Rajasthan: All The Right Reforms

Vasundhara Raje is attempting all the right kind of reforms. Can these reforms ensure her political success?

Rajasthan, the historical home to bloody battles, is shaping up as the battlefield for a wide range of supply side reforms. As the Modi government completes a year and a half in Delhi, there has been a chorus of sometimes shrill, sometimes disappointed voices, questioning the slow pace of supply side reforms in the country. The most credible answers are coming in from Rajasthan, where the Chief Minister Vasundhara Raje is on an overdrive to address a wide range of issues including labor laws, education, power distribution companies, public healthcare, and public distribution systems among others.

Raje, who served as a Member of Parliament for 14 years before taking over as the Chief Minister of Rajasthan in 2003 for the first time, suffered a rare defeat to the Congress in the 2008 assembly elections. Staying out of power for five years – five years in which Rajasthan became the United Progressive Alliance (UPA) policy laboratory – seem to have given Raje a range of ideas to undo the pet UPA policies, as well as to mix social welfare with market drivers. BJP surged to victory in Rajasthan under her leadership in 2013, winning almost 80% of the assembly seats. The size of the mandate virtually gave her a blank cheque in terms of the potential legislative changes.

And she hasn’t disappointed as her government approaches the 2 year anniversary. As a number of BJP leaders rose to prominence over the last few years, including several Chief Ministers, Raje has largely remained the most un-fancied name in the second rung of the party leadership. Morever, the controversies relating to her family links with Lalit Modi came right out of the left field. Raje had a tough time through June and July 2015, with Congress gunning for her resignation. Perhaps her legislative determination lies in precisely this relative fallibility – she does not seem too concerned about electoral setbacks or getting a larger role in future at the Centre.

Competitive Federalism

Modi government has been stressing upon states to make changes to their business environment to compete with each other for investments, job creation and attracting talent. In the recently published “Assessment of State Implementation of Business Reforms 2015” report – a joint effort by Department of Commerce and Industry, World Bank, KPMG, CII, and FICCI – Rajasthan was ranked 6th among all states in terms of ease of doing business. Raje government has taken a lead to further the Rajasthan interests competing with more industrialized and higher per capita income states. In July 2015, Raje wrote in the daily Indian Express –

In 1949, Babasaheb Ambedkar said in his speech to the closing session of the Constituent Assembly that “The basic principle of federalism is that the legislative and executive authority is portioned between the Centre and states, not by any law to be made by the Centre but by the Constitution itself. The states are in no way dependent upon the Centre for their authority under our Constitution; the Centre and states are co-equal in this matter.”

Rajasthan became the first state in 2014 to start attacking the subjects in the concurrent list, taking a lead over the Centre and all other states in terms of far reaching reforms.

Labor Reforms

Indian organized labor market is governed by the laws created in 1940s and 1970s at the height of Fabian socialism tightening its grip over the country. Modi government has been mooting the idea of merging the Industrial Disputes Act, the Industrial Employment (Standing Orders) Act, and the Trade Unions Act into a single code for Industrial Relations. The labor unions have been up in arms against this proposal and have flexed their muscles via bandhs and hartals.

In July 2014, barely half a year into its tenure, the Rajasthan government passed laws to change three labour law amendment Bills relating to the Industrial Disputes Act, 1947, the Contract Labour Act, 1970, and the Factories Act, 1947. The state assembly also made changes to the Apprenticeship Act. These amendments made it easier for industrial units operating in the state to shut down and fire up to 300 workers without any permission. Most states in India have 80% small scale units employing less than 100 employees, with the rest being contracted, for fear of letting people go in the eventuality of a business downturn. These changes will help the small businesses absorb more workers on direct payroll, which in itself is beneficial to the workers in terms of getting better benefits. The amendments will also need 30% of the workers to get together to form a labour union instead of the original 15%, thus making it more difficult to unionize.

These changes came into force in November 2014 after the President of India approved them – a requirement where a state law supersedes the central one.

Land Reforms

In September 2014, the Rajasthan assembly approved a bill making it easier for land owners to sublet or lease part or whole of their land to solar and wind power companies, making it attractive for investors in the power sector. Rajasthan is making a thrust towards renewable sources of energy and land availability is the biggest impediment towards these projects.

