Despite the Indian economy facing a whole new set of challenges due to the second wave of COID-19, Prime Minister Narendra Modi said that state governments were able to implement several “public-friendly” reforms in a short span of time due to a new ‘reform by conviction and incentive’ model.
In a blog, titled “Reforms by conviction and incentives”, and published on LinkedIn, Modi listed out how the Central Government nudged states into implementing four key reforms by incentivising the implementation of progressive policies with the availability of additional funds..
These policy reforms, the blog said, were aimed at improving the ‘ease of living’ to the public and particularly the poor, the vulnerable, and the middle class, and also promoted fiscal sustainability.
Unlike in the past, where “schemes and reforms remain un-operational often for years” for various reasons, reforms were implemented quickly because of the Centre’s new policy of ‘reforms by conviction and incentives’.
What does ‘reforms by conviction and incentives’ mean?
In May 2020, as part of the Aatmanirbhar Bharat package, the Centre had announced that state governments would be allowed enhanced borrowing for 2020-21. States were allowed to borrow an extra 2 percent of (Gross State Domestic Product) GSDP. However, there was a caveat to it. States could borrow more, provided one 1 percent of this additional borrowing was spent on the implementation of certain economic reforms.
The prime minister said that the results of this exercise has not only been encouraging but also run contrary to the notion that there are limited takers for sound economic policies.
While on the one hand, the policy allowed states to borrow significantly more in 2020-21 despite the financial crunch due to the COVID-19 pandemic (states were able to raise an extra Rs 1.06 lakh crores in the period 2020-21), they were also able to raise enough resources for public welfare schemes.
“Overall, 23 states availed of additional borrowings of Rs. 1.06 lakh crores out of a potential of Rs. 2.14 lakh crores. As a result, the aggregate borrowing permission granted to states for 2020-21 (conditional and unconditional) was 4.5 per cent of the initially estimated GSDP,” the blog said.
What are these four reforms?
Here are the four reforms which Modi said about in his blog:
1. Public Distribution System: Modi mentioned that the first reform under the ‘One Nation One Ration Card’ policy required state governments to ensure that all ration cards in the state under the National Food Security Act (NFSA) were seeded with the Aadhaar number of all family members and that all fair price shops had an electronic point of sale devices.
The main benefit from this is that migrant workers can draw their food ration from anywhere in the country, said Modi adding that apart from these benefits to citizens, there is the financial benefit from the elimination of bogus cards and duplicate members.
Modi said that at least 17 states have completed this reform and were granted additional borrowings amounting to Rs 37,600 crore.
2. Renewal of business-related licences: He stated that the second reform, aimed at improving ease of doing business, required states to ensure that renewal of business-related licences under 7 Acts is made automatic, online and non-discretionary on mere payment of fees.
“Another requirement was the implementation of a computerised random inspection system and prior notice of inspection to reduce harassment and corruption under a further 12 Acts. This reform (covering 19 laws) is of particular help to micro and small enterprises, who suffer the most from the burden of the ‘inspector raj’. It also promotes an improved investment climate, greater investment and faster growth,” the blog read.
Twenty states completed this reform and were allowed additional borrowing of Rs. 39,521 crores, he added.
3. Property taxation: The third reform required states to notify floor rates of property tax and of water and sewerage charges, in consonance with stamp duty guideline values for property transactions and current costs, respectively, in urban areas. This would enable a better quality of services to the urban poor and middle class, support better infrastructure and stimulate growth, the prime minister said.
He stated that property tax is also progressive in its incidence and thus the poor in urban areas would benefit the most, adding that this reform also benefits municipal staff who often face delay in payment of wages.
Eleven states have completed these reforms and were granted additional borrowing of Rs 15,957 crore, Modi said.
4. Direct Benefit Transfer: The fourth reform was the introduction of Direct Benefit Transfer (DBT) in lieu of free electricity supply to farmers, which Modi said that the requirement was for the formulation of a state-wide scheme with actual implementation in one district on a pilot basis by the end of the year.
He said that additional borrowing of 0.15 percent of GSDP was linked to this. A component was also provided for a reduction in technical and commercial losses and another for reducing the gap between revenues and costs (0.05 percent of GSDP for each). This improves the finances of distribution companies, promotes conservation of water and energy and improves service quality through better financial and technical performance.
The prime minister said that 13 states implemented at least one component, while six states implemented the DBT component. As a result, Rs. 13,201 crore of additional borrowing was permitted, he added.
Modi said that officials who have been working on these reforms suggest that without this incentive of additional funds, the enactment of these policies would have taken years.
India has seen a model of ‘reforms by stealth and compulsion’, this is a new model of ‘reforms by conviction and incentives’, the blog added.