Winter Session: To push GST, Modi govt should do away with its majoritarian attitude

(This article is being republished with updates)

With the shadow of Parliament’s monsoon session wash-out still lingering, economists and analysts are keenly awaiting the winter session slated to begin on 26 November to see whether the Narendra Modi government will be able to build a consensus with the opposition parties on critical reforms.

What has made the situation precarious for the government is the serious drubbing the NDA suffered in the Bihar elections, boosting the confidence of the opposition parties.

Indian economy desperately needs a visible progress on long-promised reforms such as Goods and Services Tax (GST) and Land Bill. Failure to push large-ticket reforms, mainly a unified tax regime, could seriously hamper investments into the country, global rating agency, Moody’s Investors Service warned in a note on Wednesday.

The Modi-government, which desperately needs fresh investments to push ahead the growth agenda cannot afford to ignore investors’ concerns. “…potential headwinds loom from a loss of reform momentum (in the economy,” Moody’s said. The Modi administration so far this year has been unable to enact legislation on key reforms, including GST and Land Acquisition Bill, Moody’s has noted.

“It seems highly unlikely that the major reforms will get enacted by the upper house of the Indian parliament where the ruling coalition is in minority. A failure to implement these reforms could hamper investment amid weak global growth,” the agency said.

The GST hurdle

The economy desperately needs a visible progress on long-promised reforms such as Goods and Services Tax (GST) and Land Bill. If the government needs to keep its date with GST on 1 April 2016, the GST Bill must pass in the winter session. If indeed the BJP manages to win consensus with the opposition through constructive discussions, passage of the GST Bill doesn’t appear impossible.

Finance minister Arun Jaitley has already begun preparing the ground by seeking out the Congress’s support to resolve the GST deadlock. A simplified tax regime, designed to subsume more than a dozen levies and create a single market, can be a booster-dose to the GDP. More critically, it will show the world that India is serious on solid economic reforms.

On the other hand, missing the April 2016 deadline can send a wrong signal. Such a possibility cannot be ruled out as Parliament needs to pass the Constitution Amendment Bill in the winter session itself. Without the opposition support, the Modi government cannot get the Bill through since the NDA lacks majority in the Upper House.

Even in case of land acquisition, where the government has chosen not to re-promulgate the ordinance and urged the state governments to bring in laws facilitating purchase of land for industrial use, there is still a possibility of the Bill getting through with minor changes if it takes the opposition into confidence. The Bill is pending before a joint committee of Parliament now.

Though the Bill may be largely inconsequential now, since most of the major changes such as consent clause has been done away with in the new version, its passage will send a signal that the government is ready for talks with the opposition.

The fact is in the aftermath of Bihar poll loss, it will be a lot tougher for the Modi government to reintroduce these Bills in Parliament and get the opposition’s support. The political strategy of the Congress-led opposition will be to pick up gaps and delay the process so that the NDA doesn’t easily pocket the credit. This is pretty much what the BJP did too when it was in the opposition.

But it is likely that the Congress wouldn’t put up a blind opposition on GST if the BJP initiates discussions and accommodate suggestions. Moreover, endlessly opposing the Bill can only boomerang, reinforcing the Congress’s anti-reform image. In fact, some of the large-ticket reforms such as GST started during the UPA rule and aren’t necessarily NDA inventions.

“…From the perspective of the economy and of economic reform, the BJP’s hammering in Bihar should not have a major impact. This is largely because the BJP did not seem to have major economic reform on the anvil anyway,” said brokerage Ambit in a report.

As the fortunes are unlikely to turn in the BJP’s favour in the Upper House any time soon, the only way out for the Modi government to forge ahead with reform is to shed its majoritarian approach in Parliament. As Jaitley has signalled, the BJP must reach out to the opposition to seek consensus. The fact is that the government cannot afford to have a repeat of Monsoon session washout.

Besides these, the government is likely to face hurdles in some of the recent announcements on foreign direct investment (FDI) reforms since the Congress-led opposition is likely to force a vote on opening up of sectors like media and defence .

The BJP will also have to fight opposition from the RSS-affiliated bodies, Bharatiya Mazdoor Sangh and Swadeshi Jagran Manch (SJM), which have threatened mass agitations unless the FDI proposals are rolled back. “It is painful to see that the present government continues to follow the policy of previous UPA government in this regard,” said Ashwani Mahajan, All India Co-Convener of the SJM .

Dissent from these outfits show the FDI plan was not a well discussed idea within the Sangh Parivar itself. If the BJP government fails to pacify the BMS, it can emerge as a major headache for Modi. Here again, consensus-building is critical.

Intolerance, the big challenge

However, the biggest challenge for Modi is likely to be the ‘intolerance debate’ for which the opposition parties are preparing for. Chances are the prime minister may find it tough to even draw the opposition to discuss reforms unless the government pronounces its stance on the recent killings, which have raised concerns about rising religious intolerance.

Opposition parties, including Congress, JD (U), RJD, the Left parties and the NCP, have given notices demanding debate on the issue and they may seek action against the BJP’s ministers, who have made inflammatory comments recently. They are also likely to demand a statement from the prime minister in Parliament. If the BJP needs to tackle the battle effectively, PM Modi himself has to lead from the front.

Pain in the economy

The economy is faring better under the Modi government than under the UPA. Inflation is lower, current account deficit is manageable and interest rates are also falling. But, the sharp rise in the prices of pulses and other essential items in the recent past will likely be another point the opposition might take up. Pulse prices have seen the sharpest spike in a decade, according to rating agency Crisil.

Also, things don’t look quite well on some areas of the economy despite early signs of growth pick-up in factory output and the core sector performance. The continuing muted sentiment in the corporate sector (muted earnings, over-leveraged balance sheets) and high non-performing assets (NPAs) in bank balance sheets continue to exert pressure on the economic front, which the government has to deal with.

Top Indian companies have shown a collective 9.4 percent growth in core profit in July-September quarter, the slowest since January-March 2013, while debt burden of India’s 963 companies covered by Thomson Reuters StarMine reached more than $640 billion, or more than 40 percent of India’s GDP. Worse still, the total stressed assets in the banking system stand at over 10 percent of the total loans.

The IIP fell to a 4-month low of 3.6 percent in September, mainly by weak manufacturing growth and lower consumer spending. A weak monsoon and stagnant growth in non-farm income have hurt consumption in India’s rural economy too. In the context of delayed economic recovery, the government will have to keep public spending high to keep the momentum on, even if it means sacrificing on the fiscal deficit target. Also, it needs to strengthen the PSU banks with more capital infusion. The Rs 70,000 crore capital infusion promised is too little, considering the stressed asset levels and the ability of PSU banks to raise funds from the market.

The winter session is critical for the government both on the economic and political front. It is a test of Modi’s political dominance post the massive defeat in Bihar. His challenge is to keep pushing the reforms juggernaut on a bumpy road. For that, he will need to let go off his majoritarian approach and take the opposition into confidence.