Nomura has just released a research report, which puts together Gujarat's extraordinary achievements under Narendra Modi
There is widespread optimism around Prime Minister Narendra Modi’s ability to deliver faster growth. This stems from the reforms he oversaw as chief minister of Gujarat from 2001 to 2014. What clues can we get from this model? If he applies the same thinking as the PM what should we expect? "Mr Modi’s policies may focus more on developing agriculture and the industrial sectors, particularly small and medium-scale enterprises (SMEs) and raising their share in GDP. He is also likely to focus on turning around the power sector, deepen penetration of internet and technology and encourage renewable sources of energy generation," says Nomura in a research note.
However, the implementation of Gujarat model at the central level will not be easy, says Nomura. "For example, some areas, “such as power appear on the concurrent list, meaning responsibility is shared by both the central and state governments, while agriculture falls under state purview. However, the changes brought about under Mr Modi in Gujarat give a broad direction of his likely policy focus."
Here are the key areas the Modi govt is likely to focus on...
• Despite its semi-arid climate, Gujarat has been able to achieve average agricultural growth of over 9% in the last 10 years compared to all-India average of 4%.
• The state government amended the Agriculture Produce Market Committee (APMC) Act to enable farmers to directly sell their produce to wholesalers, exporters, industries and large trading companies, which helped encourage contract farming and also reduced mandi (wholesale market) charges.
• In order to improve productivity, the state machinery enabled knowledge-sharing between various stakeholders in agriculture such as farmers, scientists, input suppliers, cooperatives and banks on a regular basis through annual outreach programmes.
• The state government started issuing Soil Health Cards to every farmer to improve soil management and introduce farmers to new technology. In another initiative, the government started certifying seeds to avoid farmer exploitation.
• Implementing Mr Modi’s commitment of “less government, more governance”, the Gujarat administration devolved power to farmers’ cooperatives in procurement of inputs.
• Gujarat also invested heavily in the construction of major and medium-sized canal irrigation projects (such as the Sardar Sarovar project), encouraged water harvesting and micro-irrigation (created a special purpose vehicle to promote micro-irrigation, which has covered over 700,000 hectares of land).
• However, despite all these measures and productivity gains, inflation trends in Gujarat have been broadly in line with all-India levels likely due to spillover of inflationary pressures from other not-so-efficient sectors and regions.
• The industrial sector in Gujarat has grown at a much faster pace than overall India. The share of the manufacturing sector in Gujarat’s economy rose from 22% in 1993 to 28% in 2013. During the same period, the share of the manufacturing sector at an all-India level rose from 15% to 16%.
• Gujarat has put an emphasis on developing small and medium-sized enterprises (SMEs) through policy initiatives that offer interest subsidies, venture capital assistance and quality certification. The government has also focused on emerging sectors (nano-technology, biotechnology, non-conventional energy sources) and focused on a “cluster development method”.
• Gujarat has encouraged industrialization by focusing on four key areas:
1) faster approval process; Gujarat is the second-most industry-friendly state according to a Planning Commission sponsored study.
2) providing assistance in land acquisition; Gujarat’s land acquisition model ranked top in a commerce ministry-sponsored study.
3) the state provides good infrastructure with regular power and excellent road and port networks.
4) a number of areas have been earmarked as Special Economic Zones (SEZs) to further industrial growth. Gujarat enacted a separate legal framework – the Special Investment Regions (SIR) Act in 2009 to develop specialized industrial zones in the state (an SIR is much bigger than an SEZ and is not just export-focussed). This is similar to the Delhi-Mumbai Industrial Corridor (DMIC) project pursued by the central government. The first SIR is being set up at Dholera, near Ahmedabad. Gujarat is also a major stakeholder state in the DMIC project and the work in Gujarat is running ahead of schedule.
• Gujarat became a revenue-surplus state in FY12 and is expected to remain one in the years ahead. This has been achieved by relying on more efficient tax collection, which in turn relies on increased use of technology without raising tax rates.
