The Modi Government in India: Tough Road Ahead on Economic Reforms

Author: Amitendu Palit

Narendra Modi, the incumbent Chief Minister of the state of Gujarat in Western India, became India’s 15th Prime Minister on May 26, 2014, after leading the National Democratic Alliance (NDA) to a spectacular victory in the general elections to the Indian Parliament. The NDA, a political coalition led by the Bharatiya Janata Party (BJP), had been in opposition for a decade. It returned to power by defeating the Congress-led United Progressive Alliance (UPA), a coalition headed by erstwhile Prime Minister Manmohan Singh since 2004. 

Despite it’s impressive victory, the Modi Government in India is encountering challenges in implementing economic reforms with doubts emerging over its ability to enact change. The government needs to overcome both institutional and political handicaps to move ahead its reform agenda. This piece describes some of Modi’s major reform proposals, explains the reasons they remain stalled, and discusses the implications for India’s political and economic trajectory.

Modi and the BJP: Beginning of a New Era

Business – the Modi Mantra

Modi’s victory had much to do with his emphasis on economic growth and development, which gained great traction among the youth, middle class and rural population. He was also solidly backed by business. From industry’s perspective, he and the BJP spoke the language of commerce and the market, in marked contrast to the left-of-centre orientation of the Congress and UPA.

The major economic legislations of the UPA (e.g. rural employment guarantee, food security, land acquisition, forest rights), while expanding economic empowerment, were criticized for serving the Congress’s political objective of reaching out to vital constituencies comprising farmers, tribal populations and marginal sections of society and neglecting reforms in business regulations, taxes and insurance policies.

Modi acquired a pro-business image during his tenure as Chief Minister of Gujarat – one of India’s most industrially advanced states with investor-friendly institutions and business practices. The image made him the face of future economic reforms in India. All attention was on two major reforms: introducing the Goods and Services Tax (GST) and amending the Land Acquisition Act passed by the UPA.

GST & Land Act: Major Expectations

The GST would replace multiple taxes currently levied by federal and state governments on different goods and services by a composite structure of uniform taxes. This would enable businesses to visualize the Indian economy – a federation of twenty-nine states and seven union territories – as a common market with uniform taxes.

Amendment of the Land Acquisition, Resettlement and Rehabilitation Act of 2013 (LARR, hereafter “the Act” or “the Land Acquisition Act”) is also a priority for industry. The Act made the acquisition of land by the state for commercial use an onerous task, by predicating acquisition on obtaining the consent of affected households and paying exceptionally high rates of compensation.

Modi and the BJP’s pro-business outlook and electoral commitment to grand economic objectives, such as making India a global manufacturing hub, raised expectations for the quick implementation of the GST and amendments to the Land Act. Hopes were fuelled with Modi urging foreign and domestic investors to commit to his signature initiative ‘Make in India’ for transforming India into a manufacturing powerhouse and initiating measures for improving the investment climate of the country. The GST and an amended Land Acquisition Act would expand the appeal of the large Indian market for foreign investors and contribute significantly to the success of ‘Make in India.’

Challenges to Reforms

The GST and Land Acquisition Act amendments have become major legislative challenges that the NDA has failed to overcome, leading to disappointment among many, particularly business. While there are no doubts over Modi’s commitment to reforms, questions are being raised about his government’s ability to overcome the institutional and political barriers to reforms.

Parliamentary Arithmetic

The last general elections gave the BJP-led NDA a large majority in the Lower House (Lok Sabha) of Parliament. The NDA, comprising the BJP and its alliance partners, such as the TDP (Telegu Desam Party), Shiv Sena, and the Shiromani Akali Dal (SAD), have 337 MPs, out of a total of 543. While the NDA’s superior numbers ensure passage of legislations in the Lower House, the same is not assured in the Upper House (Rajya Sabha) – where members are elected by state legislative assemblies. Consequently, parties running governments in states are able to send more members to the Upper House given their majorities in state legislatures. At present, the NDA has only 57 MPs out of a total of 250 in the Upper House.

