GST to bad bank: Modi revisits economic reform agenda after landslide win

Modi still faces a struggle to implement reforms to boost growth and jobs

 1489596196-3475

Prime Minister Narendra Modi, fresh from his landslide election victory in Uttar Pradesh, now has a chance to advance his economic reform agenda.

Voters in Uttar Pradesh handed Modi’s Bharatiya Janata Party (BJP) the biggest majority for any party in the state since 1977, effectively giving their blessing to his shock decision last November to scrap 86 percent of the cash in circulation.

The so-called demonetisation sought to wipe out ‘black cash’ – 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.

Armed with a new mandate as a champion of the poor, Modi still faces a struggle to implement reforms to boost growth and jobs in Asia’s third-largest economy, say experts.

Here are the government’s reform priorities:

GOODS AND SERVICES TAX:

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.

State of Play:

Central and state 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.

Likely upshot:

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.

BAD BANK:

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.

State of play:

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.

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.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s