritisation for local value addition. This campaign to turn the clock back on a decade of mining policy liberalisation has been conducted in astounding secrecy. To give just one example, the prime minister refused for months to meet the chief ministers of these five states to discuss the draft policy, until a showdown in Parliament compelled it last December. Thereafter, the chief ministers’ memorandum has only been given lip service without their recommendations being incorporated. Finally, in an era when most ministries post their draft legislation on their websites for public discussion, the exact wording of the proposed rules for value addition is not being shared with even these state governments (let alone the public).

Why such secrecy? One reason could be the whisperings about powerful lobbies working overtime to push through the new mineral policy — which seeks to reinstate some of the bad old ways of the licence permit raj — well in time before the general election. A public debate about the wisdom of reverting to Nehruvian central planning and allocation in mining would certainly slow down the new policy beyond the term of this government.

But secretive policy-formulation in the world’s largest democracy is no longer a sustainable proposition in the internet era. The wording of the new rules, whenever they are finally disclosed, would undoubtedly invite legal challenges and public interest litigation. Meanwhile, it does not seem to have registered in Delhi that the new policy has become a political hot potato in those states. The mantra of local value addition — creating local revenue, local infrastructure and, most importantly, local jobs — is a powerful formula which has been transforming lives for a decade. It will be no more be possible to turn this clock back than it was for the Raj to continue after Gandhiji’s boycott of its goods galvanised a nation.

But there remain dyed in the wool recidivists who not only pine for the bad old days but are working very hard to bring them back. The argument for denying local value addition as a basis for mining allocation is mostly couched in hoary old “national interest” dogma. In other words, nonsensical justification that states that don’t have mineral resources somehow also “deserve” to have their own power, steel and other such plants, even if that defies economic logic. As if stealing from Peter — in this case poverty-stricken mineral-bearing states — to pay politically powerful Paul, is some kind of noble aim. It is in fact outright political thuggery. The reality, of course, is that every state has its own economic strengths and weaknesses, and must be allowed to achieve its own best potential. If that means that power and steel plants will naturally come up in mineral-rich clusters, so be it. The nation will have access to their output, share in their success, and that will be a sustainable basis for national integration.

Of course, Delhi’s wily efforts to revert to the old status quo will be bitterly resisted. When millions of people feel they are being exploited by a remote centre of power, a political vacuum is automatically created; in this case, there is no shortage of political parties or leaders willing to fill that vacuum.