Big Win Will Make Narendra Modi Push Bigger Economic Reforms

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Narendra Modi
Big Win Will Make Narendra Modi Push Bigger Economic Reforms

The massive win has laid to rest the ghost of demonetization and this will give Modi courage to push big ticket economic reforms.

Narendra Modi
Big Win Will Make Narendra Modi Push Bigger Economic Reforms

The BJP’s landslide win in Uttar Pradesh will give Prime Minister Narendra Modi fresh energy to push more economic reforms.

Now that the voters in India’s largest state have dismissed claims of Opposition parties on demonetisation, Modi will look at more riskier and sharp-edged economic reforms.

The so-called demonetisation sought to wipe out black money  – 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.

The landslide win in Uttar Pradesh has virtually shown that the voters have effectively given their blessing to his shock decision last November to scrap 86% of the cash in circulation.

High on the agenda is 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 percent, 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.

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.

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.

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.

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.

BENAMI PROPERTY DEALS

Another reform high on the agenda is the move to wipe out benami property deals – a money spinning mechanism adopted by politicians and bureaucrats by holding high value property in another or fictitious names.

Benami property deals are used to convert black money – something that has been a bane to India’s economy.  There are talks doing the rounds that Modi may introduce property passbooks that will unearth all fake property deals.

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.

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.

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.

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