A new beginning

Don't let coalition be a constraint for growth

Prime Minister Narendra Modi, along with the Union Council of Ministers, took the oath of office for the third consecutive time on Sunday. While returning to office after two consecutive terms in a diverse democracy like India is commendable, Mr Modi will this time depend on allies in the National Democratic Alliance (NDA) to run the government. While the basic priorities of the new government will be known in the coming days, there are concerns that it may be difficult to push reforms in a coalition government. Experience, however, shows coalitions have the potential to work effectively and bring structural reforms. India will need continued reforms to sustain higher economic growth in the medium term. It is worth noting that much-needed factor-market reforms proved difficult even with single-party majority governments.

Building a consensus on such reforms may take time, but the government can start with initiatives that allies are unlikely to object to. For instance, the government must quickly initiate the goods and services tax (GST) rate and slab-rationalisation process in the GST Council. Although GST collection improved in recent years owing to greater compliance, the multiplicity of rates has meant that the indirect tax system has underperformed, affecting fiscal outcomes at both central and state levels. A simple GST system with fewer slabs will improve revenue and the ease of doing business. Besides, there are at least three major reforms promised in the Bharatiya Janata Party’s election manifesto that can be initiated immediately.
 

The first is strengthening India’s statistical system. For a rapidly developing economy like India, it is crucial to have reliable high-frequency data to enable better decision-making by both the government and the private sector. The last census in India was conducted in 2011. Although the government recently published the data from a consumer expenditure survey after a long gap, economists argue that another one should be done before revising the gross domestic product and consumer price index series. India also needs a producer price index to get a better sense of the production side. Further, it is important to have frequent and reliable employment data. Given that some indicators are based on outdated data, they may not accurately reflect the current situation, potentially compromising the quality of policy decisions and affecting economic outcomes.
 

Second is the National Litigation Policy to expedite the resolution of matters in courts. About 50 million cases are pending in different courts. India needs to considerably improve its judicial capacity. Speedily disposing of cases in courts will significantly improve both the ease of doing business and living in the country. Third is fiscal autonomy for Panchayati Raj institutions. In most advanced and fast-developing countries, basic government services are provided by local bodies. In India, local bodies depend mostly on grants that are often infrequent and inadequate to achieve anything. As a recent study by the Reserve Bank of India showed, local taxes and fees contributed only 1.1 per cent to Panchayats’ revenue. Empowerment of local bodies will be a big step forward. Although this would require support from states, the idea must be pursued to improve developmental outcomes. Overall, for achieving better policy outcomes over the next five years, it will be important that Parliament is allowed to function properly. The onus will be on the government to appropriately engage with the Opposition to attain better legislative outcomes.