The caution from the International Monetary Fund (IMF) that India shouldn’t lose sight of the economic reforms momentum to ensure that the country retains its economic ‘sweet spot’, is a stronger reminder both to the Narendra Modi government and the Congress-led opposition that time is running out and the country should act with urgency on the reforms front.
After two washed out Parliament sessions, the Budget session assumes crucial importance with respect to the progress of much-needed reforms process--mainly the passage of Goods and Services Tax (GST) Bill. At this stage, there is a lack of clarity on how the Modi-government plans to take ahead the land, labor and financial sector reforms, when it is set to complete 2-years in office.
The budget 2016 wasn’t really a winner if seen in the context of large-ticket reforms process. There wasn’t any major mention of a clear roadmap on how the government intents to take the economic reforms process ahead. Where the Budget scored was on the rural and agriculture sector initiatives.
Now that, the Budget is over. What is the game plan for the government for the rest of the session? So far, the house has only seen mudslinging between the Congress and BJP on JNU, Rohith and political legacy issues. Beyond Rahul Gandhi’s ‘Fair and Lovely’ taunt on Narendra Modi on amnesty-like scheme for black money and Arun Jaitley’s ‘What does he know’ retort on Gandhi, the question is can the BJP and Congress-led opposition generate consensus for productive purpose.
There are 16 Bills waiting to get the nod in the Budget session, including the GST. There are 12 bills to be considered and passed, 4 bills, including the Finance Bill, listed to be introduced, considered and passed, 2 new bills to be introduced and other 2 to be withdrawn, according to the PRS website. At this stage, there doesn’t seem to be a consensus on GST yet.
The biggest tax reforms Indian has ever seen, the GST is designed to subsume several state-level taxes into one, thus make the process transparent and broad base the tax net. This is critical for India’s ambitions as a global manufacturing hub. The original deadline of 1 April, 2016 will be missed since there isn’t any consensus so far with Congress on this issue. The Congress party wants the GST rate, about 18 per cent, to be included in the constitution, do away with the inter-state levies and constitute an independent dispute resolution mechanism. Of the three, the first is the most contentious demand.
In a post budget event organised by CNBC TV18 and Mint, top bureaucrats of the government hinted that chances for GST roll out happening is only in the middle of 2016-17 fiscal year. This is logical since, even if Parliament passes the Bill, half of the state governments need to agree for the roll out. Both the centre and states will have to pass CGST (Central GST) and SGST (state GST Bills), and frame rules for their respective jurisdictions. Also, the companies will need time to understand the working of GST and migrate to the new tax mode. In short, even the 2016-17 mid GST roll out can happen only if the Bill gets passed in Parliament now.
The IMF, which is until now bullish on India, highlights a few important areas of concern in its annual article IV consultation report released on Wednesday.
One, the Modi government needs to push ahead its reforms agenda. “India’s potential is enormous,” the IMF acknowledges. But, “to remain in the economic sweet spot, Indian must ensure forward momentum of its programme of economic reforms.
Two, investment cycle is yet to pick up with the desired pace. “The pick-up in the investment cycle is yet to gains strength. The banking system is weighed down by bad loans, and the weaker economy has hit India’s exports.
Three, structural reforms are key: the GST Bill is a priority. The government needs to address the long-standing supply bottlenecks and revamp labor laws. “India can lock in good fortune with private investment, structural reforms,” the report said.
Four, the stress in banking sector can serve a double-whammy on growth since banks will become even more cautious to lend, further dragging the growth recovery process.
The world, without doubt, acknowledges India as a bright spot among emerging markets with strong domestic fundamentals and future growth potential. But, unless the economic reform process moves ahead, there is also a danger that the country will miss the bus, especially if the world economy takes a wrong turn.
What is critical to note here is that the recovery in Indian economy is at a nascent stage. This is no time for chest-thumping yet but to work hard on the reforms process across sectors. There is severe stress in the banking sector and cracks in the corporate balance sheets. Exports remain muted, manufacturing activities haven’t picked up in a way it should be to justify a 7.6 per cent yearly growth. Investor sentiment remains tepid.
The IMF warning is a strong reminder to both the Congress and BJP that the reforms process shouldn’t suffer amid political fighting. After two spoiled sessions, the contry cannot afford a repeat. If the Budget session too turns out to be a washout, the damage will be even higher on the economy. The IMF report is a good reminder to the warring politicians.