The great Indian economic reform began with Prime Minister Narasimha Rao in 1991 and it was accelerated by Prime Minster Atal Behari Vajpayee during 1999 to 2004. Economist Dr. Arvind Panagariya observed that reforms in 1991 were related to product market. Removal of licensing systems in manufacturing and imports, ebbing controls on prices and distributions, relaxing investment controls and providing more autonomy to banks to administer the interest rate structures, freeing FDI in almost all manufacturing sectors and drastic cut in the reserved items for small scale are all related to product market liberalizations. But, these reforms were half baked to usher a sustainable growth in the economy. The absence of second phase of reforms led the growth wobbling, which returned India to 1980’s growth, according to Dr. Arvind Panagariya.

The second phase of reforms relate to factor market, primarily land reforms and labour legislations, according to Dr Arvind Panagariya. Land reforms began under Vajpayee government, while repealing Land Ceilings and Regulation Act 1976 and were accelerated under UPA with the passing of Land Acquisition and Rehabilitation and Resettlement Act 2013. But, the actual benefits were not yet poured due to conflicts between State and Centre with their empowerment. Acquisitions of land have almost come to standstill. Land acquisition is a State subject. Centre can only formulate the law.

A number of SEZ projects turned idle and some are quitting due to legal and procedural bungling under the new law. State industrial and infrastructure development organizations – the prime organizations in acquisition of land for industries — failed to acquire new land for the entrepreneurs. FDI at green field level was chocked due to non- availability of land. The only options available for FDI are merger and acquisitions.

Reforms in labour legislations did not move an inch. The Industrial Disputes Act 1947 continues to be mainstay in labour laws. Since inception there was no major change in this law, even though BJP once urged to amend the law under Vajpayee regime. There are more than 35 legislations to regulate the labour laws. Most of these legislations mandate for more favour to the protection of workers right, while letting owners have little powers to settle the labour disputes.

Given the tough task required to trigger reforms in factor market, which mean multiple amendments in the regulations and require Parliamentary approvals, can Mr Modi be successful to steer the reforms with his Gujarat model of development? What is the nitty-gritty of Gujarat model of development? They are refurbishment of certain schemes in accordance to the State needs and required special budget and implementations mechanisms, let alone the reforms through legislations. For example, Jyotigram Yojana, which ensures eight hours of electricity supply for irrigations for all Gujarat’s 18,000 villages and domestic electric supply to 97 percent of all villages, required special budgetary support. The scheme did not require any change in the legislations.

Modi government provided ‘merit-based’ packages of assistance to core infrastructure projects involving minimum investment of Rs 5,000 crore. The State offered several benefits to develop ports, inciting Adani group to set a major project – the first major private project after private sector was permitted in port development.

‘Vibrant Gujarat’ has become the talk of foreign and private investors. A number of automobile giants shifted their units to Gujarat. But, there was a mismatch between the aspirations and actual flow of investment. Modi magic of mesmerizing the foreign investors lost the sheen at the time of actual investment. During the five biennial Vibrant Gujarat summits between 2003 and 2011, MOU worth US $ 893 billion were signed. Against this, actual FDI flow in the State was US $ 8 billion only during 2000-2012. The core problem was providing land to the entrepreneurs. With land acquisitions programmes stuck by Land Acquisition Bill in 2007 , which took six years to be a new Act in 2013, foreign investors’ confidence waned.

Therefore, wherever legislations are required to induct second phase of reforms, Modi magic of replicating Gujarat model may not work. Factor market reforms require endorsement by amendments in different legislations and Parliamentary approvals. And, a smooth road to factor market reforms through legislations requires Modi led BJP government absolute majority in the Lok Sabha and less dependence on coalition partners. Can Mr Modi use his philosophy of minimum government and maximum governance at the Centre and kick start second phase of reforms without garnering absolute majority? It is a tough task to get an absolute majority with poll turning multi-polarized. A large coalition base government will wither chances of minimum government and maximum governance. Further, Gujarat model of development is not applicable to the entire country, given the diversity in the country.

India is bouncing back on the growth trajectory after several summersaults during the past two to three years. To push forward this growth, factor market reforms need to be accelerated. For example, the success of new National manufacturing Policy needs to be geared up by the reforms in land and labour legislations. Unless the land is available without much legal bindings and entrepreneurs are more free to settle the labour disputes, National manufacturing Policy may fail to enthuse the investors. Mr Modi should churn a new development model which befit the entire country, instead of adopting Gujarat model which received political overtones in the election campaign. (IPA Service)