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Monday, 25 June 2012 03:52
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More than just natural resources drive Bimaru’s change, but the governance revolution needs to last

It is easy, and frustrating, to highlight the central government’s actions that have led to investors fleeing the country. High fiscal deficits, more so if you include oil subsidies of around 1.5% of GDP, have meant the government leaves that much less money for private investors; the government’s investor-unfriendly attitude is best exemplified by the Vodafone retrospective tax amendment, but goes on to the doubling of income tax disputes to R436,741 crore in the 12-months ending December 2011; ‘policy paralysis’ has meant land acquisition remains dicey (the Calcutta High Court Singur ruling shows just how much); despite Parliament having legislated it, coal blocks for captive users are still not auctioned and the power sector remains hostage to Coal India’s inefficiencies ...

The list is a long one, and though the new finance minister may be able to speed up the implementation of the GST, for instance, it is foolish to think he can do much until the Congress party changes its distribute-first-grow-later DNA which has led to public sector savings falling from 5% of GDP in FY08 to just 1.7% in FY11—till savings rise, neither investments nor GDP growth can pick up (see Budgeting for clarity, http://goo.gl/v8PTQ). To that extent, even while it is true some states are running progressive governments, the Central government’s actions act as an overall constraint to India’s growth.

Within the states, while the growth of what used to be called the Bimaru states (see graphic) is well known, the picture isn’t an unalloyed one. While Bimaru states have grown well, a large part of this is due to the extremely low base; also, with the electorate seemingly more exacting, the Bimarus seem to be using central government schemes more effectively, good examples being the Prime Minister’s rural road programme (PMGSY, see first graph), rural electrification programme and Bharat Nirman. An equally large part of Bimaru’s new shine relates to the plethora of steel and other raw material-based industry proposals in these states—Bimaru account for 80% of India’s coal/iron ore reserves and 70% of bauxite, but their inability to get land, among others, has ensured few of the mega projects have come up.

So, how sustainable is the Bimaru boom, and given more than 70% of India’s incremental workforce will come from here over the next 40 years, this is also critical for India’s overall growth—by 2020 or so, the proportion of working age population of prosperous states

like Maharashtra, Tamil Nadu, Gujarat, among others, will start to fall.

This is where BNP Paribas ‘Bimaru to Booming’ report comes in. For one, it points to sharp increases in educational attainment in Bimaru states—in Bihar the Gross Enrolment Ratio (GER) is up from 5.9 in 2006 to 11 in 2011. For Chhattisgarh, it is up from 8.7 to 20—the quality of this education may not be as good as we’d like, but it represents a definite movement upward. But even here, the picture is graded—Uttar Pradesh’s GER has hardly moved in this 5-year period; in terms of even the very basic Aser tests of ability of kids in Class 3-5 who can do two-digit subtraction, UP (which will account for a fourth of India’s incremental labour force) has the lowest scores. Assisted deliveries and hospital beds per ‘000 population in Bimaru states, BNP says, are up, and violent crimes are down.

An interesting point BNP makes is that, with Bimaru incomes growing faster than the all-India average in the last 5 years, consumption growth may reach tipping point in the next 4-5 years (Punjab, for instance, has 1.5x Madhya Pradesh’s per capita income but its 2-wheeler penetration is 2.5x; Maharashtra’s per capita income is 2x Orissa’s but it’s 4-wheeler penetration is 3x). In which case, expect more consumer durable and non-durable producers to head towards Bimaru! According to the finance ministry’s PPP database, 20-30% of upcoming PPP projects in state highways and urban infrastructure, to cite more data, are from Bimaru states.

Can this last? If Bimaru governments are able to convert existing steel proposals to projects on the ground, clearly it will. Ditto, if they’re able to raise education levels, provide better amenities in terms of roads, hospitals, etc. But governance here is critical—if the central government can, over 4-5 years, fritter away the India story, why blame states? Later today, we’re promised, the UPA will take critical decisions to improve investor sentiment. Fingers crossed.

 

 

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