The Narendra Modi government has clearly been put in bind with the decisive defeat of the BJP in the Bihar assembly elections.
On the one hand, Modi and his team will now have to concentrate on economic issues. As this story in Firstpost shows, this is what investors and the business community want.
On
the other hand, most of the big-bang reforms require legislation to be
passed and the re-invigorated non-BJP parties are just not going to let
that happen. Even as the election process was on, Anand Sharma of the
Congress had said that the government would have to give up
its confrontationist mindset for parliament to function. Now that the
non-BJP parties have tasted blood, they are not going to give in easily.
This effectively rules out early passage of the constitutional amendment enabling the goods and services tax (GST) and even the thought of attempting to revive the land acquisition bill on which the government had to beat a retreat.
The Bankruptcy Law Reform Committee headed by T. K. Vishwanathan committee, which submitted its report last week, had recommended the enactment of an Insolvency and Bankruptcy Bill and finance minister Arun Jaitley had said that the bill will be introduced in the winter session of Parliament. It is unlikely that the opposition will allow it to be even tabled. An alternate route is to bring in piecemeal changes in the Companies Act but that too requires legislation.
Labour law reform is also ruled out. Even the ambitious UDAY (Ujjwal Discom Assurance Yojana) unveiled last week may not be that successful if the opposition state governments don’t sign up for it – the blame for the abysmal power situation (another disincentive for industry) will be laid on the door of the central government.
To whom all can power minister Piyush Goyal go around explaining that the Centre has little control over state-level power utilities whose poor performance and near-bankruptcy are at the root of the power sector’s miserable performance?
So where does that leave the government?
Actually, the situation need not be that bad. There is enough that the government can do without having to go to Parliament. Some of these things are entirely within its domain.
For starters, it can begin with reining in the tax bureaucracy which does tend to switch to harassment mode, regardless of whatever conciliatory noises the political leadership may make. The country cannot afford more controversies like MAT, retrospective taxation and the like. The indirect tax machinery also needs a close look to reduce scope for harassment.
The government needs to junk the targets-driven approach – a source of much harassment of domestic industry as well. A creditable start has been made with the announcement last week of a change in the performance appraisal of tax officers – that needs to be taken to its logical conclusion.
A committee to simplify the provisions of the Income Tax Act has also been set up and though this is not as good as a wholesale review of the Act, it is a good enough first step. If the committee gives suggestions that can be implemented without having to resort to legislation, the government should not tarry.
Second, the government needs to keep a sharp eye on the state of public finances and ensure that fiscal deficit targets are met. This is one number rating agencies will be monitoring closely. The sovereign ratings can be questioned but there’s not getting away from the fact that what they say matters to foreign investors.
Rating agencies will not just be looking at the fiscal deficit numbers but also the quality of the deficit. Keeping behind the red line but letting productive capital expenditure suffer in favour of the relatively unproductive revenue expenditure will not be a good idea.
Under this government, there has been a reversal of the decades-old trend of higher growth of revenue expenditure; the share of revenue expenditure in total expenditure is still very high, but the share of capital expenditure is higher than before. This trend needs to be sustained.
There should be no going back to spending on unwise and untargeted subsidies in the wake of the defeat in Bihar and in the light of other upcoming assembly elections, notably the one in Uttar Pradesh. Populism needs to be eschewed.
The welcome focus on infrastructure will need to stay and be made stronger. Infrastructure projects have a significant snowballing effect on several industries and on job generation. There is not much the opposition can do to block these. Central infrastructure projects are mammoth ones and may take time to get going and yield benefits. So why not encourage and assist states to take up their own infrastructure projects?
It is the central government alone that can push ahead on the banking sector reforms. Arun Shourie, in his headline-grabbing speech 10 days back, had pointed out that while the government had made a grand announcement of the Indradhanush programme for the banking sector, it had not moved very much on some of the reform steps and had even backtracked on some like appointment of people with a non-public sector background. Giving the banks more autonomy is not something the opposition can block. This is essential to restore the public sector banking system to health.
The financial inclusion push also needs to continue and issues that are hampering it – banking infrastructure, payment gateways, banking correspondents, mobile network coverage – must be addressed urgently. These are genuine problems and they should not be brushed aside.
Above all, the government needs to move even more aggressively on ease of doing business. Rejoicing over moving up four step (and nitpicking over whether it is a four step or twelve step progress) is not going to be enough. As this article points out, the government needs to sit down with the distance to frontier score (which show how far a country is from an ideal situation) and work hard on areas where it scores less than 50 and move closer to the 100 mark in areas where it has crossed 50. Paying taxes is an area in which India slipped from last year and the centre holds the key to this.
Several other areas (registering property, dealing with construction permits) are in the realm of the state governments. In any case, the bulk of hurdles to doing business are encountered in the states. This is one area where states will not drag their feet purely out of political pique.
But the Modi government needs to reach out to state governments. Modi has a somewhat edgy relationship with some of the other BJP chief ministers like Vasundhara Raje, Shivraj Singh Chouhan and Raman Singh.
He needs to rise above this and persuade them to undertake significant reforms like labour law amendments and land acquisition law changes and even UDAY. That can set off a healthy competition among the other states, a start in this direction has been made by the ranking of states on ease of doing business.
All these will deprive the government of grand optics – something Modi seems to love – or even the opportunity to blame the opposition for blocking progress. But they will put the economy on a sounder footing even in the absence of the big bang reforms.