Bills do not become Acts of Parliament unless passed by both Houses. The Lower House (Lok Sabha) has the prerogative to overlook the Upper House’s objections to Money Bills; namely, those pertaining to tax measures or measures having implications for resources in the Consolidated Fund of India. But many important bills are not Money Bills. The GST, for example, might appear to be a Money Bill given its focus on taxation; however, it is actually a complex piece of legislation seeking amendment to the Constitution making the Centre and States concurrent authorities for taxing services. Such bills require passage through both Houses with the consent of at least two-thirds of the members present and voting. Other bills that do not require constitutional amendment, such as the one involving changes to the Land Acquisition Act, still need to be passed by both Houses.

Convening a joint session of both Houses is a possible solution for passing some bills. Given the current numbers, the NDA would be close to a majority in a joint session. But even a joint session wouldn’t help the GST bill since legislations proposing constitutional amendments cannot be passed by joint sessions. The Land Act amendment can be taken to a joint session only after it has been introduced in both Houses and is rejected by at least one.

Political Acrimony with Gandhis

Modi’s task on reforms has become more arduous due to sustained political opposition to his reform agenda. The Congress has successfully disrupted proceedings in Parliament, preventing discussions on economic legislations. The aggressive posture of the Congress has much to do with the souring of ties between it and the BJP, which reflects the animosity between Modi and the Gandhis – the mother-son duo of Sonia and Rahul – the most influential leaders of the Congress.

The Prime Minister and the Gandhis have not spared any opportunity to lash out at each other in recent months. The roots of their animosity go back to the campaign before the Gujarat assembly elections of 2007, when Sonia Gandhi described Modi as ‘Maut ka Saudagar’ (Merchant of Death), accusing him of involvement in communal riots in the state in 2002. Congress began re-employing the phrase in the run-up to the general elections of 2014 as it realized it was fast losing ground against a rejuvenated BJP led by Modi.

During the same campaign, Modi labeled the UPA government ‘Ma-Bete ki Sarkar’ (the government of Mother and Son), in obvious reference to Sonia and Rahul Gandhi’s complete control over the government. The slandering has continued with Modi criticizing the Gandhis even in his overseas addresses, drawing sharp retaliations from the latter.

 The Congress realizes the overwhelming support for the BJP in the last elections, which were pitched as a face-off between Modi and the Gandhis, reflected the electorate’s rejection of the latter. For the Gandhis, it is imperative to dent Modi’s popular appeal for their political sustenance. For Modi on the other hand, the Gandhis remain arch foes for ceaseless personal attacks and blocking Parliament.

Business Bashing & Anti-Poor

The Congress has also taken on the ‘pro-business’ image of Modi by accusing his government of being sensitive to only the demands of business, and not those of the less privileged and marginalized. Rahul Gandhi described the Modi Government as ‘suit-boot ki sarkar’ (the government of suits and boots), drawing attention to the close proximity between government and business leaders. In another recent jibe at the Modi Government, he criticized it for justifying incentives for business and industry as ‘development’ and branding tax reliefs for poor as ‘charity.’  

The criticism began gaining traction last summer when crop failures in various parts of India increased rural indebtedness and farmer suicides. The Congress also labelled the government’s efforts to amend the Land Acquisition Act ‘anti-farmer,’ precipitated by demands from industry keen on acquiring large tracts of farming land for commercial development.

The Congress is determined on winning back its decimated support base by anointing Modi and the BJP as messiahs of industry. Senior Congress leaders like Rahul Gandhi have repeatedly highlighted the pro-business, or ‘anti-poor’ character of the Modi Government in rallies across the country. It won’t be surprising if, going ahead, the Congress labels Indian industry, Modi and the BJP equally anti-poor, in a throwback to the socialist political rhetoric of the 1970s and 1980s that branded profit and business among the dirtiest words in India.

Prospects for Reforms

Persuading and Placating

It is important for the BJP and the Prime Minister to get Parliament back on track. The Prime Minister’s political skills are critical in this respect. Not only does he have to take the lead in reaching out to the Congress, he also needs to engage the non-Congress opposition for gathering support in passing important bills. Regional parties like the AIADMK (All India Anna DMK), TMC (Trinamool Congress), BJD (Biju Janata Dal), SP (Samajwadi Party) and the BSP (Bahujan Samaj Party) can be crucial in this regard. The support of these parties, however, might be conditional on the Central Government’s positive response to their major demands such as larger financial assistance packages.

