In recent weeks, the Indian government has displayed unusual amounts of energy to drive long-awaited economic reforms. The last session of Parliament, interrupted when several MPs tested positive for Covid-19, was exceptionally productive. Two amendments to the labor legislation were approved, as well as a package of measures aimed at the agricultural sector.
However you look at it, these movements are leading India in the right direction. They don’t go far enough, they are poorly planned and poorly communicated; however, they are cause for optimism.
However, cautious optimism that India’s ruling party’s political style of taking no prisoners threatens to undermine the impact of its own reforms. The government completely undermined Parliament in its effort to push through legislative changes. Little or no effort was made to get other political parties to participate. And Indian states can justifiably complain that the federal government is appropriating the issues on which they have traditionally set policy (and earned revenue).
Prime Minister Narendra Modi recklessly ignores the central difficulty of reform in India: while he cannot wait for everyone to agree before making changes, he also cannot impose them without any agreement.
It is hard to overstate how different Modi’s approach is from that which India has traditionally taken to economic reform. One of the strengths of the Indian system is that the state has valued consensus building. That is why there has never been a sustained political or popular reaction to past reforms.
It wouldn’t have been difficult to take a similar approach in this case as well. Modi himself has shown how it can be done in the past: a couple of years ago, the effort to reform India’s indirect tax regime represented a joint effort, by all parties, the state and the Union.
That moment seems to belong to the past now. In recent years, even the national goods and services tax, one of the proudest achievements of Indian federalism, has become a cause of conflict. In part, the pandemic is responsible: New Delhi’s Finance Ministry told its counterparts in the states that it simply could not deliver on the promises it had made as part of the grand tax reform deal, blaming it on an “act of God.” It is not an act of God, but an act of fraud, insisted the West Bengal Finance Minister.
The new reforms must deal with this charged atmosphere. In agriculture, the government decided to “circumvent” the states’ rights and powers over agricultural marketing and open trade outside of previously existing state-controlled wholesale yards. The states will lose the revenue they had received from taxing transactions in these “mandis,” as they were called.
Opposition-ruled states already refuse to implement the new laws. This will seriously undermine Modi’s stated ambition for a single national market for agricultural products.
The simple fact is that in India’s complex federal system, it is up to the central government to ensure political buy-in at all levels of major reforms. Yes, that takes time, costs political capital, and requires commitment. But without the effort, the reforms simply won’t work. Modi himself, who as Chief Minister of State in Gujarat excelled in obtaining concessions from New Delhi, surely knows this better than anyone.
The costs of going by rail through changes without worrying about what state governments think will be paid not now, not next year, but for decades to come, as India goes rogue. A former federal finance minister issued a stern warning: “One nation, one whole will eventually destroy a nation.”
There is a similar problem with the new labor reforms. As with the agricultural reorganization, the new codes governing the hiring and firing of workers have been needed for a long time. Meanwhile, the government has allowed states to develop a patchwork of different regulations that employers find excessively confusing.
The federal government, which has the constitutional right to legislate alongside the states on labor issues, needed to get all states – and, by extension, several opposition parties – to join in on employment reform to enact a single, simple package. of labor regulations. across the country. Instead, the government chose not to send its latest amendments to parliamentary committees where the hard work of reaching a compromise is being done.
Modi’s party has easily won two general elections. There are many reasons to assume that he would win again if the vote took place tomorrow. But the Indian system is not designed so that the winner takes all. It requires cooperation between the central government and the states, between multiple centers of power.
Modi has the political capital to promote that cooperation and make those commitments. The reforms he wants to push have the enormous momentum of ideas that have long been championed. Thus, there are very few excuses for imposing them without adequate effort to build consensus, especially when the effort runs the risk of turning them into mere words on paper.
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