If Modi wants to reclaim the development plank, if he wants to win back the vote of the youth (which seems to have abandoned him in Bihar), if he wants even a minor shot at the 2019 elections, he will have to deliver on this front. He has to give undivided attention to this.
On the one hand, Modi and his team will now have to concentrate on economic issues. As this story in Firstpost shows, this is what investors and the business community want.
PM Narendra Modi. AP
This effectively rules out early passage of the constitutional amendment enabling the goods and services tax (GST) and even the thought of attempting to revive the land acquisition bill on which the government had to beat a retreat.
The Bankruptcy Law Reform Committee headed by T. K. Vishwanathan committee, which submitted its report last week, had recommended the enactment of an Insolvency and Bankruptcy Bill and finance minister Arun Jaitley had said that the bill will be introduced in the winter session of Parliament. It is unlikely that the opposition will allow it to be even tabled. An alternate route is to bring in piecemeal changes in the Companies Act but that too requires legislation.
Labour law reform is also ruled out. Even the ambitious UDAY (Ujjwal Discom Assurance Yojana) unveiled last week may not be that successful if the opposition state governments don’t sign up for it – the blame for the abysmal power situation (another disincentive for industry) will be laid on the door of the central government.
To whom all can power minister Piyush Goyal go around explaining that the Centre has little control over state-level power utilities whose poor performance and near-bankruptcy are at the root of the power sector’s miserable performance?
So where does that leave the government?
Actually, the situation need not be that bad. There is enough that the government can do without having to go to Parliament. Some of these things are entirely within its domain.
For starters, it can begin with reining in the tax bureaucracy which does tend to switch to harassment mode, regardless of whatever conciliatory noises the political leadership may make. The country cannot afford more controversies like MAT, retrospective taxation and the like. The indirect tax machinery also needs a close look to reduce scope for harassment.
The government needs to junk the targets-driven approach – a source of much harassment of domestic industry as well. A creditable start has been made with the announcement last week of a change in the performance appraisal of tax officers – that needs to be taken to its logical conclusion.
A committee to simplify the provisions of the Income Tax Act has also been set up and though this is not as good as a wholesale review of the Act, it is a good enough first step. If the committee gives suggestions that can be implemented without having to resort to legislation, the government should not tarry.
Second, the government needs to keep a sharp eye on the state of public finances and ensure that fiscal deficit targets are met. This is one number rating agencies will be monitoring closely. The sovereign ratings can be questioned but there’s not getting away from the fact that what they say matters to foreign investors.
Rating agencies will not just be looking at the fiscal deficit numbers but also the quality of the deficit. Keeping behind the red line but letting productive capital expenditure suffer in favour of the relatively unproductive revenue expenditure will not be a good idea.
Under this government, there has been a reversal of the decades-old trend of higher growth of revenue expenditure; the share of revenue expenditure in total expenditure is still very high, but the share of capital expenditure is higher than before. This trend needs to be sustained.
There should be no going back to spending on unwise and untargeted subsidies in the wake of the defeat in Bihar and in the light of other upcoming assembly elections, notably the one in Uttar Pradesh. Populism needs to be eschewed.
The welcome focus on infrastructure will need to stay and be made stronger. Infrastructure projects have a significant snowballing effect on several industries and on job generation. There is not much the opposition can do to block these. Central infrastructure projects are mammoth ones and may take time to get going and yield benefits. So why not encourage and assist states to take up their own infrastructure projects?
It is the central government alone that can push ahead on the banking sector reforms. Arun Shourie, in his headline-grabbing speech 10 days back, had pointed out that while the government had made a grand announcement of the Indradhanush programme for the banking sector, it had not moved very much on some of the reform steps and had even backtracked on some like appointment of people with a non-public sector background. Giving the banks more autonomy is not something the opposition can block. This is essential to restore the public sector banking system to health.
The financial inclusion push also needs to continue and issues that are hampering it – banking infrastructure, payment gateways, banking correspondents, mobile network coverage – must be addressed urgently. These are genuine problems and they should not be brushed aside.
Above all, the government needs to move even more aggressively on ease of doing business. Rejoicing over moving up four step (and nitpicking over whether it is a four step or twelve step progress) is not going to be enough. As this article points out, the government needs to sit down with the distance to frontier score (which show how far a country is from an ideal situation) and work hard on areas where it scores less than 50 and move closer to the 100 mark in areas where it has crossed 50. Paying taxes is an area in which India slipped from last year and the centre holds the key to this.
Several other areas (registering property, dealing with construction permits) are in the realm of the state governments. In any case, the bulk of hurdles to doing business are encountered in the states. This is one area where states will not drag their feet purely out of political pique.
But the Modi government needs to reach out to state governments. Modi has a somewhat edgy relationship with some of the other BJP chief ministers like Vasundhara Raje, Shivraj Singh Chouhan and Raman Singh.
He needs to rise above this and persuade them to undertake significant reforms like labour law amendments and land acquisition law changes and even UDAY. That can set off a healthy competition among the other states, a start in this direction has been made by the ranking of states on ease of doing business.
All these will deprive the government of grand optics – something Modi seems to love – or even the opportunity to blame the opposition for blocking progress. But they will put the economy on a sounder footing even in the absence of the big bang reforms.
If Modi wants to reclaim the development plank, if he wants to win back the vote of the youth (which seems to have abandoned him in Bihar), if he wants even a minor shot at the 2019 elections, he will have to deliver on this front. He has to give undivided attention to this.
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