Economy
The Gujarat model explained
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...
 
Agriculture:
•       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.
 
Promoting industrialisation:
•       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.
 
Fiscal:
 
•       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:
•       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.
 
Information Technology:
 
•       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.
 
Investor outreach:
•       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.
 
Education:
•       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.
 
Drinking water:
•       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%.

 

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COMMENTS

Francis Lobo

3 years ago

The data is highly misleading. The graphs cover from 1993 to 2013. But the growth in the last five years of Gujarat v/s India as a whole is more or less the same.

FRANCIS LOBO

shadi katyal

3 years ago

India is not Gujarat and thus there will be many road blocks but let us watch and see which way the wind blows. Criticism is good for the govt to know hat is wrong and why if one wishes to develop the nation.
One question still unanswered about the reduction of poverty level?

S.S.A.Zaidi

3 years ago

what more proof is needed about the development in Gujarat?critism for the sake of criticism is nonproductive and reflects the immaturity of the people whio indulge in it.
zaidi

AirAsia India's first flight on 12th June, ticket sales from Friday
AirAsia may look at making airfares 35% lower than the current average airfares as its officials had promised to make the carrier one of the cheapest airlines in India
 
AirAsia India, the $30-million tripartite joint venture between Tata Sons, AirAsia Berhad and Tekestra Tradeplace, is all ready to take its maiden flight on 12th June. The ticket sales would start from 30th May.
 
In a tweet, Tony Fernandes, AirAsia's group chief executive (CEO) said, "Very very proud to announce AirAsia India open for sale tomorrow. Wow. First flight June 12th."
 
Earlier this month, the carrier received operating permit from Directorate General of Civil Aviation (DGCA). On 9th May, the Delhi High Court refused to stay grant of flying licence to AirAsia India by aviation regulator DGCA. The High Court was hearing a public litigation filed by Bhartiya Janta Party (BJP) leader Dr Subramanian Swamy, which claimed the venture is a violation of the FDI guidelines for the civil aviation sector. 
 
AirAsia India is expected to launch services from it's Chennai base with three Airbus 320 aircrafts, and will mainly connect the Tier-II cities in India. They will also look to make the airfares 35% lower than the average airfares in the market currently, as the officials promise to make it one of the cheapest airlines in India. The startup carrier had completed the final inspections, including test flights of its Airbus 320, monitored by the DGCA.

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Only earned and shared prosperity is sustainable
The greatest good, and the highest virtue of sustainable globalisation is that, it does not permit, except in the very short term, ‘unearned’ and ‘unshared’ prosperity but delivers ‘sustainable prosperity’ only if it is ‘earned’ and ‘shared’
 
As is invariably the case with any major crisis, the ongoing global financial and economic crisis, including lately, of course, the Euro-zone crisis, has unleashed a passionate debate over the design of a new architecture of finance, capitalism and globalisation. However, the trouble has been not so much with the inter-temporally evolved architecture of finance, capitalism and globalisation as really with how it was actually worked in practice. The apocalyptic denouement, almost bordering on a veritable global financial and economic nuclear winter, happened not because the existing systems and best practices failed but because those responsible for implementing, and enforcing, them failed them!  After all, of all risks to regulators and regulatees alike, human resources risk is by far the most serious as it is the source of all risks as confirmed by the ongoing financial and economic cataclysm.
 
Effective and credible systems are not about right architecture but about right people. For right people can make a wrong architecture work while wrong people can’t make even a right architecture work!  This “right people-wrong people” trade-off is substantively, and effectively, about “ethics-expediency” trade-off, with the overwhelming anecdotal evidence of ‘expediency’ prevailing over ‘ethics’.
 
The crux of the matter is what we need is not more, or less regulation, but good regulation, and governance. This has been the undoing of regulators/ supervisors and financial institutions and banks alike.  But unfortunately broad-spectrum and generic failure of an inertial regulatory and supervisory system worldwide, especially in the West, precipitated the unprecedented global financial crisis and the resulting great recession. This regulatory and supervisory inertia and imperviousness to the early warning signals of unprecedented underpricing of risk, which were galore, and aplenty, pre-crisis, is graphically epitomised by the most no-holds-barred acknowledgement of this - though it came much later only recently - was when Donald Kohn, former vice chairman of the US Federal Reserve apologized by saying, “The cops were not on the beat, resulting in the worst economic recession and loss of millions of jobs”!   
 
