Gujarat polls: Narendra Modi's victory shows BJP has left GST woes behind; but what does it mean for economy?
BJP can be credited for implementing successfully a plethora of reforms in economy and there is really little left that has not been taken up with alacrity
The outcome of the Gujarat and Himachal Pradesh assembly elections is very significant as it comes at a time when there was hope rather than conviction that the results could be different from the point of view of the opposition.
State elections are always going to be a contentious subject as they are being progressively viewed as a referendum for the persona Narendra Modi which goes along with whatever steps have been taken on the policy front. The overwhelming victory in both the states proves that there is popular support. Hence, the same narrative will build up next year too as the next set of state elections are held.
Two extremely bold measures taken by the BJP government at the centre were demonetisation and GST. The former came in like a storm without any warning, while the latter was always on the table where the policy was just not able to move. To the credit of the government, it was implemented as per schedule which was a bold decision as it came on the back of demonetisation which supposedly had affected the country perceptibly in terms of being a significant disruption.
The UP elections outcome has also been projected as a vindication of the NDA ventures including demonetisation while the Gujarat elections can be taken to be the acceptance of the necessity of GST too. At the time of going to the polls it was felt that GST could have turned the tables as the merchant community which dominates the state was perceived to have been affected adversely by this new tax regime. The fact that there has been vote for continuity is significant as it clearly shows that the policy has been welcomed notwithstanding the temporary travails.
At another level the fact that anti-incumbency phenomenon has been absent testifies that the Gujarat growth model is intact, and more importantly has been persevered with successfully by two chief ministers following the elevation of Modi to the Prime Minister.
As the state is also known for clean governance it can serve as a model for other governments. The message is that progressive growth policies in a transparent environment which provides incentives to the productive elements will always be rewarded and that the anti-incumbency factor will be kept in abeyance.
How will these results affect the future course of the economy? With the General elections due in 2019, which will come after the state elections in 8 states of which Karnataka, Madhya Pradesh, Chattisgarh and Rajasthan will test the BJP again, the approach taken towards policies will be interesting.
The BJP can be credited for implementing successfully a plethora of reforms and there is really little left that has not been taken up with alacrity. The fact that every detail of global indices has been addressed with proper policy action shows that there are several heads working on all fronts.
Two sticky reforms which however are hard to implement pertain to land and labour. While progressive victories in states for the BJP has already given the government increased strength in the Rajya Sabha, these reforms still would require further deliberation.
Land reforms are required for growth but there needs to be a balance with the interests of the owners as well as agriculture. Today an issue is that any kind of land acquisition could be going across farmland and given that agriculture still remains vulnerable to production swings, will be hard to take a decision.
Getting aggressive here would hence also mean inviting a double whammy as it affects the small land owner and landless laborer as well as the broader economic issue of farming.
Labour reforms have come in a diluted way so far. However, it is unlikely that there will be an aggressive position taken on wide scale reforms as the economic growth story so far has revealed that jobs have not been created commensurately with growth.
In such a situation allowing for liberal downsizing of labour by employers will not go down with the common man. Hence, not much movement can be expected here as any drastic measure here could reverberate at the elections and would be a major risk to take. Besides, this is not of direct relevance for the government per se and hence could be deferred for some time.
The Union Budget for 2018-19 would probably be the revealed policy of the government as it gets set for the elections in 2019. Normally all governments are most active in the first 3 years while the momentum slows down in the fourth and liberalises in the fifth to the point of inaction.
Budgets tend to be liberal just before the elections and would normally not burden any section with more taxes while the handouts tend to increase. This could be replicated here with the added advantage being that with GST in place, indirect taxes need not be touched. There could be some discussion on direct taxes though the measures are more likely to be relevant for the higher income groups than the lower ones.
The handouts on the expenditure side would need to be looked at closely. One may expect more measures on broader issues like banking and social sector development which will be positive for the economy.
The results of the Gujarat and HP elections are a major boost to the BJP as it has proved all naysayers incorrect. This adds to the confidence and strength for the government to persevere with their manifesto on both economic and social policies.
While incremental reforms may be expected to reiterate that the party is fully in charge, large scale reforms would probably not be on the priority list though could be put on the discussion table. As election results which go against the theory of anti-incumbency are a vindication of the regime, there would always be the temptation to experiment with new ideas.
However, with all the big ones already in place, it is more likely that the government will take a breather to ensure that the apple cart is not upset as the next round of state elections would be critical from the point of view of lengthening their benches in the Rajya Sabha.
For full coverage of Union Budget 2018, click here.
(The writer is Chief Economist, CARE Ratings is author of ‘Economics of India: How to fool all people for all times’. )
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