What can state governments do in the short-run to boost economic growth?

A friend recently asked me what can a state government in India do to boost GDP growth over a government’s five-year tenure. 

So I thought of a few areas where public policy can be useful for Chief Ministers and their governments who are seriously committed to this objective. 

These areas cover the typical economic growth drivers of government spending, private spending, and private investment. It excludes reforms on human resource development and capital formation that are more systemic and will play out over longer time frames. 

1. Completion of all ongoing infrastructure works will have the greatest impact. Since they are already ongoing, they involve immediate expenditure and, once completed, will generate at least some of the expected benefits. The government can appropriate political capital from the inauguration of these projects. This could be complemented with a few carefully identified highest value/impact infrastructure projects (critical connectivity roads, small and medium irrigation projects, water supply etc.). 

2. Improve the Ease of Doing Business (EoDB) and ensure their implementation in letter and spirit. It pays to build the state’s value proposition among investors in terms of its real EoDB. Real EoDB is about changing a culture and not merely tweaking rules, and it must be infused across the public system. This would entail going beyond EoDB for large industries (which is what EoDB has come to signify) to include micro and small businesses, including in the informal sector, and Ease of Living for citizens in accessing statutory and other government services. While changing culture in five years is hard, there are several ways in which leadership can signal its intent and reap transformational effects. 

3. Complement EoDB improvements with initiatives on the supply side of employment (labour market). This would include improving the quality of the ongoing skill development initiatives, focusing on effectively implementing the PM Internship Scheme, and reducing labour market frictions (facilitating labour market matching for both employees and employers). 

4. Focus efforts on the growth of existing industrial clusters by encouraging its current units to expand and also attract new manufacturing firms. This would involve addressing critical gaps in infrastructure and shared services, single-window facilitation for permissions and clearances, coordinating on labour supply and credit access etc. Given the prohibitive cost of land, facilitating access to land at reasonable rates alone can provide a big competitiveness boost for businesses. The aforesaid EoDB and labour market efforts should be implemented with greater intensity in these clusters. 

5. Prioritise the development of the major cities, which are the engines of economic growth. Complete all ongoing infrastructure works, take up some high-impact projects (road widenings, new infrastructure etc.) that are in long-standing demand and complete them in no more than 3 years, focus on affordable housing and generally lowering the cost of housing construction (see this proposal), and increase property tax collections (by improving collection efficiency and expanding the tax base) and other revenues (see this on adoption of land value capture methods).

Each of these must be developed as a package of a few interventions, and enabling government orders and guidelines must be issued. 

Their effective implementation would require focused four-level engagement - Chief Minister, Chief Secretary, Secretary/Head of Department, and District Collector. 

The initiatives on the five pillars should be identified and clear guidelines issued. The monitoring mechanism (parameters, periodicity, and follow-up) should be minimal and different for each level but decrease in granularity upwards. At the Chief Minister’s level, the monitoring should be monthly (to start with) and be such that it covers just 1-2 parameters proximate to outcomes for each initiative and ensures clear downward accountability. 

The Chief Secretary’s role would be to coordinate on emerging issues brought forth by the Departments and Collectors, as well as to follow up on issues emerging from the Chief Minister’s reviews. This monitoring system should establish clear performance accountability of the Secretary/HoD and Collector.