At the end of the day, the problem is of not knowing the problem, but knowing it and dithering, agonising over choices, temporizing, procrastinating and doing nothing credible, timely, tangible and decisive about it.  In other words, in my considered opinion, we don’t really have to rethink capitalism and globalisation, for paraphrasing John Ruskin, what finally matters is not knowing what must be done but actually doing what must be done and doing it when it must be done!
 
The cataclysmic financial crisis has thrown into sharp relief, as never before, the critical and important role of ‘asset price’ inflation/asset bubbles also, as opposed to that of shop floor, products, services inflation alone, as a key variable, in monetary policy response. For what happened was unprecedented in that with monetary policy focused only on traditional consumer price index (CPI), interest rates were kept low in spite of exploding prices of assets like real estate or property, credit assets, equity and commodities.  And this was all made possible because of the huge pre-crisis current account surpluses in China and other Emerging Market Economies (EMEs), and huge private capital inflows into EMEs in excess of their current account deficits (CADs), getting recycled back as official capital flows into government bonds of reserve currency countries, especially the US, resulting in compression of long term yields which, in turn, translated into lower long term interest rates even for the riskier asset classes mentioned above.  
 
This chasing of yield, due to global savings glut, in turn, led to a veritable credit bubble, characterized by unprecedented underpricing of risk as reflected in the all-time-low risk premia with junk bonds spreads becoming indistinguishable from investment grade debt!  
 
Such a low interest rate environment coupled with luxuriant supply of liquidity, created enabling environment for excessive leverage and risk taking.  This financial syndrome was a classical case of 'too much' and ‘too little’ – too much liquidity, too much leverage, too much complex financial engineering, too little return for risk, too little understanding of risks.  This syndrome of too much of arcane rocket science and financial alchemy in the financial sector, almost entirely for its own sake to almost complete exclusion of the needs of the real sector, created a massive ‘financial sector – real sector imbalance’ which, being, intrinsically unsustainable, culminated eventually into the now-all-too-familiar apocalyptic denouement.  
 
Significantly, the above pre-2007 story of massive and unprecedented current account imbalances was almost replicated in the  Euro-zone with large and persistent current account imbalances between the core, proxied by Germany, and the Netherlands, and the crisis-hit periphery, with the surpluses of the core being almost mirror image of the current account deficits of the periphery.  
 
Indeed, it is noteworthy that current account surpluses of the core increased dramatically after the launch of the single currency because of significant depreciation of the real exchange rate in the core and appreciation of the real exchange rate in the periphery.  
 
Such large, and persistent, current account imbalances between the core and the periphery would not have been possible but for the explicit moral hazard of fixed and stable exchange rates created by the single currency because the respective national currencies of the periphery would have depreciated in real terms resulting in timely automatic rebalancing of the current account imbalances!  
 
Incidentally, but significantly, these current account imbalances between the ‘core’ and the ‘periphery’ were, to an extent, the result of post-1999 fiscal convergence to fiscal divergence story in the Euro zone for, unless net private savings offset it, fiscal deficit typically tends to spill over into current account deficit and, therefore, post-Euro launch, there ought to have been a credible, effective and functioning institutional enforcement mechanism to ensure ongoing compliance on Maastricht fiscal parameters.  
 
Of course, this post-1999 fiscal convergence to fiscal divergence story in the ‘periphery’ would not have mattered if, like in the case of Japan, net private savings more than offset the comparable net public dis-saving (fiscal deficit) of -9.5%!  
 
So the way out of the current crisis is unwinding these imbalances through higher productivity and competitiveness in the periphery relative to the core.  This is exactly what happened post-crisis in the case of unwinding of the imbalances between China, on the one hand, and the US, on the other, with the United States' CAD halving from almost 6% in 2007 to 3% currently and that of China’s current account surplus shrinking steeply from 10% in 2007 to 2.6% currently!  
 
