Modi2016

An Agenda For Revival

What Modi should do in 2016 | 2

What Narendra Modishould do to push through economic reforms in 2016- by Vivek Kaul

Preface

Love him or hate him...But you just can’t ignore him.

That seems to be the case with India’s current Prime Minister – Narendra Damodardas Modi.

After leading NDA towards a landslide victory in the 2014 general elections, Modi now seems to have found his own challenges to deal with...

Whether it is the Mahagathbandhan in Bihar, Arvind Kejriwal in Delhi or the Gandhis holding the Parliament at ransom!

So, as Modi continues to tread on his tough political path...I share my views on some of the most common issues which could be on Modi’s mind in 2016...

Happy Reading!Vivek Kaul

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What Modi should do in 2016 | 4

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“What Modi should do in 2016”

TABLE OF CONTENTS

Page

What Narendra Modi should do to push through economic reforms in 2016 5

The History 5

The Bills that are stuck! 6

The Rajya Sabha conundrum 7

Lesson from Bihar 9

Of mother and son 9

Us and them 11

Cooperative Federalism 12

Disclaimer 15

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What Narendra Modi should do to push through economic reforms in 2016

- By Vivek Kaul

It’s that time of the year when the media is getting into an advisory mode, trying to tell anyone who is willing to listen about what to do during 2016.

I thought let me join the show as well. If you can’t beat them it’s best to join them, as they say... So here are my two paisa on what I think Narendra Modi should be doing on the economic reform front in 2016. Not that he is listening to me, but I might write it out as well...He just might...Who knows...

And why 2016? Well, as I said, it is that time of the year.

Narendra Modi was sworn in as the prime minister of India on May 26, 2014. It was widely expected that Modi and his finance minister Arun Jaitley would unleash the second generation of economic reforms that the country badly needs.

But as I saw, and you saw, dear reader, Modi has not been able to come up with any major economic reforms. Will 2016 be his chance to make amends?

The History

Over the last 25 years, starting in 1991, economic reform in India has largely concerned itself with the product markets, from cars to mobile phones to a lot of other products that you buy and use dear reader.

Many of these things were not there in 1991. Human desire was limited to buying a Bajaj scooter or at best an Ambassador car (Maybe a Premier Padmini (more commonly referred to as the Fiat car) if you lived in Western India).

These days buying something as simple as a mobile phone can be a topic for a

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PhD thesis with so many permutations and combinations having to be taken into account. Okay, I am going a bit overboard here...But hope you get the drift dear reader...

And getting back to the topic at hand...

What has largely been left unreformed in India are the factor markets (land, labour, capital and technology). As veteran editor and journalist TN Ninan writes in his new book The Turn of the Tortoise—The Challenge and Promise of India’s Future: “The reforms that were introduced in 1991 focussed primarily on product markets. They opened up the country to international competition through the abolition of import controls and lowering of tariffs. Capacity restrictions on domestic producers were removed; more players were allowed to enter and compete in product and service markets. Some, like airlines and telephone services, were no longer reserved for government companies.”

While there has been a good amount of product market reforms, over the last 25 years factor market reforms have not come through. And it has clearly not been because the governments haven’t tried. Oh yes, tried they clearly have!

The Bills that are stuck!

Take the case of Modi and Jaitley. They first struggled to push through the amended Land Acquisition Act of 2013. Then they struggled to push through the Goods and Service Tax (GST) Bill. The Real Estate (Regulation and Development) Bill, 2015, has also been stuck. The labour reforms are nowhere in sight, even though the government has talked about coding the 44 labour laws at the central government level into four codes on labour laws. This would include one code each on industrial relations, safety and welfare, social security and wages.

One reason why factor market reforms haven’t gone through is because the insiders don’t want them. Take the case of labour laws. Who do these laws benefit the most? Those who are employed in organised sector. In 2012-2013, the organised sector in India employed around 2.95 crore people. The total number of people working in the organised sector had stood at 2.29 crore in 1981. The number has grown at

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less than 1% per year.

It is those employed in the organised sector who benefit the most from India’s surfeit of labour laws and any serious labour reform is likely to see a huge amount of protest from this lot. As Ninan points out: “Governments have constantly obsessed about policy issues relating to land and labour. Both are intensely political subjects. The clash of strong interest groups, the failure to apply clear principles and the role of intermediaries seeking to protect their positions or to cash in on insider advantage, all these have kept rules complicated and unsatisfactory.”

The point being it will take a really thick-skinned government to push through these reforms. Other than this, Modi’s other big problem is that he simply does not have the required numbers in the Rajya Sabha to push through these economic reforms.

