India's Economic Reforms and the States

India's government is a federal system – ie, a two-level system: centre + states. Since 1991, our media and economists have been talking about economic reforms (transformation from government-controlled socialism to free-market capitalism) and demanding economic reforms – which is a good thing. The problem is they demand these reforms from only one of the two levels: the centre – which is only 50% of the equation. They have completely forgotten the other level and the other 50% of the equation – the states.

An economic system needs 3 inputs to make products and services – land, labour and capital. Our economy is inefficient because our markets for all these 3 inputs are inefficient. So to make our economy efficient, we must reform our markets in land, labour and capital. Successive central governments have been reforming our capital market by reforming our financial system since 1991. The problem is the other two markets have not been touched – land and labour. Why?

Our Constitution has divided powers between the central government and state governments by assigning some areas to the centre (central subjects), some areas to the states (state subjects) and some areas to both (concurrent subjects). Land is a state subject and labour is a concurrent subject. So it is the state governments who must carry out reforms in our land market and labour market – ie, land reforms and labour reforms. So our media and economists must take a break from their obsession with the central government. They must start demanding economic reforms from the state governments – especially land reforms and labour reforms.