The recent executive decisions announced on the economy did not need legislative support and Modi has only himself to blame for the delay in taking them
Almost as if to make up for lost time, the NDA government announced a series of economic measures just after the BJP’s humiliating defeat in the Bihar assembly elections.
Possibly, Prime Minister Modi wanted to signal that he had quickly moved on to economic governance at the Centre, leaving the Bihar debacle behind. Further relaxation of the foreign direct investment rules in several sectors, the promise of a bankruptcy law, and concessional credit to revive collapsing exports were some of the decisions announced. The pink papers described these economic measures as “big reforms”, starved as they are of any good news.
The stock markets are roughly at the same level today as they were when oil prices had just started to decline in the last quarter of 2014. In October 2014, when oil prices were on a downward trajectory but still around $90 per barrel, the BSE index was around 26,500. A full year on, despite the bonanza of oil prices having fallen to half of that level, the BSE index is somewhat lower than it was last October.
Experts are asking why the stock markets are not reflecting the “big advantage” India’s economy has got from the dramatic fall in oil prices. How can the stock index levels be more or less the same when oil prices have halved? Prime Minister Modi and finance minister Arun Jaitley need to reflect deeply on this signal from the markets. In January 2015, many foreign institutional investors were projecting that the BSE index would touch 33,000 by December. We are near December and the index is stagnating at less than 26,000. The answer to this puzzle has been given by none other than Narendra Modi in an article in The Economist.
For the first time, the Prime Minister has admitted in writing that there were “great expectations” from his government. “Inevitably, some of these expectations run ahead of us”, Modi confesses.
The admission by Modi that expectations have run ahead of the government partly explains the anxiety and urgency shown in the recent economic decisions. Though they have been described as “big reforms”, the decisions are simply incremental measures which Jaitley and his team could have taken a year ago. We all knew that exports were collapsing, not only in India but in other emerging markets too. October exports showed 17.5% negative growth. This is the 11th month of negative export growth. Why couldn’t the government announce concessional credit to exporters six months ago when the writing was clearly on the wall?
Why did the government have to wait for the Bihar elections to come before announcing a higher minimum support price for the procurement of pulses? It should have known that the shortage of dal, the only source of protein for the poor, would be a major election issue in Bihar. The production of pulses has declined from a peak of 19 million tonnes in 2013 to about 17.5 million tones. The government knew this crisis was around the corner. Yet the NDA delayed taking a decision on raising the minimum support price for the pulse farmers.
Also, why should further relaxation of FDI norms come just after a defeat in the Bihar elections? The decision on investment liberalisation ought to have been taken within three months of coming to power. None of these needed legislative clearance and were purely in the domain of the executive.
The NDA spin doctors have for some time been blaming the opposition for blocking economic decisions which are largely non-legislative in nature. The flurry of announcements, post the Bihar setback, only confirms this. However, there is one big legislative item – the Goods and Services Tax (GST) – on which there is a broad consensus but it is stuck for both political and technical reasons.
The political reason is the overconfidence and even conceit shown by the Prime Minister, who refused to even show up in Parliament on the day the Lalit Modi issue was being discussed. If he continues to show such indifference to the opposition demand for a debate on the growing intolerance in various parts of the country triggered by the Hindutva elements , the GST bill could become a casualty again in the winter session of Parliament starting next week.
Jaitley has reached out to Congress leader Rahul Gandhi to help pass the GST bill in the Rajya Sabha, where the BJP does not have the required numbers. The government also needs to positively examine the changes proposed by the Congress party in the GST bill. The Congress has a valid argument when it says the dispute settlement authority should be independent of the GST council, which has states as members. If some half a dozen states get together to bring a tax dispute to the council, how can the disputants, or those against whom the dispute is targeted, sit in judgment over themselves? There is a clear conflict of interest in the current mechanism. An independent authority with retired Supreme Court judges and other constitutional/tax experts is necessary in such situations.The BJP should accept this if it wants a smooth passage for the bill.
The other contentious issue is the tax rate itself. Most experts believe that a GST rate of 22% to 24% is unsustainable and will not bring any great competitive advantage to the economy. In fact, a study by Goldman Sachs says a GST rate of 20% and above could even prove to be inflationary and would add about 1.5% points to the inflation rate within two years of implementation. Politically, this could be disastrous for the BJP as the inflationary impact of a high GST rate would show up closer to the 2019 general elections. It is in the NDA’s own interest to keep the GST rate as low as possible so that some real benefit accrues to the economy as well as the consumers.
Jaitley needs to show some political will and vision in this respect rather than just leave it to the chief ministers to decide. All this will require a serious consensus building effort. Narendra Modi has mostly wasted his first 18 months trying to aggressively consolidate political power in elections after election in the states, when he should have focused entirely on the national economy. First Delhi and now Bihar have given Modi and Amit Shah a reality check. They would do well to focus much more on economic governance – the promise of which got them into power in the first place. A lot of time has been lost. But there is still time to recover if the NDA puts its head down and walks its tall talk.