The Rajya Sabha conundrum

The Rajya Sabha has 245 members in total. Of this, Modi’s Bhartiya Janata Party(BJP) has just 48 members, even though it is the second largest party in the upper house. It’s major allies like the Shiv Sena, Shiromani Akali Dal and Telgu Desam Party have three, three and six members respectively. In contrast the Congress Party is the single largest party in the house with 67 members.

How is this possible, you may ask? One third of the members of the Rajya Sabha retire every second year and are elected indirectly through an electoral college consisting primarily of the elected members of the state legislative assemblies. So you and me, dear readers, elect the members of legislative assemblies (MLAs) who in turn elect the members of the Rajya Sabha.

So how does the scene look for Modi in the Rajya Sabha? By when will the BJP get majority in the upper house, which will allow it to push through key-legislation?

One theory that several stock brokers and analysts have tried selling to me over the last one year is that the Modi led BJP will get a majority in the Rajya Sabha by 2017 and that is when it will start to push through key economic legislation. In fact, several of my readers seem to believe in this as well. I have come to know of this

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with my interactions with them on the social media.

This theory is based on the logic that by 2017 BJP would have won a few more state assembly elections and would be in a position to then elect members to the Rajya Sabha, as it would have more MLAs. And more MLAs would mean more Rajya Sabha seats. QED...

But people offering this theory either do not understand how the Rajya Sabha works or are simply trying to mislead you, dear reader. Allow me to explain.

Every member elected to the Lok Sabha has a tenure of five years. A Rajya Sabha MP on the other hand has a tenure of six years. Further, as I mentioned earlier, one-third of the Rajya Sabha MPs retire every second year. Hence, unlike the Lok Sabha, Rajya Sabha elections do not happen all at once. This means that any change in the party-wise composition of the Rajya Sabha happens at a slow pace and does not happen all at once.

Before the May 2014 Lok Sabha elections, the Congress led United Progressive Alliance had a majority in the Lok Sabha. After the elections the BJP led National Democratic Alliance has a majority. In case of the Rajya Sabha such a change is not possible all at once because elections are held for only one-third of the seats at a given point of time.

Once this is taken into account how do things look for Modi? As Pradeep Kaushal wrote in The Indian Express earlier this year: “Between now and 2019, when the Modi government's term ends, the NDA will just about cross the 100-seat mark in the House - and that's in the best-case scenario. That will leave it well short of the halfway point in the Rajya Sabha.”

Kaushal further wrote: “Taking best-case scenarios of the BJP getting a simple majority in Bihar, and doing well in the West Bengal and Uttar Pradesh Assembly polls, the party can reach only around 70 by the end of its tenure.”

The BJP lost the state assembly elections in Bihar very badly. Bihar, where I grew up, elects a total of 16 members to the Rajya Sabha. Given this, even reaching the figure of seventy will be tough going ahead, unless the party does very well in the Uttar Pradesh state assembly polls. And that can’t be taken for granted. What BJP’s

loss in Bihar clearly tells us is that Modi’s personal charisma basically turns out to be useless if the opposition parties decide to get together and take on the BJP.

Lesson from Bihar

In the 2014 Lok Sabha elections, the NDA had got 38.8% of the votes in Bihar. In the 2015 state assembly elections this fell to 34.1%. In the 2014 Lok Sabha elections the alliance comprising of Lalu Prasad Yadav’s Rashtriya Janata Dal, the Congress Party and the Nationalist Congress Party, had polled in 30.2% of the votes.

Nitish Kumar’s Janata Dal(United) had polled in 16.04% of the votes. But Kumar was not in alliance with Lalu and the Congress. Hence, their vote was split and the NDA won the majority of the seats in the state during the Lok Sabha elections.

If there had been an alliance between Nitish, Lalu and the Congress, they would have polled in a little over 46% of the votes, which would have been more than the 38.8% that the NDA polled. And Modi’s BJP would have been beaten comprehensively even then.

This time around Lalu, Nitish and Congress got together and they got 41.9% of the votes. The NDA on the other hand won only 34.1% of the votes. The point is that the anti-Modi vote was always in the majority, only this time around the votes were not spilt. This is a fact that the BJP needs to deal with. If the other parties decide to come together and fight Modi, he and the BJP don’t stand a chance. And given this dear reader, Modi cannot personally be fighting all state assembly elections for the party in the years to come. At least that is the way I look at it.