The assembly has also taken up amendments to the Land Acquisition Bill – which has now been left to the states in the absence of a central law – but this bill is yet to be approved by the assembly. Tamil Nadu is the only state so far which has overruled the UPA 2013 Land Act, but conceivably Rajasthan should follow at some point.

Another area where central government has proposed greater transparency but has not yet legislated the relevant bill is ownership of real estate. While Rajasthan urban clusters aren’t yet vertical the way top metros are, Raje government got the Rajasthan Apartment Ownership Bill passed in March 2015. The provisions in this bill ensure greater disclosure of properties being developed to the buyers and greater accountability for the promises made during the sales process. With Jaipur growing as one of the fastest cities in India, these provisions are ahead of the times.

In the same session, the Rajasthan Special Economic Zone (SEZ) bill was also passed which frees the SEZ related land acquisitions from agricultural land ceiling provisions which have existed in the state since 1970s. This bill also provided for the usual state tax sops to attract new industries to set up shop.

Agricultural Reforms

Rajasthan has taken a few steps ahead to align with the usage of the proposed National Agricultural Market. Changes have been made to the Agricultural Produce and Marketing Committee (APMC) Rules as the first step to aligning with the central preconditions to participate in the national market. These include abolishing the market fee and rationalized tax structures imposed for selling perishable horticultural commodities like fruits and vegetables. Rationalization of licenses to operate in various markets to truly create one single market and greater private investments in the local committees will be the areas of future intervention.

Rajasthan along with 20 other states has also allowed contract farming for bulk buyers where they can make exclusive arrangements with farmers to procure crops for their own use.

Industrial Reforms

Ahead of the Resurgent Rajasthan Partnership Summit to be held in November 2015 focusing on attracting new industry investments, the government is undertaking necessary tweaks to make the investment experience better.

The government is planning to create a land bank of 10,000 acres even as it is strategizing on the amendment to the UPA 2013 Land Act. Under these amendments, the state may offer higher than mandated compensation to the land owners, but has vowed to keep the acquisition process easy and transparent. The idea is to substitute the opportunity cost of delay for the corporate with a higher upfront payment, incentivizing quick turnaround on the land deals.

The government has also promised to provide all clearances to start up new industrial units within 7 days including those for setting up Micro Small and Medium Enterprises (MSME) units. There’s also a plan to launch a new MSME policy before the November event which is expected to reduce bureaucratic burden for the small entrepreneurs.

Subsidy Reforms

Rajasthan is experimenting with rationalizing subsidies associated with the Public Distribution System (PDS) which chiefly deals with providing cheap wheat, sugar and kerosene through a network of 25,000 shops in the states. These shops are not fully utilized, remaining open just for a few days a month, and selling nothing but the expressly subsidized items. The government has now converted about 20% of these shops to privately run Annapurna Bhandar in association with the Future Group. These bhandars will stock not just the subsidy items, but also items of daily needs sold at a fair price – the stock unit management will be done directly by the Future Group.

Additionally, eligible citizens can now opt for either direct cash subsidy transfers in their bank accounts or buy non cash subsidized goods using a Bhamashah Card, named after the close aide of Rana Pratap. These cards, first distributed under the same scheme by Raje in 2007-08, were discontinued by the Gehlot government in 2009. Reviving the card based subsidy management approach; the Raje government now plans to provide all government assistance through this single route to plug leakages.

Other than the ration subsidies, Bhamashah cards will also be used for healthcare benefits covering more than 1700 illnesses, providing cashless treatment at private hospitals up to INR 30,000 for general illnesses and INR 300,000 for critical ones.

In her September blog in Times of India, Raje wrote:

“A modern state is a welfare state. But a modern state does not “spray and pray” with its subsidies. It must deliver them with grace, efficiency and effectiveness.”

Power Reforms

Rajasthan today runs the highest installed capacity of solar in the country at 1,100 MW. The National Thermal Power Corporation is looking at adding 680 MW already. And the state government has signed MOUs with several private players to add up to 26,000 MW solar in the state, which has the highest incidence of sunlight and vast open tracts of land.

