India – Impasse Broken, but Obstacles Remain

( ) Indicates change in rating.                                     *  Indicates forecast of a new regime.

Impasse Broken, but Obstacles Remain

The political headwinds encountered by Prime Minister Narendra Modi since he led his BJP and its allies in the NDA to a landslide victory at the 2014 parliamentary elections have eased in recent months, thanks to losses sustained by the main opposition INC in state elections held in Kerala and Assam in May.  The resulting erosion of the INC’s strength in the upper chamber of the Parliament has improved the prime minister’s prospects for cobbling together majority coalitions willing to back reforms on a case-by-case basis.
Any doubts as to Modi’s ability to exploit that opportunity were dispelled in early August, when the government achieved upper-house approval of a constitutional amendment that will replace the current chaotic system of state-based sales taxes with a single national goods and services tax.  Various analyses suggest that the introduction of the GST could boost annual GDP growth by 1–2 percentage points, and, by greatly simplifying the collection and payment of taxes, would boost fiscal revenues and eliminate a particularly bothersome bureaucratic obstacle for foreign investors.
While undeniably a significant victory for Modi, it is too early to say that the political winds are now at the prime minister’s back.  The constitutional amendment must still be ratified by at least one-half of India’s state assemblies, and both the national and state governments must also approve implementing legislation.  Officials have expressed optimism that the new tax system will be in place at the start of the next fiscal year in April 2017, but there is a fairly high probability that the timeline will be extended.
Moreover, it cannot be assumed that the victory in the parliamentary battle over the GST will improve the chances of resuscitating other reforms that were shelved after running into a wall of resistance in the Rajya Sabha, including land and labor reforms that are viewed as essential to the realization of the country’s full economic potential.  Although the INC no longer claims the critical mass in the upper chamber that will enable it to hold Modi’s agenda hostage, the NDA’s own weak position in the Rajya Sabha means that future legislative victories will require potentially protracted negotiations with other parties that will bargain hard for their support.  In that regard, the Modi administration’s recent call for state governments to take the lead in implementing labor-market reforms underscores its pessimism about making progress on that front at the national level.
Otherwise, the government has focused on easing restrictions on FDI in numerous sectors, including defense, civil aviation, food processing, and brownfield pharmaceuticals.  The government has also relaxed local-sourcing requirements for single-brand retailers.  However, some analysts have noted that the introduction of a time limit on local-sourcing exemptions available for companies offering products with advanced technology could be a disincentive for some potential investors, such as Apple.

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