India’s economy was perceived to face a cul de sac last year with respect to the progress on big-ticket reforms. The BJP-led NDA’s majority in 2014 polls failed to give it the desired advantage owing to its weak position in Parliament’s upper house. Bad politics, poor reform-drive and lack of foresight on key economic issues were often highlighted as the reasons for the dead end. After two years in power, the government seems to have broken the jinx and is showing encouraging signs on reforms front.The NDA government’s renewed push to get the Goods and Services Tax (GST) puzzle solved, passage of crucial legislations such as bankruptcy law, Aadhaar Bill, efforts to clean up the stressed assets in the banking system and subsidy reforms indicate its reforms intent.
The latest examples are cabinet nod on civil aviation policy and SBI-associate merger shows that the decision making process is happening in the government, as opposed to the prolonged policy paralysis during the UPA-regime. If the current momentum continues with the desired pace, it can actually put the mojo back in the economy. It is an opportune time for prime minister Narendra Modi.
At this stage what is most critical is GST. This is where Modi and his backroom political strategists should throw their weight and give a final push for the constitutional amendment happen in the monsoon session. This is critical to meet the April 2017 rollout deadline (already delayed by one year). Also, the GST rollout would take much more time to happen on the ground even after Parliament clears the amendment since it has to go through state assemblies and processes. There is a lot of paper work involved to put in place the systems for the final implement the unified tax regime.
The Modi government, which is already in the third year of its term, has very short time to do all this. The final years will be occupied with strategies that please the electorate for the 2019 elections, where the government’s headroom to bring about radical reforms that would have near-term adverse impacts, will be limited. Even in the case of GST, not all will be dancing to the same tune. For instance, a high GST rate will initially push up costs of some services. Too low rate will hit those states who bet big on manufacturing. Hence, certain short-term dissents are to be foreseen when the GST rollout happens. But that is an inevitable risk the government must take to salvage the larger reform goal.
Now is the opportune window for the BJP to do that. Chances for GST passage are relatively bright in the monsoon session since the Congress party, the main opposition that has been opposing the Bill, is at its weakest point now after the massive defeats in recent state polls. The party is also structurally weak on account of lack of strong leadership and revival strategy.
Also, most of the regional parties, including Trinamool Congress, have agreed to support the Bill in larger national interest. If one goes by the comments of finance minister Arun Jaitley after the recent meeting of GST council with finance ministers of 22 states, all states but Tamil Nadu, have agreed in principle on the GST. This includes the Left-ruled Kerala. Even AIADMK’s broader approach seems to be favorable. If Modi throws his weight to convince the small parties and force the Congress on a consensus path, it’ll be a major victory for him politically and a big boost for the economy.
Modi has all the advantages to make its case for the GST passage. The BJP has already agreed in principle upon two of the demands raised by the Congress party on GST –waiving of 1 percent inter state levy and joint dispute resolution mechanism. The GST council meeting has also agreed that issues of dual control and revenue neutral rate should be dealt by the Empowered Committee. As far as capping the GST rate in the Bill is concerned, the Congress and its crown price Rahul Gandhi is actually asking for the moon.
Once the GST rate is included in the constitutional amendment, every time when an exigency arises and if the GST rate needs to be modified, it will need parliament’s approval. This is a foolish thing to do in such a vast country, where multiple states have different geo-political conditions. If Gandhi blackballs the Bill for this reason, he’ll find no supporters anywhere. As the projected revival agent of the Congress party, it will be a politically disastrous move for Rahul to do.
The smart thing for Gandhi to do is admit a temporary defeat on this point and play it up as a political sacrifice made for the larger economic interests of the country. Modi should exploit the Congress party’s weak position and put pressure for consensus. With all states falling in line, the Congress doesn’t have a strong case to make to prevent the Bill. The larger point is clearance of GST will silence Modi’s critics on lack of reforms progress. Multilateral agencies, including International Monetary Fund, have asserted time and again that reform progress is critical for India to retain its advantage among emerging market peers. In this context, GST is critical.
It is also time for Modi to radically rethink his stance on privatization of PSU assets. Modi’s stated view that ‘the government has no business to be in business’ doesn’t go well with his actions after he assumed power. There has been no serious intent to privatise the entities in the banking sector and the likes of Air India, which every year return to the government exchequer with a begging bowl to seek survival funds.
This is particularly true in the banking sector, where the huge pile-up of non-performing assets (NPAs) has necessitated substantial chunk of additional capital, which the government has to provide. Given the fiscal constraints of the government, it isn’t practical to keep feeding funds. Modi should announce the government’s intent and prepare a roadmap to initiate the privatisation drive, which will be the biggest reform since the liberalisation in the 1990s.
The government’s existing disinvestment roadmap has largely failed to generate sufficient revenues, which is evident from its ambitious targets and disappointing performance in the previous years. NITI Aayog’s recommendation for disinvestment in companies, including Air India and immediately winding up 26 state-run firms and leasing out several loss-making hotels, is a step in the right direction.
Modi is ruling the Centre at the most opportune time in last 10 years. Low commodity prices, an improvement in the domestic fiscal situation, a reformist RBI governor who has restored international confidence in the Indian economy and BJP’s dominant position over the political opponents are Modi’s big advantages. It’s time for him to give the final reform push.