I mean, a batsman cannot bat from multiple ends? Can he? He can only bat from one end, at a time. As you would know, there is only so much time and energy that any individual has and they need to be best utilised. The BJP has to start depending on their local state level leaders to fight state assembly elections. That is one clear lesson that has emerged from Bihar.

Of mother and son

The results in Bihar has given the opposition leaders a lot of hope. It has told

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them that the Modi juggernaut is stoppable. This hope has been clearly visible in the winter session of Parliament. The Congress led opposition allowed very little work in the Rajya Sabha and as a result the Goods and Service Tax (GST) Bill was put on the backburner.

This was primarily on account of Rahul Gandhi and his mother Sonia, vice-president and president of the Congress Party, being asked by the Delhi High Court to appear in person before the trial court in the National Herald case. I will not get into the details of the case here given that it will take me away from other more important points that I am trying to make. I guess enough has been written on it already and for a change the media has done a good job of explaining things.

The Gandhis have always liked some amount of mystery to surround them and appearing in a court would have taken some of that sheen off (at least in their minds). Hence, the Congress party was put to use to disrupt the Parliament and allege that the government was indulging in “vendetta” against them. They ultimately got a bail in this case by appearing in a court.

The Congress Party has only 45 seats in the Lok Sabha but manages to retain a huge nuisance value given that it has 67 seats in the Rajya Sabha. And this is not going to change any time soon. At least, not up until 2019, when the term of the Modi government ends.

The surprising thing is that the Congress is no longer a pan India party that it used to be. The ability of the Gandhis to push the party towards a victory on their own has gone down considerably over the years. Nevertheless, the party still operates around them for the simple reason that the Congress does not stand for anything other than the Gandhis.

In fact, it also needs to be mentioned here that when the BJP was in the opposition between 2004 and 2014, it’s behaviour as an opposition party was nothing home to write about, especially during the second term of the Manmohan Singh government between 2009 and 2014, when the party repeatedly disrupted the Parliament. It is now getting a taste of its own medicine and the nation is losing out in the process. As the old Hindi saying goes: “Jaisi Karni Waisi Bharni (as you sow, so you shall reap).”

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Us and them

There is now talk about the government introducing the GST Bill during the budget session in February, next year. But the numbers in the Rajya Sabha are still against them. If you look at the following table, it shows the top ten political parties in the Rajya Sabha. Other than the Telgu Desam Party none of the other eight parties are currently a part of the NDA. The Biju Janata Dal even though not on good terms with the BJP has said that it will support the GST Bill.

The Achilles Heel of the BJP

In the winter session of the Parliament the government made some effort to reach out to the opposition but without much success. Given this, I have my doubts on whether the government will be able to push through GST even during the course of the next year as well.

Also, if the government is unable to get GST passed next year, it is highly unlikely that the Bill will be introduced in 2017, given that the initial impact of the tax

1 Indian National Congress (INC ) 67

2 Bharatiya Janata Party (BJP ) 48

3 Samajwadi Party (SP ) 15

4 All India Anna Dravida Munnetra Kazagham (AIADMK ) 12

5 ALL INDIA TRINAMOOL CONGRESS (AITC ) 12

6 Janta Dal (United) (JD(U) ) 12

7 Bahujan Samaj Party (BSP ) 10

8 Communist Party of India (Marxist) (CPI(M) ) 9

9 Biju Janata Dal (BJD ) 7

10 Telgu Desam Party 6

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on services is expected to be inflationary. A government panel headed by Arvind Subramanian, the chief economic adviser, has recommended a standard GST rate of 16.9-18.9% for a bulk of goods and services. The service tax rate currently stands at 14.5% (14% service tax plus 0.5% Swacch Bharat Cess). As Saloni Roy, senior director, Deloitte told The Times of India recently: “At this rate, services are likely to become more expensive, as the difference between the current rate of service tax and suggested rate of GST is significant.”

Once this is taken into account the question is will the government introduce GST in 2017, just two years before the next Lok Sabha elections? I mean wasn’t the Manmohan Singh government thrown out precisely because everything had become so expensive.

Cooperative Federalism

While, the government has made some efforts to get the GST Bill passed, the Land Bill has been completed put on the backburner. The country is currently governed by the land acquisition Act which was passed in 2013. Land acquisition under this Act is extremely complicated and has completely come to a standstill. This is a reason for worry.

In fact, in the recently announced bullet train project (referred to as high-speed rail by the government), land acquisition is expected to be a major problem.