• Most of government expenditure has been on capacity-building programmes. Given a superior credit profile, the yields on Gujarat state bonds are one of the lowest among the states in India. According to CARE Ratings, Gujarat has successfully implemented the recommendations of the Sixth Pay Commission, while adhering to the targets of the Thirteenth Finance Commission and the Gujarat Fiscal Responsibility Act.
• Power production in Gujarat rose at a 10% CAGR between 2000 and 2013 compared to all-India growth of 6%.
• Under the Jyotigram Yojana (rural electricity scheme), Gujarat provides power to all domestic, commercial and industrial consumers 24/7. The state has separate feeder lines that supply power to rural areas: one for agriculture, which is subsidised and another for households and other needs. This helps reduce pilferage by other sectors and ensures quality and subsidised power reaches farms.
• In May 2003, the Gujarat government passed the Gujarat Electricity Industry (Reform and Reorganization) Act, dividing the electricity board into a holding company, a power generation company, a power transmission company and four distribution companies, which enabled better management.
• Under Mr Modi, the Gujarat government turned around the Gujarat State Electricity Board from losing Rs22.5 billion in 2001-02 to recording a surplus of Rs5.3 billion in 2010-11, by substantially reducing transmission and distribution losses, renegotiating power purchase agreements with private power suppliers and without any increase in electricity tariffs for seven years.
• To meet the growing needs of the state economy, Gujarat increased its installed generating capacity from 9,663MW (in 2007) to 15,715MW (in March 2012) and is now a power-surplus state. The state plans to add a further 14,622MW of capacity by March 2017, taking total capacity to 30,337MW. Gujarat has already established 2,582MW of wind power capacity and 690MW of solar power capacity; it has the highest share of renewable energy sources in India.
• In a successful attempt to reduce power theft (a chronic problem across India), the state government set up specialised police stations to check for power theft.
Roads, ports and oil & gas:
• The Gujarat government has focused on developing the physical infrastructure relying heavily on a public-private partnership model.
• Through various schemes the government has built road infrastructure from village roads to state highways. Gujarat has the highest density of roads in the country, with approximately 92% of them paved (the national average is just 58%).
• Bestowed with the largest coastline in India, Gujarat has also focused on developing ports, the backbone of its export-oriented manufacturing sector.
• As well as the state-owned ports, there are two private ports (a first in the country). Gujarat also has the country’s first dedicated chemical terminal and the first LNG terminal and is the only state to have a state-wide gas grid.
• The Gujarat State Wide Area Network (GSWAN) is the largest optical fibre network in Asia – connecting all government offices at every level, right up to the 18,000 villages.
• Further, the state has increasingly relied on online systems to disseminate information to potential investors. General public thought initiatives such as GIDC MITRA (for potential investors in the state) and SWAGAT (e-governance initiative for citizens to seek quick turnaround on their grievances) were implemented.
• Marketing and investor outreach was an important part of Mr. Modi’s administration in Gujarat. The Vibrant Gujarat Summit is the flagship outreach program where it hosts investors from all over the world and pitches itself as an investment destination, promising extensive government assistance to those willing to set up there.
• The outreach program has been supplemented with a mechanism to monitor these projects.
Managing state-owned enterprises:
• The Gujarat government was able to turn around several state-owned companies such as Gujarat State Fertilizer and Gujarat State Petroleum Corporations in the last 10 years, making them engines of growth by granting them more autonomy and focussing on increasing efficiency. As a result, Gujarat ranked first in terms of net profitability of State Level Public Enterprises (SLPEs) according to the National Survey of SLPEs.
• Gujarat boasts 100% enrolment in every locality, for every child in every family, and the dropout ratio has fallen from 20.5% in 2001-02 to 2.09% in 2010-11.
• The state also pays special attention on quality of education through the annual outreach program. The government has opened several specialized universities focusing on, among others, agriculture and education. To fill the skill deficit, the government increased the number of Industrial Training Institutes from 275 in 2001 to 1,054 in 2013-14.
• Gujarat is also the first state to have a Water Grid – comprising 1900km of bulk pipelines and 100,000 km of distribution pipelines with filtration plants covering almost 10,000 villages. Consequently, 75% of the population now has drinking water directly through pipelines/taps, compared with a national average of just 30%.