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Modi’s integrated India may be world’s next biggest trading bloc

NEW DELHI — A new Common Market is being formed. It has a bigger economy than the whole of sub-Saharan Africa, more states than the European Union has members and twice the population of North America. It is called India.

Clothes vendors on the roadside in Mumbai. India is trying to improve the ease of doing business in its states. Photo: Reuters

Clothes vendors on the roadside in Mumbai. India is trying to improve the ease of doing business in its states. Photo: Reuters

NEW DELHI — A new Common Market is being formed. It has a bigger economy than the whole of sub-Saharan Africa, more states than the European Union has members and twice the population of North America. It is called India.

For more than six decades since independence, India’s 29 states have operated almost as separate countries. They set their own taxes, charged import duties on goods from neighbouring states, had their own politics, culture and even languages.

Prime Minister Narendra Modi is trying to change that. He is using his popularity among voters to replace more than a dozen levies with a single goods-and-services tax by next April, leaning on state governments to amend labyrinthine labour and land laws and revamping the Soviet-style Planning Commission. To win support from states, he has pledged them a record share of federal tax revenue.

“There are 29 mini Indias within one big India and they are modifying their approval process, procedures to make themselves competitive,” said Mr Ajay S Shriram, 61, chairman and senior managing director of DCM Shriram Ltd, a business with interests in sugar, chemicals and cement that has plants and offices in at least five states. “States are trying for their own economic development, which will help improve the ease of doing business and boost the country’s growth.”

The new commercial competition is beginning to show. Ask Mr Vineet Mittal, vice-chairman of solar-power company Welspun Renewables. Five years ago, he tried to get permission to build a solar power plant in a southern Indian state. After six months of waiting for appointments with officials and being given the runaround by government bureaucrats, he gave up.

Last October, he tried again. When he arrived at the airport, he was surprised to find liaising government officers waiting for him. They whisked him straight to meet senior bureaucrats and the Chief Minister of the state. By March, Welspun was ready to start work on a 7.5 billion-rupee (S$157 million), 100-megawatt project, 20 times the size of the one he tried to propose in 2010.

“In the past, officials enjoyed making you wait. There was a level of sadism,” Mr Mittal said during an interview in his New Delhi office. “There is drastic change in attitude and culture to attract industries.”

Given the size of India’s states and a predicted growth rate of at least 7.5 per cent over the next five years, the potential benefits of integration for investors are huge. In population terms, Uttar Pradesh is equivalent to Brazil, Maharashtra would be Mexico, while Bihar is on par with the Philippines.

“India’s states can be compared to major countries around the world,” McKinsey analysts including Mr Jaidit Brar wrote in a report in October. “Understanding their evolution and making the right bets from a five- to 10-year standpoint is critical to being well positioned for growth in the Indian market.”

Should Mr Modi succeed in forging a single market, the biggest winners could be some of the poorest states. Eight Indian states accounted for about 45 per cent of the US$1.8 trillion (S$2.4 trillion) gross domestic product in 2012, led by Haryana and Maharashtra, the McKinsey report said.

“For India to grow at average 9 to 10 per cent, many states of India have to grow at 15 to 16 per cent,” said Mr Amitabh Kant, secretary in the Department of Industrial Policy and Promotion, in a March interview. “That’s easily doable because there are very low levels of growth.”

India has forecast growth of as much as 8.5 per cent in the year ending March next year, which would be the fastest among major economies. Achieving those levels of expansion will require states to adopt supportive policies, the McKinsey authors said.

That still means a political battle for Mr Modi, whose Bharatiya Janata Party and its allies control 11 states, while the main opposition Congress party-led bloc holds nine, with the rest run by regional parties that include groups opposing Mr Modi’s policies.

“The political colour of each Indian state has a significant impact upon their relations with the Indian federal government,” Mr Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight, said in Singapore. “States also need to realise that they are not just competing amongst each other, but also face global competition.”

The infighting, corruption and endless regulations have tarnished the country’s image for investors. India fell to 71st from 60th among 144 nations in the World Economic Forum’s Global Competitiveness Index 2014/15, behind Rwanda and Romania. On the World Bank’s latest Ease of Doing Business Index, India’s position worsened to 142nd out of 189.

Mr Modi has directed his administration to improve India’s ranking, but many of the measurement parameters — registering a business, getting electricity, paying taxes, enforcing contracts — rest with the states.

“We’re trying our best to attract investment by facilitating land, providing incentives and other facilities,” said Mr Apurva Chandra, principal secretary for industries in the western state of Maharashtra, which houses the financial hub of Mumbai. Maharashtra is the most competitive innovation-driven Indian state, attracting more than 30 per cent of foreign direct investment in the country since 2000.

“Ultimately this intense competition among states is helping them as well as the country,” Mr Chandra added. BLOOMBERG

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