The Math Shows Modi Inching Closer to Single Market in India

Indian Prime Minister Narendra Modi Speaks At The Bloomberg India Economic Forum 2016

Narendra Modi.

Photographer: Dhiraj Singh
  • In an optimistic scenario, Modi is still a few votes short
  • Concerns linger that compromises will undermine economic gains

After more than a year of delays, Prime Minister Narendra Modi is slowly getting closer to securing the votes needed to pass one of India’s biggest economic reforms in decades.

Finance Minister Arun Jaitley said on Tuesday that Modi’s government would again seek to pass a constitutional amendment authorizing the goods-and-services tax, known as GST, in the parliamentary session starting next month. Still, he said, some details remain pending even though most states support “the idea of GST."

“We don’t fix deadlines," Jaitley told reporters in Kolkata after meeting with finance ministers and officials from the nation’s 29 states. “We move forward with positive intentions."

While Jaitley’s comments deflated optimism in the markets that a breakthrough was imminent, recent state elections have helped boost support for the measure -- either by adding strength to Modi’s coalition or to regional parties that support GST. The tax aims to unify India’s 1.3 billion people in a single market for the first time.

For a look at how the tax would spur trade across India, click here.

The opposition Congress party, which first proposed the GST in 2006, has led the charge against the bill in the upper house of parliament, where Modi lacks a majority. It wants an 18 percent cap on the GST rate written into the amendment, a provision that Jaitley said was opposed by a “complete consensus."

The party has a responsibility to seek a “pro-people, pro-consumer” GST, said Raj Babbar, a Congress spokesman.

With Congress digging in its heels, Modi needs to lure smaller regional parties to his side to get the two-thirds majority needed to pass a constitutional change -- or 161 of the 241 upper house seats currently filled. If a vote were taken this week, Modi could count on 159 votes in an optimistic scenario based on stated positions.

Supporting GST:

BJP coalition (Modi’s group)69
Trinamool Congress (West Bengal)12
Appointed MPs (apolitical)10
Others and independent5
TOTAL: 96

Likely to Vote for GST:

Communists9
BJD (Odisha)7
Janata Group 12
BSP (Uttar Pradesh)6
SP (Uttar Pradesh)19
NCP (Maharashtra)6
Others (Small parties)4
TOTAL: 63

Likely to Oppose or Abstain:

Congress (main opposition party)61
AIADMK (Tamil Nadu)13
DMK (Tamil Nadu)5
Others (Small parties)3
TOTAL: 82

Tamil Nadu is key for Modi to pass GST without Congress. To that end, Modi on Tuesday met J. Jayalalithaa, the state’s chief minister who leads AIADMK, or All India Anna Dravida Munnetra Kazhagam.

Tamil Nadu, home to factories of Ford Motor Co. and BMW AG, fears revenue loss worth 92.7 billion rupees ($1.4 billion) once the national sales tax is implemented, and has sought compensation from the federal government for five years. Jayalalithaa raised those concerns with Modi in their meeting, according to a statement from her office.

To address those worries, Jaitley is considering whether to put an additional 1 percent levy on goods shipped out of producing states -- a measure also opposed by Congress.

Horror Stories

Even if Modi convinces AIADMK to abstain, it could push him over the finish line. Since those votes wouldn’t count, the two-thirds threshold would fall to 152.

When and if the amendment clears the upper house, it needs to be ratified by more than half of India’s states. Then parliament must pass another bill to implement the tax. Finally, a newly formed GST council would decide the overall rate, which would vary for different goods.

The bigger danger may be that Modi compromises too much and settles with a tax that undermines the potential economic gains, according to Satya Poddar, a senior adviser at EY. An 18 percent overall rate plus the 1 percent additional levy for producers risks a potential backlash, he said.

“If the government is hell bent on proceeding with the current form of GST, it will be a liability -- not an asset -- going into elections," Poddar said. “There are many horror stories which will unfold when you bring a new tax."

Before it's here, it's on the Bloomberg Terminal. LEARN MORE