Rajasthan power distribution companies (discoms) have run up a loss of INR 73,000 crores and the state had to cancel a few power purchase agreement in August this year owing to high interest burden and low power demand. The state is working with the central government to potentially take over the discom debts on its books, to be serviced via bonds to be raised for this specific purpose. The cost of borrowing for the discoms is way higher than what the state government can raise funds at, and if the central government provides a respite on the Fiscal Responsibility and Budget Management Act driven deficit targets of 3% only for this restructuring, Rajasthan may become one of the first states to avail the facility.

Addressing the discom debt, which has a domino effect on the public sector bank NPAs and thus on the credit availability in the economy for growth, has been a top priority for Piyush Goyal, the Minister of State with independent charge for Power, Coal and New & Renewable Energy. It is quite likely that the first moves on the Centre – State cooperation on this subject will be made in Rajasthan in 2016.

Education Reforms

In September 2015, amidst protests by the Congress members of the assembly, Rajasthan became the first state in the country to move the needle on assessing the education standards on output based parameters rather than inputs as provided for in the UPA Right to Education Act (RTE). The state has made a few changes with respect to assessment methodologies and the role of the private sector. The critics of the UPA era RTE act have suggested a long list of changes, especially concerning the treatment of majority and minority institutions. For now, these have not been touched by the Rajasthan government. But conceivably if the state gets the union government and the Presidential nod to its amendments, it can propose a wider review of the RTE provisions in the next cycle.

The RTE act has been a source of constant friction between the UPA and the NDA supporters. Various BJP governments have chosen widely different approaches to this act. During the Narendra Modi tenure as Gujarat Chief Minister, the state had made some tweaks to soften the provisions of the act. Maharashtra under Devendra Fadnavis on the other hand, has largely been pushing the act in its current form even more vigorously than the previous Congress-NCP government. The changes made by Rajasthan thus become even more significant in the light of these inherent contradictions – they can be used as a template by other NDA ruled states in the future.

Water Resource Management

In March this year, the government created a Water Resource Management Authority to ensure better management of the already scarce water resources in the state. This regulatory body will also look at interlinking of the river basins and submit proposals to seek central assistance for river interlinking. After Madhya Pradesh and Andhra Pradesh, Rajasthan may also seek to create these river linkages for more efficient flood water management.

Public Representation

Rajasthan became the first state in the country in March 2015 to specify minimum educational qualifications required to serve as sarpanch (class VIII, class V in tribal areas) and as members of panchayat samitis and zila parishads (class X). The law also specified that there should be a functional toilet inside the house of every contestant – thus pushing the Swachh Bharat Abhiyan as add-on.

Judicial Interventions

In addition to making sure all these far reaching laws are passed, the government has also worked on a small set of prisons and court reforms, municipal reforms including greater devolution of authority to corporations, preserving tourist heritage and provisions to counter defacement of property and banning social evils like witch hunting, still prevalent in the rural areas.

In the recently concluded session of the Rajasthan assembly marred by frequent Congress disruptions, the government managed to pass a bill to repeal 61 state acts and 187 underlying state acts, which were not relevant to governance. The assembly also passed the Rajasthan Vexatious Litigation (Prevention) Bill, 2015, which allows the litigating parties or the Advocate General to intervene and get potentially frivolous cases quashed. The High Court will enact specific rules to define what constitutes a vexatious legislation. Similar law already exists in Goa, Madhya Pradesh, Maharashtra, and Tamil Nadu.

In her Times of India blog on August 18th, Chief Minister Raje summed up her intent thus:

“The Rajasthan government agrees with Ambedkar’s view that our laws must be living documents that are diligently interrogated and continuously reviewed from the lens of an individual citizen.”

Vasundhara Raje’s term as Chief Minister is a great test for India’s ability to scale a true federal structure. Creating a system of balances where states chip in to patch the shortcomings or constraints of centre to keep the economic engine running is a key priority and Raje has taken a big lead in that race. Reforms of this breadth and depth come with their own political price, and indeed Raje herself faces a lot of opposition to the changes she is making from within the BJP. She is tackling the challenge with a mix of carrot and stick – populism via reservations and not letting the dissidents organize.

Raje’s success will doubtless encourage other Chief Ministers, specially the BJP ones, to make bolder reform moves. Her failure on the other hand can stall the process of bottom up change for fear of political repercussions. As of today, despite a lower public profile, Vasundhara Raje is the most important state leader in the country. If she wins, India wins.