Progress Report on Constraints of the Modi Government
June 4, 2015
At the time of the Bharatiya Janata Party’s (BJP) victory in the April-May 2014 Lok Sabha election, we had pointed out that there would be powerful constraints on the government’s ability to take key actions to stimulate the economy. These included:
- Continued weakness in the upper house of Parliament (Rajya Sabha);
- A weak footprint at the state level as it controls just 8 of India’s 29 states;
- Internal party divisions on the importance of economic liberalization specifically regarding increasing market access;
- The lack of fiscal space due to a high federal deficit; and lastly,
- India’s large imbalance in goods trade.
Over the last year, the BJP has incrementally strengthened its hand in most of these areas, and will likely continue to do so in the coming year. But there are no obvious watershed moments on the horizon that could strengthen the party’s policymaking hand. Below we review the changes to each of these constraints over the last year, and the outlook for Modi Year 2.
Rajya Sabha (Upper House of India’s Parliament):
Members of the Rajya Sabha are indirectly elected by state legislatures for six year terms, with seats opening up throughout the year. At the time of its victory in the Lok Sabha election, the BJP held only 42 of 243 seats in the Rajya Sabha. Since then, the BJP has increased its seat total to 47. Congress still has a healthy lead with a total of 68 seats and also appointed all 10 “nominated” members currently in the Rajya Sabha.
The government has shown some ability to navigate this weak hand through important legislative successes including the coal, insurance, and mining bills, and the land boundary agreement with Bangladesh. But other key reforms including the goods and services tax (GST) and land acquisition amendments have been stalled in Parliament. The government has not yet resorted to using its powers to call a special “joint session of Parliament,” though this remains a potential tool for key reforms.
Over the next twelve months, twenty-one seats will open in the Rajya Sabha of which Congress currently holds six, the BJP two, regional parties six, and “Nominated” members seven. Both the BJP and Congress are likely to each lose a seat, though the BJP will be able to add the seven “Nominated” seats to add to its support base. The regional parties will pick up the difference of two seats.
Looking Ahead: Both the BJP and Congress stand to lose a bit of ground when looking at seats held by their parties. But there will be an important shift in the BJP’s favor as it fills 7 “Nominated” seats currently held by Congress appointees. Including these “Nominated” members, the BJP should increase its hold to 22 percent of Rajya Sabha seats. Better, but still lagging behind Congress.
When the BJP took office at the Center, the party controlled only five of India’s 29 states (by “states” I include the territories of Delhi and Puducherry, which have locally-elected bodies). By winning state elections in Haryana, Maharashtra, and Jharkhand, the party now holds 8 states. Successful implementation of other programs, like the “Make in India” and “Smart Cities” campaigns, lies primarily with state governments, and winning states also allows a party to strengthen its hand in the Rajya Sabha.
In the next year, six states/territories will hold elections including Bihar, Assam, Kerala, Puducherry, Tamil Nadu, and West Bengal. The BJP is not the incumbent in any of these states, but it did win a majority of Lok Sabha seats in Bihar (22 of 40) and Assam (7 of 13) last year.
Looking Ahead: Assam is the only election that will pit the Congress and BJP in a head-to-head contest. The BJP has a reasonable chance of winning one or two states, and in so doing, may match or exceed the total states held by Congress (currently 9) if Congress loses in Assam and/or Kerala.
Internal Divisions over Liberalization:
This may be the hurdle that has proven least difficult for Prime Minister Modi to overcome. Certainly there are differences within the party on certain reforms such as opening up areas such as retail trade to foreign investment. But overall, the primary legislative agenda has been aimed at economic liberalization. However, this is only true in terms of domestic economic liberalization. India’s opposition to opening its borders to global trade remains strong, as evidenced by the inability to move forward on key pending trade agreements, the detrimental changes being contemplated to India’s model Bilateral Investment Treaty, and stalling implementation of last year’s WTO Trade Facilitation Agreement.
Looking Ahead: While sometimes stymied due to opposition, the party put economic bills covering mining, coal, insurance, GST, and land acquisition reforms at the top of its list of priorities. The government has moved on non-legislative market access reforms too, in areas such as railways, defense, medical devices, and construction. But there are very few signs that the Modi government is warming up, even incrementally, to serious trade liberalization beyond FDI caps.
High Fiscal Deficit:
So far we have seen the Modi government move slowly on fiscal consolidation. His government has prepared two budgets, and adopted a slow, incremental approach to reducing India’s deficits. The central government had a 4.1 percent fiscal deficit in Fiscal 2015, which is expected to drop to 3.8 percent over the next two years. In reality, it is more likely that they quietly hope to reduce the fiscal deficit through economic growth (and resultant tax income growth), and may, in fact, be headed in that direction. This is critical as reduced deficits will allow interest rates for private sector borrowing to moderate.
Looking Ahead: The deficit appears to be narrowing, due to a mixture of budgetary changes as well as brighter growth prospects. This will likely continue in the year ahead.
Trade Deficit (Goods):
India has a surprisingly large deficit in its goods trade. In the fiscal year ending March 31, 2015, India’s trade deficit was$137 billion, up slightly from the $136 billion deficit the preceding fiscal year. This is despite a steep 16 percent decline in India’s oil import bill during the current fiscal year. India’s goods trade deficit has averaged between 8 percent and 10 percent of GDP in recent years, one of the highest levels among G20 members. This has resulted in many actions that have aggrieved foreign trade partners, notably the creation of compulsory local manufacturing rules in several industries. This point is closely related to the issue of internal BJP opposition to market access liberalization noted earlier.
Looking Ahead: So far we have not seen India take advantage of lower oil prices to balance its trade, nor seen the fruits of the new “Make in India” campaign. Until India proves capable of reducing its trade deficit, the nation is unlikely to deeply embrace substantive global trade talks or gravitate away from forced localization.
In its second year in office, the Modi government will not see a substantial decrease in the hurdles that limit its ability to press for a more robust economic reform program in the coming year. However, the government has already shown it can conduct a more limited legislative agenda and carry out important non-legislative reforms despite the challenging political environment.
Richard M. Rossow is a senior fellow and holds the Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies (CSIS) in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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