Path to India Reforms Eased as Modi Turns Enemies Into Friends

EghtesadOnline: Prime Minister Narendra Modi’s ability to turn enemies into allies is expected to help kick start controversial labor and land reforms as he expands his authority over the majority of India’s states.

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01 August 2017

With Modi’s Bharatiya Janata Party back in power in the key eastern state of Bihar, the federal ruling coalition now controls 18 of 29 states, which represents 60 percent of the country’s gross domestic product. It’s also expanding its base in Karnataka and luring lawmakers from the rival Congress party in Gujarat, where state assembly elections are set to be held in December.

According to Bloomberg, the BJP’s National Democratic Alliance is expected to increase its strength in the upcoming polls, allowing Modi “to work across much of India with friendly state governments to accelerate the implementation of key national economic policies such as accelerated infrastructure development, labor law reforms, energy reforms and smart cities roll out,” said Rajiv Biswas, Singapore-based Asia Pacific chief economist at IHS Markit.

“Key proposed federal legislation on industrial relations and improving maternity and social security benefits can be gradually rolled out by friendly NDA state governments even if the federal legislation faces hurdles in the upper house,” said Biswas.

Bihar Surprise

Since he came to power in May 2014, Modi has led the BJP to state election victories and expanded the party’s base. Among the big states he failed to capture were Bihar and West Bengal. But in a surprise political maneuver last week, Modi renewed his ties with regional party leader Nitish Kumar, who was regarded as a potential rival to him in national elections due in 2019.

"Nobody can compete with Narendra Modi," Kumar said on Monday, expressing confidence the prime minister would win a second term in office. Kumar’s Janata Dal (United) party severed its alliance with the BJP-led coalition in June 2013, only to join hands again with the BJP to reclaim government in Bihar.

“The re-alignment of the BJP and Janata Dal (United) should give a solid boost to economic development, both nationally as well as within Bihar itself,” said Richard Rossow, an India specialist at the Washington-based Center for Strategic and International Studies.

Rapid Reforms

The renewed alliance and the BJP’s expected gain in the August 8 upper house elections will increase the ruling coalition’s strength, although it will still be short of a majority there.

“With the BJP now looking in a strong position to win a second term of office, if the NDA can achieve a working majority in the upper house early in Modi’s second term of office, this will allow the Modi government to push ahead with more rapid economic reforms,” said Biswas.

To give a momentum to the labor reform process, Modi’s government is likely to introduce a bill in the current parliament session that ends on August 11. The bill, which will seek to consolidate a clutch of wage-related labor laws and ensure a minimum wage across all sectors, was approved by cabinet last week.

Jagdish Thakkar, a spokesman in the Prime Minister’s Office, didn’t return calls seeking comment.

By accelerating federal and state level regulatory reforms, the Modi government may be able to improve India’s international ease of doing business ranking, said Biswas. India is currently ranked 130 out of 190 countries by the World Bank.

States like Rajasthan and Madhya Pradesh have already taken steps to simplify rules on land and labor. Yet the move to make it easier for companies to acquire land and hire and fire workers has been stymied at the federal level by a strong opposition as well as concerns from trade unions and farmers’ groups.

The increasing political strength of BJP and allies “should bode well over the coming years for reforms at both the central and state level,” Vishal Vaibhaw, Nupur Gupta and Andrew Tilton, researchers for Goldman Sachs, said in a July 28 report. “That said, the likelihood of the introduction in the upper house of any major reforms -– such as amendments to land or labor legislation –- in 2018 appears low. We expect that the central government may continue to rely on state governments to carry out these reforms.”

State Power

India’s states have operated almost as separate countries. They set their own taxes, provide most basic amenities critical for development, including electricity, water, sanitation, law and order, and health care. Getting states to reform and attract business is critical for India’s overall development.

The July 1 implementation of the national sales tax, which rolled more than a dozen levies into a goods and sales tax is an illustration of Modi securing the cooperation of states to push the decade-long pending indirect tax reform.

Provinces ruled by the BJP and its allies are leading the way with reforms, said Rossow. There’s been "real changes in the balance of power between the central government and state governments, which is a very positive development.”