Making Local Governments Productive: A Case for Sub-State Public Enterprises in India

India’s debates on decentralisation often stall at a familiar impasse. While state governments demand greater autonomy from the Centre, they remain reluctant to devolve real power—especially economic power—to panchayats and municipalities. As a result, sub-state governments remain largely policy implementers, not economic actors.

Yet, there is no need to be either revolutionary or hopeless, I argue. Even within India’s existing pseudo-autonomous structure, sub-state governments can be strengthened, productivised, and made fiscally relevant—if we move beyond schemes and focus on institutions that generate revenue.

One such instrument already exists in India’s governance vocabulary but is almost entirely absent below the state level: Public Sector Undertakings / Public Sector Enterprises (PSUs/PSEs).


The Core Idea: Why Not Sub-State PSUs?

If the Centre and states use PSUs to convert policy priorities into productive and strategic capacity, there is no principled reason why sub-state governments should be denied the same tool.

The absence of sub-state PSUs has had predictable consequences:

Panchayats and municipalities remain fiscally dependent

Decentralisation stays symbolic rather than functional

Local governments cannot anchor economic ecosystems

Innovation remains concentrated in capitals and metros


Sub-state PSUs are not about copying central or state PSUs. They require different rules, narrower scope, and greater operational flexibility. But they can allow local governments to acquire something they currently lack: balance sheets.


Design Principles for Viable Sub-State PSUs

For sub-state PSUs to be feasible across most of India—not just a few advanced municipal corporations—they must satisfy strict constraints.

They must be:
- Simple to operate
- Industry-facing (B2B / G2B), not household-facing
- Grounded in land, territory, or physical assets
- Revenue-generating, not subsidy-distributing
- Politically unglamorous, to limit populist distortion

This immediately rules out many attractive but impractical ideas (retail, housing sales, healthcare delivery, education delivery). What remains is a narrow but powerful set of opportunities.


Four Universally Deployable Sub-State PSUs

From today’s discussion, four sectors clearly meet the simplicity and scalability test. Importantly, these do not require highly mature municipal capacity and can be operated by average districts or blocks with modest professional support.

1. Warehousing and Logistic Yards

Sub-state governments are uniquely placed to operate:
- industrial warehouses
- agricultural aggregation points
- cold storage facilities

These assets:
- rely primarily on land and basic infrastructure
- generate stable rental and service-fee income
- serve MSMEs, traders, FPOs, and logistics firms
- require minimal discretionary decision-making

Warehousing is one of the cleanest ways for sub-state governments to become revenue-earning entities without distorting markets.

2. Bus and Truck Stations (Platforms, Not Fleets)

There is a critical distinction between owning vehicles and owning platforms.

Sub-state PSUs should:
- operate bus terminals and truck stations
- provide parking, bays, scheduling space, and basic services
- charge entry, platform, parking, and service fees

They should not:
- own buses or trucks
- compete with existing STU stations 

These stations are land-anchored, labour-intensive, economically viable, and politically defensible.

3. Industrial and Urban Bulk Water Storage

Sub-state PSUs can build and operate:
- micro-dams
- off-channel reservoirs
- bulk water storage for industrial and urban use

Critically, these must focus on :
- selling water via contracts to industries and utilities
- operating on clear, profitable pricing agreements, not political allocation

This allows local governments to monetise a strategic resource without entering irrigation politics or welfare entitlements.

4. Waste/Biomass Collection and Collation Enterprises

This is a particularly strong candidate when kept deliberately limited in scope.

Sub-state PSUs should focus only on:
- collection
- collation
- basic sorting and baling

They should not:
- run processing plants
- engage in energy conversion
- handle advanced technologies

Why this works:
- Waste and biomass are inherently local
- Collection and collation are labour-heavy and land-heavy
- Industry demand for biomass feedstock is rising
- Revenue comes from long-term supply contracts

In this model, sub-state PSUs function as feedstock suppliers to:
- biomass processors
- bioenergy firms
- industrial users

This keeps the enterprise:
- simple
- labour-intensive
- industry-facing
- and scalable across regions


Funding and Governance

There is no need to romanticise municipal bonds or complex financial engineering at this stage. Initial capital can come from the Centre and states, just as it does for central and state PSUs.

Boards can include regional CXOs from central or state PSUs to enforce financial discipline.

Hiring and firing rules must be flexible, with market-linked salaries, benefits, and incentives 

Revenue targets must be explicit, not aspirational.

These should be enterprises, not departments in disguise.


Political Economy: Aligning Incentives Without Pretence

Local political buy-in is essential. It should be acknowledged—not denied—that local politicians care about visible outcomes and discretionary capacity.

If a substantial portion of PSU profits flows back to panchayats and municipalities, as untied or semi-tied funds, then productivity becomes politically defensible. Thus, welfare and patronage, instead of being transfer-financed, becomes productivity-financed.

This is not cynicism. It is realism.


Why Simplicity Matters More Than Elegance

More complex sub-state PSUs—energy and water utilities, advanced waste processors, etc—may work in a handful of advanced municipalities. But they cannot be the baseline model.

India’s sub-state governance reform will succeed only if it works at the median level of administrative capacity, not the top decile.

Simplicity, in this proposition, is not a compromise but a scaling strategy.


Conclusion: Governments Become Governments When They Produce

Sub-state governments will not become engines of innovation merely by receiving more 'functions' or more schemes. They become governments only when they:
- own productive assets,
- enter real economic relationships,
- and generate their own revenues.

Sub-state PSUs—limited in number, simple in design, land/labour-intensive, and industry-facing—offer a pragmatic path forward, even within India’s current political constraints.

True decentralisation may be politically difficult.
But productive decentralisation is already possible.
And that is enough to begin.

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