The recently concluded monsoon session of Parliament was a washout for the big-ticket reform agenda of the NDA government. The land acquisition bill, goods and services tax (GST), labour market reforms, among others, are crucial for kick-starting investments for faster GDP growth. The government has a huge majority in the Lok Sabha to pass reform bills but not in the Rajya Sabha. The Congress-led opposition in the upper house single-handedly disrupted the entire monsoon session. As a result, the Constitution (122nd Amendment) Bill, 2014 to introduce the GST could not be passed and might not roll out in April 2016 as planned.
The GST is not the only casualty of the monsoon session. The opposition’s gang-up against the land acquisition bill forced NDA to back down on its proposed amendments to the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 passed by the UPA. As this Act had made it difficult for corporates to acquire land—perhaps taking four years or more —the NDA sought to make amendments to exempt defence, rural infrastructure, industrial corridors and public-private partnerships where the government owns the land from social impact assessments and consent requirements of landholders.
NDA’s Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Second Amendment) Bill, 2015 was introduced in the Lok Sabha on May 11. Thanks to relentless opposition, it was referred to a Joint Parliamentary Committee which was expected to submit its report by the first week of the monsoon session. Since that did not happen, the action on this front shifts to the winter session. The government’s U-turn on the land bill is considered a “retreat from a reform that business has seen as critical to a revival of stalled investments” and a big setback for the PM, according to the Financial Times.
The PM’s image, till recently, was of a decisive man of action who would overcome political opposition to create a business-friendly environment as he did in Gujarat. The failure to push through changes to the land acquisition law of 2013 was perhaps the first sign of vulnerability in the NDA’s economic reforms agenda despite securing a massive mandate. With the Centre not having its way on land acquisition, the focus will now shift to the various states that will be given greater flexibility to pass their own laws. However, legal challenges loom on the horizon if this results in more liberal laws than those framed by the Centre.
Did the NDA do enough to get the GST Bill passed? It is far from true that the NDA’s reform agenda has run aground because of the Congress Party. The latter, in fact, relented in a rare show of bipartisan consensus to allow the Insurance Laws (Amendment) Bill 2015 – which raises the limit for FDI from 26 per cent to 49 per cent — to be passed in the upper house on March 12. The Congress supported insurance reform as this bill was virtually identical to what it sought to push through, unsuccessfully, while it was in power from 2004-2014. For similar reasons, it supported the historic Land Border Agreement that India signed with Bangladesh.
The Congress struggled to get the Constitution (115th Amendment) Bill of 2011 passed when it was in power. As admitted by former finance minister, P Chidambaram, it was a “sub-optimal bill” and efforts were made to improve it from 2012 onwards. When the NDA came to power, it continued with these efforts and made changes to that Bill. “It is the contents of the amended Bill — its strengths and weaknesses — that are being debated now and not the contents of an earlier version as if the earlier version had been carved on stone” argues Chidambaram. Is the Constitution (122nd Amendment) Bill, 2014 that different from the 2011 version?
The NDA may well succeed in getting its GST Bill passed if it is similar to what the Congress had sought in vain to do. The latter is also not averse to passing a re-worked GST Bill that addresses its concerns. The 2014 Bill hardly makes for a good GST. Unlike a flawless GST that includes all goods and services under its ambit, the NDA’s Bill is riddled with exemptions. Alcohol for human consumption is exempt. So, too, are petroleum products for five years. The Centre is also empowered to levy an additional duty of 1 per cent on inter-state sale of goods that is non-VATable and could push up prices by 4-5 per cent if it crosses four states.
According to the chief economic advisor to the government, this 1 per cent levy is a distortion that makes a mockery of a destination-based tax like GST. He added that such a levy makes imports cheaper than domestic production and adversely impacts the Make in India programme. The combined revenue neutral rate of central and state GST is also unacceptably high at 27 per cent while the Congress prefers 18 per cent. A revenue neutral rate leaves you with the same revenue as before. The report of the Task force on Goods and Services Tax in 2009 pegged it even lower at 12 per cent. A compromise entails no loss of face for the NDA government.
The upshot is that all is not lost for the NDA. There is a window of opportunity to get a re-worked GST Bill passed during a special session of Parliament in the coming weeks. It is only with a good GST that its full benefits can be harnessed. Many years ago, former bureaucrat Vijay Kelkar provided a ball-park estimate of a flawless GST of 1.4 per cent of GDP in Canada. Assuming the same benefit for India, he stated that the positive gain was $15 billion every year into the future. If this is discounted by the long-term interest rate of 3 per cent, the net present value of a GST is half a trillion dollars! Using last year’s GDP, this goes up to a trillion dollars!
(N Chandra Mohan is an economics and business commentator based in New Delhi)
