Let's get started with economic reforms, India

The time for sloganeering is over. Rocketing into the very centre of the political lexicon are two words – economic reforms. Unpalatable for many, but direly needed for the nation to get a move on. In the 19th century, Manifest Destiny was the widely held belief in the US that American settlers were destined to expand throughout the continent. India needs to be shot with steroids to carve its place at the world’s high table. It can do that only if it shows the stomach for painful reform. The proof of concept is here and now. The Winter session of Parliament starting next week has much to look forward to. That is if it manages to transact business and the Opposition doesn’t end up bushwhacking the ruling party’s agenda. And believe me the likelihood of disruptions are very high. Such is the nature of Indian polity now – manufactured anger to stymie and stall – create a din and drown out everything.

To understand what is required, one needs to listen in to what finance minister Arun Jaitley said the other day. These words reverberate in the corridors of my mind for they succinctly capture the nature of the discourse at the moment. Jaitley said, “The mindset of polity has to change. The mindset of polity can't be "well I have a Parliament session in a few days from now, how do I block reforms?" I can quite see some groups working overtime in that direction.” Agreed, but the BJP was guilty of exactly the same thing when it sat on the Opposition benches. A bipartisan approach to reforms is crucial. Jaitley himself averred that the next important decision that India will have to take is who is entitled for LPG (Liquefied Petroleum Gas) subsidy. As I have been writing in these columns, untying the knots has been at the core of the new government’s policy manoeuvres.

Strategy

Jaitley put it best when he said: “The new definition of reforms is to undo a lot of what the predecessor has done,” namely pointing towards UPA government's 2012 decision to impose taxes retrospectively on corporate deals that included Vodafone's acquisition of Hutch's assets in India in 2007. The good news for the new government is that it enjoys a handsome majority in the Lok Sabha but is hobbled due to paltry numbers in the Rajya Sabha. As such, the BJP’s strategy needs to be predicated on efficient floor management with a clear step back from its aggressive majoritarianism body language. It is only then that the spirit of bipartisanship will work. Reforms aren’t an avocation, they are a mission needs to be the underlying credo for treasury and Opposition.

What can we expect then from the BJP, as they are now the cynosure of all eyes? For starters, they are keen to introduce the redrafted Constitutional Amendment Bill for GST. The Cabinet approval is awaited on this. If Parliament gives its nod, it will require approval from at least half of the State Assemblies before the Act is implemented. An amendment in the Constitution will allow the States to tax services and the Centre to be able to collect taxes on goods from retail establishments.

Though the best laid plans of mice and men often go awry, if the BJP can time it right, GST could be introduced from April 1, 2016. GST can be a game changer, just as VAT was for it aims to replace multiple state and Central levies, such as excise, service tax, value added tax and entry tax and create a national market, while lifting GDP by 1-2 percentage points. The Centre has already indicated its intention to provide Rs 12,000-13,000 crore toward compensation for phasing out Central sales taxes. The Centre and States have agreed on a compensation package of Rs 34,000 crore to be paid over the next three years.

However, states have issues such as bringing petroleum and alcohol within GST. The Centre plans to keep petroleum within the ambit of GST with "nil" rate, which will allow the Centre and states to impose duties as they do currently. The plan is to keep alcohol out of GST, while tobacco is likely to be brought under the new tax framework.

Deficit

With two members of the Rajya Sabha select committee joining the Union Cabinet, there could be further delay as far as pushing FDI in insurance is concerned. Contingent upon insurance FDI clearing the hurdle is higher FDI in the pension sector, since the limit is subjected to that of insurance, currently at 26 per cent. The bill to replace the coal ordinance will also be tabled. The spectre of breaching the thin red lines on the fiscal deficit remains the single biggest challenge. Cuts in planned expenditure can be expected yet again, hurting growth aspirations.

Jaitley followed former finance minister P Chidambaram’s tough fiscal deficit target of 4.1 per cent of GDP in his maiden budget. Poor tax revenues and the challenge of raising a record $9.5 billion target from asset sales could force him to cut spending, risking a fragile economic recovery. There is more talk of a transformative budget coming in February, one which captures the essence of what the BJP’s economic vision is.

Growth

Asset sales are the cornerstone of the new government’s imperatives to balance the revenue side of a widening fiscal defecit. Share sales of top of the line PSUs, spectrum and coal blocks (though the revenues garnered from the auction will accrue to the states in this case) are on the playlist. How the share sales will play out is another matter, for there is every likelihood of sucking out the liquidity from the secondary market and transferring it to the primary market, thereby ending the elevated levels of the indices. GDP data for the July-September quarter is set for release on November 28 and this will show us which way the growth winds are blowing.

The last quarter numbers – 5.7 per cent – gave a huge leg up to sentiment and revived interest in India as an investment destination, but weak manufacturing numbers appear to be acting as a headwind. Most analysts reckon that India may well top 5.7 per cent marginally. Tax receipts remain well below budget estimates and though low fuel and food inflation is having a salutary impact, the growth locomotive is not running away. Not yet, anyway.