As analyst Akhilesh Tilotia of Kotak Institutional Equities, who is also the author of The Making of India, writes in a recent research note titled High-speed rail or airports?: “Building a railway line requires sizeable land (already a contentious issue in India) for two key reasons—(1) every line that is laid down requires significant width (typically, around half a km) and (2) connecting multiple cities requires creating connections between all of them. We calculate that to develop the Golden Quadrilateral connecting the four important cities, India will need to build six railway lines totaling about 10,000 kms, which will, we estimate, will require around 1,000 sq kms of land area. Lands through which railways are expected to pass inherently become more valuable and hence more expensive to acquire.” It remains to be seen how the government goes about acquiring land for this ambitious project.

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Long story short—any bill with a hint of economic reform built into it and which needs to be passed by the Rajya Sabha is unlikely to go through. So what can the Modi government do in this scenario? It clearly cannot wait to get a majority in the Rajya Sabha. As I have explained above there is no chance of the BJP led NDA getting majority in the Rajya Sabha up until 2019. But there might be a solution to this problem.

In a letter written to chief ministers earlier this year Narendra Modi had said: “I have been working to strengthen our federal polity and promote cooperative federalism...Even as Chief Minister, I had been saying that the progress of the country depends on the progress of states. This Government is, therefore, committed to the idea of empowering states in all possible ways. We also believe that states should be allowed to chalk out their programmes and schemes with greater financial strength and autonomy, while observing financial prudence and discipline.”

It is time for Modi to start actively promoting the “cooperative federalism” that he keeps talking about. The BJP and its allies are in government in many states across the country. While GST can only be implemented at the central level, the land law, the labour laws as well as the real estate law can all be implemented at the state level.

In fact, states like Gujarat, Rajasthan and Madhya Pradesh have already moved towards simplifying their labour laws. Other than labour laws at central level, states in India have their own labour laws. There is no proper estimate of how many labour laws India has in total. The state governments where BJP is in power could move towards simplifying the total number of labour laws in India.

A similar thing could be carried out when it comes to the Real Estate Bill as well. In May 2015, the Bill was referred to a Select Committee of the Rajya Sabha. The committee submitted a report. One of the members of the committee, AW Rabi Bernard of the AIADMK, dissented to the report submitted by the Select Committee of the Rajya Sabha. Bernard in his dissent note said that the central government should have sent the Real Estate Bill as a model bill to the states which could have then enacted their own bills to regulate the real estate sector. Further, the way the Bill is currently structured, it calls for the setting up real estate regulators in every state and union territory. The success of the Bill rests on how seriously any state

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government chooses to implement it. Given that, why not allow state governments to pass their own real estate bills as well, as long as they do not vary too much from the model bill of the central government? If cooperative federalism is the way forward, then this clearly is not a bad idea.

This leaves us with the issue of land acquisition. In this case, states where BJP is in power can take inspiration from Tamil Nadu. As Ritika Mankar Mukherjee and Sumit Shekhar of Ambit Capital write in a research report titled Failure to amend land law to exacerbate sense of ‘policy drift’: “Tamil Nadu was the first and only state to seek and receive Presidential assent to exempt three major categories from the purview of the Land Acquisition, Rehabilitation and Resettlement Act. In particular, land acquisition done under the Tamil Nadu Highways Act, 2001; the Tamil Nadu Acquisition of Land for Industrial Purposes Act, 1997 and the Tamil Nadu Acquisition of Land for Harijan Welfare Schemes Act, 1978 is outside the purview of the consent clause and Social Impact Assessment clause.”

Around four-fifths of the land acquired in Tamil Nadu is acquired under the three acts mentioned above. Hence, given that the Tamil Nadu government has totally managed to work around the binding provisions of the 2013 Act.

This is something that the other states can learn from. Once these laws are in place at the state level, it is likely that new businesses will be set up in these states than in other states. Once non-BJP run states start see this happening they will also have to follow suit. This is something that Modi will have to push for in 2016, given that his chances of pushing through any major economic reform at the central government level, remain very low. It is time for him to start practicing what he has been preaching.

To conclude, as the ultimate cliché goes dear readers, I remain “cautiously optimistic” when it comes to the ability of the Modi government to push through economic reforms. How about you?

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Vivek Kaul's

‘Easy Money’ Get This Trilogy Worth Rs 1,215 For FREE!

Vivek Kaul, Editor of the Daily Reckoning, is a master storyteller. And in this trilogy, he tells us probably one of the most important stories that has yet been told... the story of Money.

A highly recommended read that teaches you lessons that could help you avoid the next global meltdown. Don't Miss It!

Claim your Free set worth Rs 1,215 now...

Hurry! We only have limited copies of Vivek Kaul’s 'Easy Money' Trilogy books to give away.

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