Within Parliament, the Modi Government has to work on getting bills passed individually by both Houses. The Lower House is not a problem. Clearing bills in the Upper House would require support from opposition parties and would entail persuasion from the Prime Minister and the BJP. But irrespective of the House, bills can be cleared only after they are introduced and debated. That requires Parliament to function, which it could not during the last session due to the disruptive tactics of the Congress. With the Congress unlikely to relent during the next session, the Modi Government desperately needs a strategy for negating its tactics.  

Can Industry Help?

Modi and the BJP might also use industry to mobilize support for reforms. The unproductive Parliament and failure to pass a key economic legislation like the GST made a frustrated Indian industry galvanize popular opinion against the disruptions. Industry leaders came together on an online platform seeking public support for urging political parties to restore normalcy in Parliament. More than 50,000 people have endorsed the call so far.

The move, however, could be a double-edged sword.  It could potentially complicate possibilities of placating the Congress and some of the regional parties, who had reacted angrily to industry’s move and criticized it for trying to influence Parliament.

Bagging the Upper House

The most effective way of clearing legislative hurdles to reforms is to clinch a majority in the Upper House. For the BJP, this is not going to happen soon. The recent drubbing in the assembly elections for Bihar, one of India’s largest states, means the BJP and NDA will get few representatives from the state to the Upper House.

Much now depends on the BJP’s prospects in the forthcoming state elections. Tamil Nadu and West Bengal are two large states slated for elections next year. Between them, they account for more than 30 members of the Upper House. The states are currently ruled by regional parties, the AIADMK (Tamil Nadu) and the TMC (West Bengal), respectively, and the BJP’s prospects are not particularly bright in either. It has a better chance in the relatively smaller state of Assam.

The most important state for the political arithmetic of the Upper House is Uttar Pradesh, India’s largest state, which is due for elections in mid-2017. The BJP has its task cut out for the state elections. The loss in Bihar has made it clear that the swell of support for Modi in the general elections cannot see it through in state elections.

Implications for Canada and Foreign Investors

The Modi Government has been successful in restoring investor confidence in India, which is evident from the rise in foreign investment inflows and the country’s improved global competitiveness ranking. With US$31 billion of foreign capital inflows in the first half of 2015, India was ahead of both the US and China in attracting such flows. It also moved up by 16 ranks to 55 in the World Economic Forum’s latest global competitiveness index. India’s relatively bright growth outlook makes it a better investment prospect than other emerging markets.

The delay in implementing legislations in Parliament should not divert investors’ attention from upcoming investment opportunities in many states arising from policies and reforms being implemented at the state level. Several states in India, including industrially advanced states like Gujarat and Andhra Pradesh, as well as traditionally industrially backward states like Madhya Pradesh, Jharkhand, Chattisgarh and Rajasthan, have made progress in improving business conditions. Most of these states are now run by the BJP and its allies placing them in greater sync with the various initiatives of the Modi Government.

Acrimonious ties between the BJP and Congress might polarize Indian states in terms of their abilities to work with and make best use of the Modi Government’s policies. Much in this regard would depend on how states run by non-Congress, non-BJP governments (e.g. Tamil Nadu, Odisha, West Bengal, Uttar Pradesh) politically align themselves in the standoff between Congress and the BJP in Parliament.

Conclusion

The numbers in Parliament make it difficult for the Modi Government to pass major legislations. Bitter ties between Prime Minister Modi and the Gandhi family do not show signs of ebbing. The political feud can intensify with the BJP going all out to establish itself as the main national political party in the country – a position that has traditionally belonged to the Congress – putting the Gandhi family’s political survival at stake.

A desperate Congress is happy to make Parliament dysfunctional by highlighting the frailties of Prime Minister Modi and his party. Such tactics, while not earning the Congress credit, have chipped off some of the Prime Minister’s glory by casting doubts on his ability to implement economic reforms. A dysfunctional Parliament has hurt the BJP more than the Congress.

India’s macroeconomic outlook remains bright and Modi’s commitment to reforms is unquestioned. But he and his government must work out an effective political strategy for passing economic legislations and shaking off doubts about their ability to reform.

Dr. Amitendu Palit is Senior Research Fellow and Research Lead (Trade and Economic Policy) at the Institute of South Asian Studies, National University of Singapore. He can be reached at isasap@nus.edu.sg. The views expressed are personal.

 

 

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