States can grow through nurturing neo agriculture

By Shantanu Jindel and Vidur Prabhakar, J Sagar Associates
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Setting up a company depends on how business people view circumstances. Factors such as infrastructure, stamp duty laws, domestic and international connectivity, the policies of state governments, the availability of labour and talent, and the ease of obtaining licenses determine why some states attract business activities, leading to the incorporation of new companies. As a company can be incorporated in any state and function anywhere in the world, state governments must invest resources to understand why some states are better than others at attracting business.

Shantanu Jindel
Partner
J Sagar Associates

Higher GDPs feature prominently in the list of states attracting migrants from other states. Some migrants come to start businesses, while others migrate to work in those companies. However, stark differences emerge when comparing domestic to international migration because of stringent immigration laws enforced by developed countries. Only the well-qualified or the well-off are able to emigrate to more developed countries. This is not always so for migration within India.

While states such as Himachal Pradesh provide incentives to attract industry, this has not had a significant impact. This may be due to policies that aim for instant results. To attract industries, states provide incentives and subsidies varying from concessionary land allotment rates to subsidized electricity. Assam, Gujrat, Madhya Pradesh and Uttar Pradesh have considered the abolition of some labour laws to attract more industries. What these states have not done is to invest in long term projects and goals to develop the skills of young people, and to develop infrastructure and connectivity. Indeed, many schemes designed to attract industry mandate the employment of a certain percentage of residents. As a result, only companies in the manufacturing sector have opened factories to benefit from subsidies and favourable tax and labour regimes.

Vidur Prabhakar, Associate, J Sagar Associates
Vidur Prabhakar
Associate
J Sagar Associates

Economic development cannot be achieved by such limited and restrictive incentives. The need for global interconnectivity, or the era of neo globalisation, has made the service sector the manufacturing industry of the new age. This sector, which now accounts for more than 60% of GDP, has little interest in incentives intended to lure the manufacturing sector. Uneven and overlapping implementation of incentives between states has caused unbalanced geographical attraction and the distribution of foreign direct investment (FDI).

A decade ago a Reserve Bank of India paper, Regional Inequality in Foreign Direct Investment Flows to India: The Problem and the Prospects, concluded that the most important determinants of the regional distribution of FDI included education levels and labour market conditions; availability of civic amenities; per capita income; the quality and availability of infrastructure, and agglomeration economies. Regions receiving low FDI also attracted less domestic investment. The analysis is supported by data from the Ministry of Commerce showing that six cities, Ahmedabad, Bangalore, Chennai, Hyderabad, Mumbai, and New Delhi, received 96% of FDI in the last five years. This shows that the rich are indeed getting richer, and demonstrates the agglomeration effect. As a result, India has suffered uneven development for decades, with little or nothing being done to change the situation.

Data from the Ministry of Corporate Affairs appears to show that only 3% of private and public companies are involved in the agriculture sector. Between April 2000 and September 2020, agriculture services and agriculture machinery industries received only US$2.9 billion in FDI. This figure represents a mere 0.58% of total FDI despite the fact that the sector is unregulated. This shows that agricultural activity is disorganised but has considerable potential in a country of more than a billion people. States with extensive arable land, should plan for sectoral integration. The agriculture sector can provide the raw material for the manufacturing sector and agro-allied services such as transportation, storage and processing, will ensure that farmers receive a fair price for their produce. A fair system based on free trade will exploit opportunities not the weak. Such a situation will not only help farmers but will also develop the economies of individual states.

Shantanu Jindel is a partner and Vidur Prabhakar is a junior associate at J Sagar Associates

J. Sagar Associates

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Opposite Park Plaza Hotel Sushant Lok – Ph 1
Gurugram 122 009, India

Tel: +91 11 4311 0600
Email: newdelhi@jsalaw.com

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