Thus, in the framework of “unearned - unshared prosperity”, it was the case of ‘unearned’ prosperity for the ‘deficit’ periphery and ‘unshared’ prosperity for the ‘surplus’ core!  But as in the case of China and the US, there is some good news that real wages in Germany have gone up by 3% and those in Greece have gone down by 7%.  Going forward, this then holds the promise of unwinding such imbalances by export of goods and services from the ‘periphery’ and import of goods and services by the ‘core’, and indeed, this has already started happening with the fiscal deficits in the periphery shrinking and current account turning into surplus as a result of net private savings offsetting the net public dis-savings (fiscal deficits)! 
 
As I said, these large and persistent current account imbalances represented ‘unearned’ prosperity for deficit reserve currency countries and ‘unshared’ prosperity for surplus countries.  Such a global economic order was inherently unsustainable, and unstable, from the word go. But the greatest good, and the highest virtue, as it were, of sustainable globalization is that, it does not permit, except in the very short term, ‘unearned’ and ‘unshared’ prosperity but delivers ‘sustainable prosperity’ only if they are ‘earned’ and ‘shared’ prosperity ! And mind you, ‘unearned’ and ‘unshared’ prosperity are no socialistic/ egalitarian platitudinal rhetoric but pretty compelling real-politik and geo-economic imperatives given the current irreversibly globalised and, increasingly integrated, and interdependent, world.  Sustainable globalisation is about macro economic equilibrium, balance and harmony.  In fact, the whole thing can be likened to cosmic balance, equilibrium and harmony where stars, suns, planets, all orbit within the inviolable discipline of their elliptical orbits which do not permit deviant behaviour beyond the shortest and the longest distance from suns and stars of orbiting planets!  
 
Any deviant behaviour or conduct, inconsistent with the cosmic harmonious balance and equilibrium, will invite, and inflict, extremely retributive backlash; the more severe and prolonged the disequilibrium and imbalance, the more wrenching and excruciating will be the resulting pain as is currently being experienced, especially in the Euro zone, where, it is no brainer to see that, in the event of the break-up of the Euro, it is the surplus or creditor ‘core’ that has far more to lose than the deficit or debtor ‘periphery.’ 
 
For if the surplus or creditor ‘core’ exit the Euro, value of what is left of the Euro will be worth much less in terms of national currencies of the exiting surplus or creditor countries.  On the other hand, if the deficit or debtor ‘periphery’ exit, they will simply default on their Euro-denominated debt owed to the surplus or creditor ‘core’ because of the collapse of their national currencies against the Euro! In other words, in sustainable globalisation, there can be both winners, and losers, only in the short term, for such is the nature of sustainable globalisation that, in the long term, there can only be all winners and no losers!  To conclude, therefore, if we earn and share, we prosper together, and if we don’t, we perish together!
 
(VK Sharma is a former Executive Director, Reserve Bank of India)

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COMMENTS

MG Warrier

3 years ago

Issues of governance and regulation raised here need immediate attention. This is the right time for government to think 'differently' and act keeping in view the national priorities which were always known, as Indian Constitution had incorporated the principles that government should follow to make the life of 'WE THE PEOPLE' (to whom it was 'given')better. The message from AAP, the repeated assertions by Congress for over 65 years about people's rights, Modi's promise of right governance...all should converge to make BHARAT emerge and take the position in the world it deserves. More and more open expression of views like this will help opinion to evolve in favour of the majority of the country's population waiting for a CHANGE.

MG Warrier

3 years ago

Issues of governance and regulation raised here need immediate attention. This is the right time for government to think 'differently' and act keeping in view the national priorities which were always known, as Indian Constitution had incorporated the principles that government should follow to make the life of 'WE THE PEOPLE' (to whom it was 'given')better. The message from AAP, the repeated assertions by Congress for over 65 years about people's rights, Modi's promise of right governance...all should converge to make BHARAT emerge and take the position in the world it deserves. More and more open expression of views like this will help opinion to evolve in favour of the majority of the country's population waiting for a CHANGE.

Arumugaraja Arunachalam

3 years ago

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