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 the party's weak numbers 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 finally 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 and Aadhaar Bill, efforts to clean up the stressed assets in the banking system and subsidy reforms reinforce the government's reforms intent.
Most recently, the cabinet nod on national civil aviation policy and SBI-associate merger, shows the the decision making process is happening in the government, as opposed to the prolonged policy paralysis during the UPA-regime. If the current reforms momentum continues and shows results, the government can actually put the mojo back in the economy.
At this stage, what is most critical is clearly GST. This is where Modi and his backroom political strategists should give their best and push for the constitutional amendment in the approaching monsoon session. This is critical to meet the April 2017 deadline (already delayed by one year). Also, the actual GST roll out would take much more time to happen even after Parliament clears the amendment since it has to go through state assemblies and processes. There is a lot of paper work involved for states 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. Any government will prefer to spend the final year of its term to please the electorate not to bring about radical reforms that might cause near-term negative impact.
Even in the case of GST, not all will be dancing to the same tune. A high GST rate will initially push up costs of some services and, thus hurt some sections. Too low rate will hit those states who bet big on manufacturing. Hence, certain short-term issues are to be foreseen when the GST kicks in. But that is an unavoidable risk the government has to take to salvage the larger reform goal. Its better to do it now than later.
There are few more reasons why this is the opportune window for the BJP to do that. The Congress party, the main opposition that has been opposing the Bill, is at its weakest point now after setbacks in recent state polls and Rajya Sabha biennial polls. The Congress-party is also structurally weak on account of lack of strong leadership and revival strategy in place.
Also, most of the regional parties, including Trinamool Congress, have flashed the green light for the GST in the larger national interest. If one goes by the comments of finance minister Arun Jaitley after the a recent meeting of GST council, all states but Tamil Nadu, have agreed in principle. This includes the Left-ruled Kerala. Even AIADMK’s broader attitude seems to be favorable.
If Modi use his personal charm to convince the regional 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. In the House of 245, the NDA has raised its tally to around 74 members post the recent biennial polls, while the UPA has around 71 members. If the BJP manages the support of regional parties too such as Trinamool Congress (12 seats) and AIADMK (12 seats), BSP (10 seats) and JDU (13 seats), GST looks like a bigger possibility.
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.
If the GST rate is included in the Bill, if the GST rate needs to be modified in the event of an exigency, parliament's approval will be required. This is a foolish thing to do in 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 for the Congress party, it will be a politically disastrous move for him to do.
The smart thing for Gandhi to admit a temporary defeat on this point and play it up as a political sacrifice made for the larger economic cause. Modi should exploit the Congress party’s weak position and put pressure for an early consensus. With all states falling in line, the Congress doesn’t have a strong case to make to prevent the Bill.
The larger point here is that clearance of GST will silence Modi’s critics on the lack of reforms progress. Multilateral agencies, including International Monetary Fund, have cautioned time and again that maintaining reform pace is critical for India to retain its advantage among emerging market peers. In this context, GST passage 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 took over as PM. 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 with a begging bowl to seek money.
This is particularly true for 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 in the case of state-run banks. A fiscal constrained government cannot keep feeding PSBs. Modi should privatise these entities in phases and let the private capital come in. He should announce the government’s intent and prepare a roadmap to initiate the privatisation drive.
The government’s disinvestment process has largely been a failure, evident from the gap between its ambitious targets and final achievements. 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.
The short point is this: Modi is ruling the Centre at the most opportune time. Lower global commodity prices, improved domestic fiscal situation, a reformist RBI governor and BJP’s gaining strength in the upper house are Modi’s big advantages. It’s time for him to give the final reform push.