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Prime Minister Modi Revisits Economic Reform Agenda After Landslide UP Election Victory

Armed with a new mandate as a champion of the poor, Prime Minister Narendra Modi still faces a struggle to implement reforms to boost growth and jobs in Asia's third-largest economy, say experts

Photo Credit : PTI

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Prime Minister Narendra Modi, fresh from his landslide election victory in Uttar Pradesh, now has a chance to advance his economic reform agenda.

Voters in Uttar Pradesh handed Modi's Bharatiya Janata Party (BJP) the biggest majority for any party in the state since 1977, effectively giving their blessing to his shock decision last November to scrap 86 per cent of the cash in circulation.

The so-called demonetisation sought to wipe out 'black cash' — untaxed wealth and proceeds of corruption. While it caused huge disruption to daily and business life, voters backed Modi's pitch that the undeserving rich would suffer most.

Armed with a new mandate as a champion of the poor, Modi still faces a struggle to implement reforms to boost growth and jobs in Asia's third-largest economy, say experts.

Here are the government's reform priorities:

GOODS AND SERVICES TAX
The finance ministry plans to implement the Goods and Services Tax (GST), India's biggest-ever tax reform, from July.

There would be four tax slabs of 5, 12, 18 and 28 per cent, plus a levy on taxes on luxury items like cars, aerated drinks and tobacco products to compensate states for any revenue losses in the first five years.

State of Play

Central and state finance ministers gave their final approval to GST legislation on Thursday. The government hopes to win parliamentary backing in the current session, and in state assemblies by next month, so that the GST could be implemented in the second quarter of the 2017-18 financial year.

Likely upshot
The new tax structure will be revenue neutral, and broadly keep the rates that apply to businesses in line with existing levies. Still, it is expected to boost the rate of economic growth by about 0.5 percentage points; broaden the revenue base; and cut compliance costs for firms.

BAD BANK
The finance ministry and the Reserve Bank of India are still in talks on whether to set up a Public Sector Asset Rehabilitation Agency (PARA), or bad bank, to deal with stressed assets in the banking system.

State of play
Technocrats at both the finance ministry and RBI have called for urgent action. Finance Minister Arun Jaitley has, however, not been won over to the idea of a bad bank, a senior finance ministry official said. The banking division of the finance ministry also opposes such a move.

Likely upshot

Jaitley has told Parliament the government is considering a range of options, while aides say the focus will continue on using existing mechanisms to deal with bad loans. The approach has failed to achieve much headway until now, weakening state banks that are poorly placed to extend credit.

LABOUR REFORMS

Encouraged by the election results, the Modi administration wants to move forward with long-pending labour bills on wages and industrial relations. Labour Minister Bandaru Dattatreya has proposed boiling down 44 industrial laws into four codes to simplify employment rules and raise social security benefits for workers.

State of play
Labour ministry officials say efforts continue to build a consensus, following a government decision to extend maternity leave to 26 weeks from 12 weeks. Yet India's small but militant trade unions — even those allied to Modi's ruling party — oppose the reforms. The measures may now be introduced to the next session of Parliament in July.

Likely upshot
Officials say that if consensus cannot be reached at federal level, the Modi administration will encourage BJP-ruled states - including newly won Uttar Pradesh — to adopt state-level reforms already adopted by Rajasthan and Madhya Pradesh.

That means there won't be a big-bang simplification; but more of a gradual spread of reform under the model of "competitive federalism" championed by Modi.