Rowdy scenes in which politicians shout over each other were commonplace in India’s parliament in recent weeks, ending in little being achieved.
This political discord between Sonia Gandhi’s opposition Congress party and Narendra Modi’s Bharatiya Janata Party (BJP) government has scuppered the introduction of a long-awaited goods and services tax (GST) for India, which would be one of the country’s most significant economic reforms ever. It is a move that would be widely supported by foreign and Indian investors.
Business leaders are growing increasingly concerned that political wrangling is holding back India’s economy, as pressure mounts on Mr Modi’s government to deliver on the promises of economic reform and growth that led his landslide victory in May of last year.
“Now people are feeling that while in power, [Congress] neglected development and while in opposition they are obstructing economic growth,” Venkaiah Naidu, the minister of parliamentary affairs, told reporters in New Delhi recently.
“While in power, they pushed India backward, now in opposition they don’t want India to move forward.”
GST is planned as a uniform tax which would replace a convoluted system of varying taxes and fees across India’s 29 states. It is estimated that the introduction of GST could boost India’s economic rate of growth. The BJP had been hoping to get the bill passed by the upper house to allow the reform to be implemented at the beginning of the next financial year, which starts on April 1. But that is looking increasingly unlikely to happen after the government abandoned plans to reconvene a special session of parliament to get the bill approved.
Ironically, Congress actually championed the introduction of this simplified taxation system when the party was in power, but failed to introduce it because of opposition by the BJP.
The Congress party keeps calling for the resignation of external affairs minister Sushma Swaraj and the chief ministers of Rajasthan and Madhya Pradesh, who are facing allegations of corruption.
“If the two main parties cooperate in the national interest, then the economy will prosper and the Congress will regain credibility,” says Ameet Hariani, the managing partner of Hariani & Co, a law firm based in Mumbai.
He says that the efficiencies that GST would create would mean it would be “one of the quickest ways of kick-starting growth”.
“The GST is one of the most critical reforms for India as it will create a smooth and efficient market, lower costs and raise tax revenues,” says Adi Godrej, the chairman of the Godrej Group, one of India’s major conglomerates, based in Mumbai and with interests spanning from property to consumer goods. “We believe it would add as much as 2 percentage points to the rate of growth, which will help generate millions of new jobs. But for this the parliament must transact business.”
Jimeet Modi, the chief executive of Samco Securities, a stockbroking company in Mumbai, says considering the hindrance to policy caused by politically charged arguments, India’s economy could benefit from a complete overhaul of its political system to a two-party regime, as found in the US.
“The parliamentary democracy followed in India, the multi party system, is creating a lot of speed breakers for the ruling party,” he says “The law making gets delayed which eventually shatters the confidence of investors.”
Other key issues that have been held up in parliament include land acquisition reforms and an electricity amendment bill.
“Industry is keen to undertake the next cycle of investments as soon as the economic reforms process kicks in,” says Chandrajit Banerjee, the director general of the Confederation of Indian Industry (CII). “With several critical economic bills getting delayed, investment deceleration is plaguing the economy. Core sector growth has slowed down, the industrial production index remains volatile and bank credit is locked up. Parliament holds the key to unlocking the investment pipeline and CII urges taking up the necessary bills. CII believes that India’s GDP could pick up to 9 to 10 per cent in the next couple of years, given the right conditions.”
Such growth is vital for India. With more than 12 million Indians entering the labour force each year, the consensus is that India needs to achieve economic growth levels to support its population of more than 1.2 billion. The country’s GDP growth came in below expectations at 7 per cent in the quarter between April and June, slowing from 7.5 per cent in the previous quarter.
“Industry is concerned that India’s economic development might not happen as expected and that the necessary number of jobs and opportunities would not get created at the pace that is required,” says Ajay Shriram, the chairman and senior managing director of DCM Shriram, a conglomerate headquartered in New Delhi. “Stalling of parliamentary procedures leads to delays in crucial decision making. At a time when India is widely expected to contribute to global growth, delay in the reforms process can moderate this pace.”
Juvencio Maeztu, India chief executive of the Swedish flat-pack furniture chain Ikea, speaking at The Economist India Summit this month, said that GST was “not a political issue”.
“[GST] is massive,” he said. “It has to happen. Let’s move on. Five per cent of the people are discussing and 95 per cent have pre-consensus. It will reduce prices for consumers and whatever is for the good of consumers is good for the economy.”
Riyaaz Amlani, the president of the National Restaurant Association of India (NRAI), says that “political wrangling ultimately hurts the economy”, adding that he hopes GST is eventually passed.
“The restaurant sector is one of the most heavily licensed and taxed industry, being involved in all tax components – VAT, service tax and excise,” Mr Amlani says. “The present maze of multiple taxations across the country pose a hindrance in efficient conduct of business. Various state taxes, and different interpretations of the law by local authorities add to the problems. Such a system imposes an avoidable cost of compliance on the business. There is no doubt that GST is the single most important taxation reform being undertaken. The entire industry has been waiting for this reform.”
Areef Patel, the vice chairman of Patel Integrated Logistics, says that the introduction of GST has the potential to reduce operating costs for the logistics sector by 15 to 20 per cent.
“The government’s agenda of easing doing of business would be easily attained with the doing away of multiple axes and the smooth movement of goods between states,” he says.
“Politics here [in India] takes precedence over all other matters. Debates and criticism of concurrent policy matters are necessary but should not be a dominant factor at a time when the country is geared to position itself as a powerful global player.”
Mr Areef says that he does not see GST being scrapped but that “a specific time frame cannot be ascertained for its implementation”.
Shilan Shah, the India economist at Capital Economics, says that politics is “a sticking point” for GST and that “not only does the finance ministry’s hope of introducing the GST by April 2016 look unrealistic, implementation by April 2017 would be a stretch too”.